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Organizational Design

A Guide for Growth-Oriented Entrepreneurs

Sample Chapter: Challenges in Designing the Organizational Structure

GROWTH-ORIENTED ENTREPRENEURSHIP PROJECT

2015-1 Edition

Dr. Alan S. Gutterman

Growth-Oriented Entrepreneur’s Guide to Organizational Design

2015-1 Edition published in 2015 by the Growth-Oriented Entrepreneurship Project

(www.growthentrepreneurship.org) and copyrighted © 2015 by Alan S. Gutterman

(www.alangutterman.com).

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and intellectual property, and has also held senior management positions with several

technology-based businesses including service as the chief legal officer of a leading international

distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an

emerging broadband media company. He received his A.B., M.B.A., and J.D. from the

University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from

the University of Cambridge. For more information about Dr. Gutterman, his publications, the

Growth-Oriented Entrepreneurship Project or the Business Counselor Institute, please visit

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Growth-Oriented Entrepreneur’s Guide to Organizational Design Contents

PART I THEORY AND STUDY OF ORGANIZATIONS

Chapter 1 Definitions and Purposes of Organizations

Chapter 2 Fundamental Elements of Organizational Management

Chapter 3 Academic Foundations for Organizational Studies

Chapter 4 Organizational Effectiveness

PART II ORGANIZATIONAL DESIGN

Preface

Chapter 1 Elements of Organizational Design

Chapter 2 Informational Processing Model of Organizational Design

Chapter 3 Organizational Design and Technology

Chapter 4 Organizational Design and Strategy

PART III ORGANIZATIONAL STRUCTURE

Preface

Chapter 1 Introduction to Organizational Structure

Chapter 2 Basic Models of Organizational Structure

Chapter 3 Challenges in Designing the Organizational Structure

Chapter 4 Functional Structures

Chapter 5 Division-Based Structures

Chapter 6 Matrix Structures

PART IV DESIGNING THE ORGANIZATIONAL STRUCTURE

Preface

Chapter 1 Basic Elements of Organizational Structure

Chapter 2 Taxonomy of Organizational Units

Chapter 3 Designing an Effective Organizational Structure

Chapter 4 Creating and Selecting Structural Design Concepts

Chapter 5 Integration Strategies

Chapter 6 Project Management

Chapter 7 Team Management

PART V CROSS-CULTURAL STUDIES OF ORGANIZATIONAL

STRUCTURE

Preface

Chapter 1 The Culture-Free/Culture-Bound Debate

Chapter 2 Dimensions and Typologies of Organizational Structure

Chapter 3 National Studies of Organizational Structures

This is a sample chapter from Part III of this Guide and you can get your full copy of the

Guide and/or other sample chapters by contacting the Growth-Oriented Entrepreneurship

Project (www.growthentrepreneurship.org) at [email protected]. The

Project also prepares and distributes other Guides for Growth-Oriented Entrepreneurs

covering Entrepreneurship, Leadership, Management, Organizational Culture, Strategic

Planning, Governance, Compliance, Finance, Human Resources, Product Development

and Commercialization, Technology Management, Globalization, and Managing Growth

and Change.

Attorneys acting as business counselors to growth-oriented entrepreneurs who are

interested in forms, commentaries and other practice tools relating to the subject matter of

this chapter should also contact Dr. Gutterman at the e-mail address provided above.

http://www.growthentrepreneurship.org/

mailto:[email protected]

Growth-Oriented Entrepreneur’s Guide to Organizational Design (2015-1)

Part III – Organizational Structure

1 PART III

ORGANIZATIONAL STRUCTURE

Preface

Structure is one of the key elements in organizational design, along with such things as

strategy, culture and business processes, and establishes how senior management of the

organization wishes to allocate the ability to control activities and resources throughout

the organization. The building blocks of organizational structure are formal groupings of

people and resources into units—departments or divisions—that focus primarily on one

of several structural dimensions including functions, products, geographic areas or

customers/markets. Organizational structure determines how power and authority is

allocated, how information flows and who is accountable to whom through mandated

reporting relationships. Structure alone cannot make an organization successful;

however, if the structure is not aligned with organizational strategy it will be difficult for

senior management to achieve the desired results.

There is no single structure that works best in all cases and the structure will continuously

change as the organization grows and evolves with emphasis shifting from one dimension

to another as circumstances dictate. In most cases an organization will initially choose a

function-based organizational structure that divides work activities into functional groups

such as research and development, production, sales and marketing, finance and

administration (including human resources). As the organization grows it will shift the

primary dimension of its structure to products or markets, either geographic or customer-

based, through creation of divisions for each key product line or market. Other structures

based on two or more of the dimensions—matrix or hybrid—may be used in appropriate

cases when the activities of the organization have expanded into multiple product lines

and/or markets.

This Part provides an introduction to organizational structure that includes a description

of the building blocks of organizational structure and the way in which the structure of an

organization typically evolves as it matures and grows; and discussions of some of the

key challenges in designing the organizational structure (e.g., establishing the degree of

horizontal and vertical differentiation, balancing differentiation and integration, balancing

centralization and decentralization, and balancing standardization and mutual adjustment)

and special topics such as tall versus flat organizational structures, the span of control,

mechanistic and organic organizational structures, informal organizational structures and

making changes to the organizational structure.

Various chapters in this Part build on the introduction to the topic of organizational

structure by providing a detailed discussion of several of the basic models of

organizational structure including function-based structures, product-based structures,

geographic-based structures, market-based structures, matrix structures and network

structures. Each chapter describes the key features of the particular structure and



2 discusses some of the advantages and disadvantages of each structure and the conditions

under which it is most appropriate for the organization to select that structure. There is

no single structure that works best in all cases and the structure will continuously change

as the organization grows and evolves with emphasis shifting from one dimension to

another as circumstances dictate. In most cases an organization will initially choose a

function-based organizational structure that divides work activities into functional groups

such as research and development, production, sales and marketing, finance and

administration (including human resources). As the organization grows it will shift the

primary dimension of its structure to products or markets, either geographic or customer-

based, through creation of divisions for each key product line or market. Other structures

based on two or more of the dimensions—matrix or hybrid—may be used in appropriate

cases when the activities of the organization have expanded into multiple product lines

and/or markets.

Chapter 1

Introduction to Organizational Structure

§1:1 Introduction

Organizational structure, one of the key issues for the organizational designer1, is the way

in which the members of the organization and their job responsibilities are arranged.

Organizational structure includes several important components including roles,

relationships, responsibilities and scope of authority, and communications/reporting

channels.2 Organizational designers must consider what Pugh and Hickson referred to as

the regularities for achieving activities such as task allocation, coordination and

supervision.3 Other researchers, such as Mintzberg and Schein, emphasized similar

design activities and decisions that must necessarily focus on division and allocation of

labor among required tasks, coordination of the activities associated with those tasks and

establishment and administration of a hierarchy of authority.4

The organizational structure typically consists of various business units formed around

functions (e.g., research and development, manufacturing, sales and marketing, finance,

human resources, etc.), products, markets or customers that are arranged in a hierarchical

fashion. The organizational structure determines how power, authority and accountability

are formally distributed throughout the organization and obviously has a strong influence

on how members (i.e., executives, managers and employees) and different business units

interact with one another and the degree to which they will share information and

collaborate to achieve the overall goals and objectives of the organization.

1 For further discussion of the process of organizational design and the key issues for organizational

designers, see the Part on “Organizational Design” in this Guide. 2 W. Sexton, "Organization Structure", in W. Sexton (Ed.), Organization Theories (Columbus, OH: Charles

E. Merrill, 1970). 3 D. Pugh and D. Hickson, Writers on Organizations (4

th Ed.) (London: Penguin Books, 1989).

4 H. Mintzberg, Structure in 5’s: Designing Effective Organizations (Englewood Cliffs, NJ: Prentice Hall,

1983; and E. Schein, Organizational Culture and Leadership (4th

Ed.) (San Francisco, CA: The Jossey-Bass

Business and Management Series, 2010).



3

Chapter 3

Challenges in Designing the Organizational Structure

§3:1 Introduction

There are a number of challenges for organizational designers that must be overcome

when they attempt to identify and implement the most effective structure for a particular

organization; however, at a minimum the designer must be prepared to consider and

answer the following questions:

What is the appropriate degree of differentiation, both vertical and horizontal, within

the organizational structure? In order to answer this question decisions must be made

as to how organizational tasks will be divided and allocated (i.e., the “division of labor”) and then grouped or departmentalized. In addition, rules must be established as to how authority, control and accountability will be distributed and assigned up and

down the organizational hierarchy (e.g., the “span of control”) and reporting channels should be identified to support the authority and control relationships.

What is the appropriate balance between differentiation and integration? One of the

goals for the designer with respect to differentiation is identifying the appropriate

level of specialization when making decisions about division of labor. The challenge

for the designer is creating and maintaining the advantages of specialization which

come out of the differentiation decisions (i.e., core competencies) while ensuring that

the activities of the various organizational roles are effectively coordinated and that

organizational units communicate and cooperate.

What is the appropriate level of decentralization? The key issue here is how authority

to make decisions is going to be dispersed throughout the organization and is

typically addressed through the use of formal guidelines.

What is the appropriate balance between standardization and mutual adjustment? For

this issue the designer needs to consider the methods that can and should be used to

monitor the way in which members of the organization actually behave while they are

completing their assigned tasks and activities.

Each of these questions will need to be continuously addressed as the organization grows

and changes occur in the organizational strategy and the external environment in which it

is operating. For example, in small organizations it is likely that employees will perform

a variety of tasks—little or no division of labor or formal groupings; however, in general,

specialization (i.e., narrower job responsibilities) tends to increase as the organization

grows. Growth also leads to changes in how jobs will be grouped or departmentalized.

Traditionally departments have been formed on the basis of function-based activities

(e.g., accounting jobs in the accounting department and engineers in the engineering

department); however, other alternatives, such as product-, customer/market or

geographic-focused departments or divisions will be the likely choices when

organizations grow and expand their activities to include multiple product lines and

international markets. Finally, while organizations tend to develop a decidedly vertical



4 hierarchy, with most of the decision-making authority at the top of the organization,

during their initial growth spurt many ultimately decide that decentralization and flatter

hierarchies will be needed in order for the organization to retain flexibility and be

responsive to rapid environmental changes; however, the ability and willingness of the

organizational members to make changes in the structure that might be appropriate in

light of the external competitive environment will be influenced by other factors such as

societal culture and/or the skills and experience of the workforce.

§3:2 Horizontal and vertical differentiation

While all the challenges and questions described above are important the process of

identifying the appropriate organizational structure generally begins with a careful

consideration of “differentiation,” which involves decisions as to how human and other resources should be allocated to specific tasks and activities and the establishment of

lines of authority within the organization to be sure that the tasks and activities are

completed and that there is sufficient control and coordination of all of the organizational

activities to create value for the stakeholders of the organization. There are two categories

of differentiation that must be considered—horizontal and vertical. As noted above,

horizontal differentiation is determined by how various work-related tasks and activities

are divided and grouped. It begins with divvying up tasks between the founders and the

initial employees and then expands to the creation of departments and other business

units. The overwhelming choice for smaller organizations with respect to the type of

dimension used to departmentalize the work flow appears to be the functional form, with

some modest support for the use of geographic- and customer-based departments.

Vertical differentiation addresses the distribution of authority and control up and down

the various hierarchical levels of the organization that begin to form as more employees

arrive and additional managers are brought in to oversee them.

Every organization, through its founders, makes an initial rudimentary decision regarding

the level of differentiation at the time the organization is first launched. For example, if

two software engineers decide to launch a new company to develop and commercialize a

new software program they will likely attempt to take on all of the varied tasks associated

with forming the new business while they continue to work on the actual programming.

At this point here is essentially no horizontal or vertical differentiation within the

organization and the available human resources—the two founders—are thinly spread

over product development, finding and renting an office, securing business licenses,

contacting prospective customers, and preparing a business plan for use to secure funding

for expansion of the business. If funds are available, typically from the personal savings

of the founders or from seed financing obtained from a private investor, the founders may

hire one person, often part-time, to provide some assistance in particular areas; however,

the founders continue to be active in areas outside their core expertise and there are no

formal control, coordination and authority procedures to guide the way that the founders

and any small number of initial employees interact with one another.

The design challenge relating to differentiation actually begins to arise when the activities

of the organization get to the point where the founders become overloaded and there is a



5 need for them to focus primarily on their core competencies. In order for the organization

to continue to grow and succeed it becomes necessary to bring in new inputs, particularly

additional managers and employees, to carry out the additional tasks and activities that

must be completed because of the maturation of the business of the organization. For

example, when the programming and testing activities associated with the initial software

product for the organization described above reach a critical stage that requires full-time

involvement by the founders they will need to spend most of their time in the laboratory

and hire new employees to handle sales, marketing and administrative matters. While, on

paper, both the founders remain responsible for management of all of the functions,

including those outside of product development, the realization soon comes that formal

plans need to be put in place to manage and control the activities of the new employees

and each of the new functional specialties. For one thing, while the founders understand

how important development of the first product would be to the future of the organization

they also know that the development work will not be enough to keep the organization

alive if mistakes were being made by the sales and marketing team or the administrative

group is not closely watching how the meager funds were being spent before the business

had any sustainable cash flow from product sales.

Increased horizontal differentiation—division of labor—is the typical response at this

point. For example, one of founders may continue focusing on the development work

while the other assumes responsibility for sales and marketing and decisions must then be

made the organizational role of each employee, who they will report and how control and

coordination of activities will be achieved. The decision to divide managerial

responsibilities between the founders introduces additional complexity since they must

also consider the need for coordination and communication within the organization. It is

important for the founders to appreciate how their spheres of oversight interact and make

sure that ideas from one area are transferred to the other and vice-versa. For example, the

founder assigned to product development must be sure to keep the other founder and his

or her sales team informed of how the development work on the new product is

progressing and, in turn, the sales team needs to pass any information about the particular

requirements of prospective customers back to the product development group.

Assuming the preliminary activities associated with the business of the organization are

successful, and further growth is necessary and desired, the challenges associated with

differentiation will continue to increase in relation to the complexity of the required

division of labor and the corresponding need to be sure that the right people are put into

the appropriate positions and that procedures are implemented to coordinate activities

throughout the organization. For example, as the new software company completes its

initial product development work reaches completion and orders for the new program

begin to come in the founders will need to consider bringing in additional employees to

perform new activities that are required due to the change in the nature of the business

from product development to sales, customer support and high volume production. In

addition, the founders will need to recruit qualified managers to take control of specific

areas that are outside the expertise of the founders and which the founders can no longer

effectively manage in light of the limited amount of time and energy that they have.



6 The point where the founders are forced to deal with limitations on their ability to

directly supervise the activities of all employees initially placed under their supervision is

when there is a decided increase in the level of horizontal differentiation in the

organizational structure. The organization will begin to build its senior management team

and bring in experienced specialists to create and manage central support functions that

will ultimately become part of the anticipated core competencies of the organization.

While it is possible that one or both of the founders will assume the key roles of CEO and

President/COO it is common to bring in professional executives from outside the

founding team to fill one or both of those positions. When that occurs decisions must be

made about the continuing roles and responsibilities of each of the founders and they

must learn how to share control over the organization with newcomers who may have

their own ideas about mission, goals and strategy.

The initial expansion of horizontal differentiation also leads to the creation of specialized

subunits, generally referred to as departments, in which each of the workers performs

tasks related to a similar functional activity. The number and size of the functional

departments tends to reflect the key resources that organization must obtain from its

external environment and the interest groups in the external environment that are most

important to the success of the organization. For example, a research and development

department must be formed in order to fulfill the organizational requirements with respect

to acquiring the necessary technological inputs. Similarly, the human resources

department will be responsible for recruiting, training and motivating qualified

employees and will also handle relations with important worker groups within the

broader external environment such as labor unions. Functional departments will also be

established to handle relations with customers and competitors (i.e., sales and marketing

departments), banks and investors (i.e., finance), suppliers (i.e., materials management

and manufacturing department) and governmental entities (i.e., legal department). Senior

executives for each of these functional subunits will also likely come from the outside

and join the organization. The addition of these new senior executives will generally

trigger more restructuring of the organization to meet current goals and objectives and set

the structure of the organization up in a way that would allow it to move forward with its

broader business strategy, including development of new products and services to build

on the success of the initial launch.

As horizontal differentiation increases in the organizational structure the level of vertical

differentiation will also increase as each of the functional subunits develop their own

unique hierarchical structure, including levels of authority, based on the primary

activities of the subunit. For example, it is common for a manufacturing department to

have a relatively tall organizational structure with anywhere from six to nine hierarchical

levels because of the need to closely monitor the manufacturing process and control

production costs and quality. On the other hand, the hierarchical structure in the sales

department will be much flatter, generally no more than three levels, because of the

availability of tools such as objective sales quotas and standardized written reports that

can be used by managers to efficiently monitor and control the activities of salespersons

in their direct span of control. The research and development department will also have a

relatively flat hierarchical structure; however, the explanation differs substantially from



7 the rationale for sales. In the R&D area the complexity of the tasks involved in a specific

project, as well as the long and relatively uncertain path to completion of a project, makes

it extremely difficult for a single manager to exercise control and authority. In fact, it is

common for R&D projects to be carried out by small groups of scientists and engineers

that share information and monitor one another based on professional norms as opposed

to formal hierarchical rules and controls. When companies are involved in multiple R&D

projects at one time the level of horizontal differentiation within the R&D department

increases to the point where there are actually multiple subunits within the department in

the form of small teams working on a particular complex project with interrelated tasks.

The creation of these subunit hierarchies does allow the overall organizational structure

to remain relatively flat; however, as more and more subunits are created senior

management must monitor these changes carefully to ensure that procedures are put in

place to coordinate the activities of these subunits so that the overall business goals and

objectives of the organization are achieved. Motivational issues may also arise at the

individual level as the tasks performed by employees become a smaller and smaller part

of a much larger activity and it becomes more challenging to determine how the work

activities of an individual employee contribute to the activity and how the activities of

activities of the employee should be evaluated and rewarded. The evaluation issue

becomes even more complicated when employees are required to cooperate with other

employees within and outside their department specific sub-activities since it becomes

even more difficult to isolate and access individual contributions.

In order to maintain an adequate system of control over activities within an expanding

organization, and address the emerging issues of coordination and motivation, new

management positions are created and the number of levels in the organizational

hierarchy begins to increase. The result is an overall organizational hierarchy that is taller

and more vertically differentiated and the goal is to ensure that the organization, through

its expanding management team, retains the ability to exert direct control and positive

influence over the activities of each of its employees. Specifically, it is hoped that the

new mid-level managers can, through their face-to-face interaction with subordinates,

make sure that all tasks are being performed effectively and in a manner that fits with the

overall goals and objectives of the organization. It is anticipated that managers will be

able to consult personally with their subordinates about issues that may arise regarding

their activities and provide them with sufficient information to understand their roles

within the overall picture. Managers can also observe the activities of their subordinates

to make sure that they are not working in their self-interest and contrary to the needs of

the organization. Finally, the new managers can diffuse potential motivational issues

actively developing the skills of their subordinates, creating and applying fair and

objective evaluation metrics and rewarding subordinates for performing the tasks and

activities associated with their organizational roles in a manner that benefits the

organization.

As the organizational hierarchy gets taller those involved with the design of the structure

must also determine how much authority should be retained at the top of the hierarchy

and how much should be delegated to managers at lower levels. Specific decisions must



8 be made regarding decentralization of authority and standardization of behavior, and a

delicate balance must be struck between the desire to control the actions of subordinates

and the need to allow for sufficient autonomy to allow the company, through its

managers and employees at lower levels of the organization, to respond quickly to

problems and opportunities. Increased vertical differentiation also impacts the speed and

effectiveness of the communications and decision-making within the managerial

framework of the organization. These issues are the focus of decisions regarding just how

tall or flat the hierarchy of the organizational structure should be.

It is important to emphasize and appreciate how quickly the degree of differentiation can

change and increase for an organization that is really just starting out. At the beginning

there are just the founders and no real hierarchy or formal differentiation except perhaps

for a handful of full- or part-time employees providing basic support services. As the

organization grows it adds new hierarchical levels, and lines of authority, along with a

division of labor that forms the basis for new departments performing specialized

functional activities. New mid-level managers are brought in to oversee the functional

departments and the senior executive team is built out to coordinate the activities of the

various functions to produce the outputs that would create value for all the

stakeholders—the initial products and services of the organization. At that point the

structure of the organization becomes extremely complex even though the number of

employees is still relatively small. The design challenges get even more difficult as the

organization develops core competencies and sets out to use those competencies to seize

new opportunities (e.g., developing new products and services and/or entering new

domestic or international markets). For example, if the organization decides to market

and sell its initial products in another country it may create a new geographic division

which will add more managers and employees, create coordination issues between the

domestic and international divisions that must be addressed through implementation of

formal rules and procedures, and trigger a move toward centralizing certain functions

(e.g., accounting, finance, marketing, R&D, human resources and procurement) in order

to cost-effectively support each of the geographic divisions. Similar changes will be

required if the organization decides to expand on a product or market basis.

§3:3 Differentiation and integration

The increase in degree of horizontal differentiation in the organizational structure as the

activities of the organization grows, and new employees are brought on board, is intended

to harvest the potential advantages associated with specialization. The process of

breaking the tasks and activities that need to be performed within the organization into

smaller and more focused pieces allows employees to develop and maintain specialized

skills and experience that will ultimately make them more productive and provide them

with a sense of mastery that increases job satisfaction and overall employee morale.

Specialization is accelerated and encouraged by grouping related organizational roles into

functional departments and other types of divisions since the members of those groups

learn from one another through observation, formal and informal exchanges of

information and group-level training. Over time it is hoped that specialization can lead to



9 the development of core competencies that can be can be leveraged as a competitive

advantage that benefits the entire organization.

While horizontal differentiation is inevitable as an organization grows, and orderly

division of labor and specialization can unquestionably benefit the organization and its

employees, there is a real risk that problems may arise when it becomes necessary for

different departments to work together on projects and broader organization-wide

strategic initiatives that require cooperation and coordination among those departments.

The specific concern is that the members of each department will develop loyalties and

allegiances to their departments that make it difficult for them to understand, respect and

accommodate the perspectives of other departments. Moreover, problems may arise

because of differences in the primary operational goals and objectives of the departments.

For example, engineers and production managers in the manufacturing department are

usually focused on continuous reduction of costs and improvements in quality controls

and thus tend to have a short-term perspective since they must meet their production

goals on a daily basis; however, scientists, engineers and software developers working in

the R&D typically look at their tasks and projects with a long-term view since it

generally takes months or years to fully develop a new product or technology.

Interdepartmental relations may also be hampered by the simple fact that employees in

different departments do not share the same educational and professional backgrounds—accountants see opportunities and risks for a business differently than employees with a

marketing or engineering background.

Differentiation, and formal establishment of defined organizational roles, is intended to

enhance specialization and provide employees with a better sense of how their specific

activities fit within the broader goals and objectives of the organization. However, more

often than not, differentiation contributes to the unintended, yet very real, creation of

barriers between departments and the people that work within them. As a result, overall

organizational progress can be derailed by breakdowns in communication and

coordination as differentiation increases. In order to address the problems it is essential

that senior management temper the potential adverse impact of too much specialization

by developing and implementing integrating mechanisms within the organizational

structure in order to encourage, if not force, employees in different departments and

divisions to share information and work together as needed in order to complete projects

and ensure that their activities are not in conflict with one another. There are several

ways that organizations can approach the challenge of balancing specialization and

integration and the best approach at any point in time is generally determined by the size

of the organization and the complexity of its activities. Larger organizations will

inevitably tilt toward greater specialization and can be expected to have a much higher

diversity of products and markets that would logically require higher levels of integration

(e.g., teams and task forces and formal integrating roles and departments). On the other

hand, when an organization is still small it is likely to rely on the hierarchy of authority

and simple integrating mechanisms, such as direct contracts, to achieve the necessary

coordination between persons in different organizational roles.5

5 For further discussion of integrating mechanisms, see the chapter on “Integration Strategies” in this

Guide.



10

While reliance on functional departments (i.e., differentiation) is a common and

widespread practice within the structures of organizations from the time that they emerge

from the early start-up stage, it is important to understand just what factors come into

play when organizations attempt to determine the appropriate level of differentiation and,

at the same time, the amount of effort that should be put into development and

enforcement of integration mechanisms. Clues can be obtained from the work of

Lawrence and Lorsch, who investigated how the characteristics of the industrial

environment in which organizations compete might impact the degree of differentiation

and integration in their organizational structures. Analyzing the level of differentiation in

and among several departments—research and development, manufacturing and

production, and sales—of organizations in different industries they found that

differentiation was highest when the external environment facing those departments was

uncertain or unstable. They also observed that the organizations that were most effective

in dealing with uncertainty in their external environment implemented more formal and

sophisticated integration mechanisms (i.e., teams and tasks forces) to coordinate the

activities of their highly differentiated organizational roles.6

§3:4 Centralization and decentralization

The tension and balance between specialization and integration is an issue that must be

addressed in determining the optimal layout of the horizontal dimension of the

organizational structure; however, there is an equally important and challenging issue that

relates to the vertical dimension of the structure—the proper balance between

centralization and decentralization of authority to make decisions relating to the activities

of the various subunits that may be created within the organizational structure. When

authority is “centralized,” all of the power and authority to make decisions regarding its

activities and how its resources are allocated has been vested with senior managers in the

top layers of the hierarchy of authority. Persons in organizational roles that are located at

lower levels in the hierarchy of authority simply take their directions from the top and

have no formal or legitimate power or discretion to initiate new activities or use resources

in a manner that is different than as directed by senior management. On the other hand,

authority is “decentralized” when organizational roles at all levels of the organizational hierarchy of authority have the ability to make decisions regarding their activities and the

use of resources without the need to obtain approval each time from senior management

provided that they act within certain guidelines established by senior managers in order to

ensure some level of accountability.

Both centralization and decentralization have distinct advantages and disadvantages and

the benefits of one approach as opposed to another will vary depending on the stage of

development of the organization and the specific environment in which it is operating at a

given time. A centralized management structure generally is more suited to situations

where the senior managers feel that it is necessary that they be personally involved in all

the activities of the organization in order to retain the necessary focus and judicious

6 P.R. Lawrence and J.W. Lorsch, Organization and Environment (Boston: Graduate School of Business

Administration, Harvard University, 1967).



11 manage scarce and rapidly depleting resources. If the activities of the organization are

successful, however, and the organization continues to grow and become more complex

the senior managers will soon run out of time to continue being involved in every day-to-

day operational tasks while continuing to do the one job that they have clearly been

selected for—setting long-term goals and objectives for the organization and determining

and executing the business strategies that are best suited for pursuing and attaining those

goals and objectives. At that point more levels in the hierarchy are needed and decisions

need to be made about how much authority can and should be delegated to the persons

who will occupy the new managerial roles.

In general, when organizations are first launched and growth dictates the creation of a

formal organizational structure there is a tendency to establish a centralized hierarchy of

authority in which the power and responsibility for making decisions is primarily vested

in the organizational roles at the top of the hierarchy. For example, it is common for the

CEO to implement an organization structure that provides for various management

specialists to report directly to him or her, including a controller (finance); a manager of

production, plant and operations; a sales/marketing manager; and a general manager.

Other specialties that are also frequently represented include engineering, purchasing,

quality control, project management and shop supervision. This makes sense when the

organization is trying to move away from the “creative chaos” of the launch stage to a

structure that gives each manager and employee a clear sense of their duties and the

actions and results for which they will be held accountable. The problem, however, is that

as time goes by employees at lower levels of the hierarchy are hamstrung by formal rules,

and informal customs and “ways of thinking,” that make them overly dependent on senior managers for direction. As a result, when new problems or opportunities arise for which

there are no solutions within the existing protocols for making decisions employees will

purposely fail to take any action—they don't want to take risks or assume responsibility

for actions that are not within the discretion associated with their organizational role—and simply refer the problem or opportunity up the hierarchy and wait for direction.

Unfortunately, senior managers are generally overwhelmed with requests for direction

and responses begin to take longer and longer to obtain. The byproduct of this situation is

that the organization loses its ability to act quickly to solve problems and seize new

opportunities and the organization risks being overwhelmed by inevitable changes in its

environment.

The problems described in the previous paragraph would arise regardless of the number

of hierarchical levels in the organizational structure. Things get even more complicated

when one takes into account the almost inevitable drift toward a tall organization

structure with increasing number of managers and levels of hierarchical authority. As the

structure gets taller significant problems with regard to communications, coordination

and overall speed of decision-making are likely to arise. The senior managers at the

highest levels of the organizational hierarchy will be spending most of their time

attempting to monitor the activities of managers at lower levels and will lose focus on

more important issues such as establishing goals and strategies for the organization or

their specific departments or divisions. In turn, lower-level managers will grow

increasingly frustrated at the delays in decisions from their superiors, which occur



12 because senior managers are simply overwhelmed with queries from a number of

managers, and begin to resent that decisions are being made by persons who do not have

a good understanding of the actual situation confronting the lower-level manager.

As complexity grows and more hierarchical levels are added to the organizational

structure it is time to consider a reduction in the amount of managerial supervision

exercised from the top of the organizational hierarchy through decentralization—a

redistribution or delegation of the authority to make certain decisions to organizational

roles at lower levels of the hierarchy of authority. This process of decentralizing authority

involves identifying new spheres of authority and discretion for lower level managers to

allow them to make their own operational decisions regarding their day-to-day activities

and the activities of those organizational roles that report to them. The potential benefits

are obvious—senior managers no longer need to be involved in every decision and can

spend their time in other areas and lower-level managers can use their personal

experience and observations regarding a particular situation to make timely decisions

about how to use the resources made available to them by the organization. The lower

level managers remain responsible for achieving the goals and objectives set by senior

management; however, they are given more flexibility about how they can use the human

and other resources assigned to them in order to achieve those goals and objectives.

Decentralization not only reduces potential organizational bottlenecks it also can be a

powerful motivational tool for lower level managers and employees since they are given

permission to think creatively and an opportunity to demonstrate their personal talents to

senior management. In addition, decentralization allows decisions to be made at the point

where a specific issue or problem arises by the managers with the most current and

complete information about the situation. Not only does decision-making become more

efficient but both senior and lower-level managers should experience an improvement in

their morale.

Decentralization can be applied across all of the functional activities of the organization

or can be used in just those areas where changes can create the most immediate value and

competitive advantage for the organization. One area where the decentralization principle

is often applied is with respect to logistics. It is a common strategy for organization to

attempt to decrease and manage their costs of transporting raw materials within the

organization and shipping finished products to customers by centralizing their logistics

function and having a single headquarters-based department make decisions regarding

selection of carriers, scheduling and routing of shipments. However, in order to make

sure that any special requests received from important customers regarding shipping and

delivery can be honored, it is important to allow for variations from centralized control so

that regional sales managers can authorize alternative shipping arrangements (e.g.,

different routing) to meet customer demands even if it means additional costs for that

particular transaction. This type of flexibility is necessary in order for the organization to

remain competitive and not lose business to rivals that offer special shipping programs.

Of course, the exercise of authority by regional sales managers should be carefully

monitored to ensure that the isolated concessions to customers do, in fact, lead to higher

and more profitable levels of business.



13 Decentralization may also be the cure whenever bureaucratic tendencies have begun to

take over the activities at the headquarters office. For example, as organizations grow

they often create a hierarchical level of senior managers between the CEO and the

managers who are actually responsible for the day-to-day operations of the major

departments and divisions of the organization. While these senior managers may have

substantial experience and valuable specialized skills the net result of the additional layer

in the chain of command is slower decision making, usually by people with a poor

understanding of the actual problems faced by the departments and divisions, and

increased distance between the CEO and the “front line” commanders. The solution may be to eliminate the unnecessary level of senior management and have the executives of

each of the departments and divisions report directly to the CEO while at the same time

providing these executives with greater autonomy and responsibility with respect to

decisions impacting their subunits. This type of reorganization achieves decentralization

and a flatter organizational hierarchy at the same time and should improve performance

provided that the executives at the departmental and divisional levels are carefully chosen

and the CEO acts as a strong mentor. A similar outcome may be achieved by

organizations that reduce the amount of control that the headquarters office exercises

over regional branches and place strong executives in those branches with power and

responsibility to reduce costs, improve efficiencies, and establish and execute solid

regional-based sales and marketing initiatives.

The primary risk associated with decentralization is the likelihood that it will become

more difficult to engage in interdepartmental planning and convince the managers of

different departments to give up some of their autonomy in order to better coordinate the

activities of the departments so that the organization can achieve its broader goals and

objectives. Decentralization can also become problematic if senior management loses

touch with the day-to-day pressures experienced by lower level managers and sets goals

for those managers that are unrealistic or fails to listen to their reasonable requests for

support and resources. In addition, while decentralization is intended to free senior

management from day-to-day decisions there must still be ways for senior management

to regularly review the quantity and quality of those decisions to make sure that lower

level managers are effective and acting in ways that are consistent with the long-term

business strategy of the organization. In for this to occur, however, the organization must

be prepared to invest in information processing technology to ensure that performance-

related data flows quickly and efficiently up and down the organizational hierarchy.

As with the other challenges confronting an organizational designer, the centralization

versus decentralization dilemma is ideally solved by striking an appropriate and fully

understood balance so that senior management can continue to focus on the “big picture” and lower level managers can concentrate on executing the strategy established by senior

management and making decisions for which they are best qualified and informed within

the framework of the organization's overall strategy. In this way the organization will be

in a position to respond quickly and effectively to unforeseen changes in its external

environment while not deviating substantially from its broader mission. The decisions

which are most commonly completely delegated by the CEO of top performing

organizations are those that must be made with respect to production responsibility,



14 personnel training and job definition and procurement of supplies and services. In turn,

the CEO is generally less likely to delegate in the areas of governmental relations and

coordination of workflows. A related issue is the degree to which the CEO is willing to

seek and accept input from other managers in the process of making decisions. In the top

performing organizations, the CEO is less likely to involve subordinates in areas such as

expansion planning, monitoring and controlling costs and public relations. Research also

indicates that CEOs of top performing organizations are more likely to share authority

with other managers, as opposed to completely delegating authority, and it is most

common to find that authority is delegated to two or three managers.7 In order for

delegation and decentralization to work, however, the designer must create integration

mechanisms to ensure that fully- or semi-autonomous lower level managers continue to

understand the need to coordinate their activities and decisions with other departments.

§3:5 Standardization and mutual adjustment

The last of the four major challenges for an organizational designer is achieving the

proper balance between standardization and mutual adjustment when rules and norms and

being created to the various roles and groups within the organizational structure together.

When an organization seeks to “standardize” it is attempting to remove variations and irregularities in the way that particular situations are handled so that there is conformity

and predictability in the way that the situation is handled each time it occurs.

Standardization can take several forms and may include standardization of work

processes in order to coordinate the activities of employees working on related tasks;

standardization of outputs which facilitates coordination by providing all employees with

common performance goals for their activities and/or specifications for their finished

products; standardization of skills and knowledge which improves coordination by

ensuring that employees share the same foundation of skills and training; and

standardization of norms which builds cooperation and teamwork by instilling common

values and beliefs (i.e., organizational culture) in each of the employees that are relied

upon when acting on behalf of the organization.

The main tools of standardization are formal rules and organizational norms which, taken

together, define way in which employees discharge the duties and activities associated

with their organizational roles. When standardization begins the organization will

develop and disseminate formal written rules and procedures that standardize operations

and set forth in appropriate detail the way in which it is expect that employees will

conduct themselves in order to achieve specific goals. It is often said that standardization

turns the duties and responsibilities of a particular organizational role into a “routine” that can be easily measured and continuously repeated over and over again. Formal rules are

typically supported by organizational norms that define a standard pattern of behavior

within the company that is considered to be normal, typical and expected. Norms are

generally informal understandings that arise, and are transferred between employees, as

employees go through their day-to-day work activities. As norms become more

entrenched they become just as important as formal rules in defining the way that

7 L. Hendrickson and J. Psarouthakis, Dynamic Management of Growing Firms: A Strategic Approach

(Second Edition) (Ann Arbor, MI: University of Michigan Press, 1998), 66-67.



15 employees view, and act upon, particular situations. In fact, it is common to see that

employees that are perceived to have violated a widely known and accepted norm will be

punished by their colleagues with the same vigor and intensity as if a formal written rule

or procedure had been breached.

The level of standardization can have a direct impact on the form and operation of the

organizational structure since the use of standardization techniques to ensure that

employees perform their tasks, and respond to certain situations, in a predictable manner

allows the designer to expand managerial spans of control and slow the tendency toward

more and more hierarchical levels of authority. Organizations that establish and enforce

rules and standard operating procedures can reduce the need for direct supervision and

creation of a large number of management positions. The managers that do exist can be

expected to handle more employees (i.e., larger spans of control) and rely on standardized

tools for learning about and measuring the performance of those employees. For

example, sales managers can oversee a large number of salespeople by setting objective

sales quotas, collecting and analyzing timely objective information about sales

performance, and receiving and reviewing written reports from each salesperson in a

standard format that includes all of the data necessary to understand how the salesperson

performs his or her tasks. In addition, standardization increases the confidence level of

managers asked to delegate more authority to their subordinates since the managers can

reasonably predict how the subordinates will act provided that they follow organizational

rules and norms.

There is no dispute that organizations do need formal written rules and institutional

norms and values in order to provide some minimum level of control over the activities

and behavior of their employees. Problems may arise however if there are too many rules

and employees feel afraid and powerless to do anything that goes against established

procedures and beliefs even if they reasonably believe that some form of adjustment is

necessary in order to solve a particular problem or respond to an unanticipated

opportunity. If employees blindly follow rules without exception creativity will be

stifled, innovation will decrease, and employees are more likely to become frustrated

with working in an environment they see as inflexible and rigid. In order to avoid, or at

least minimize, some of the potential problems associated with standardization a

conscious effort should be made to permit employees to engage in informal

communications, often referred to as “mutual adjustment,” to coordinate activities and resolve problems for which the “standard operating procedures” do not provide a ready or reasonable answer. If the proper balance can be struck then employees will know how to

handle routine and non-controversial tasks and situations easily and efficiently and thus

will be able to invest more time and effort into applying their knowledge, experience and

judgment to solve new problems that will inevitably come up regardless of the level of

detail in the formal rules promulgated by the organization.

Larger organizations, particularly those that have been doing business the same way for a

long period of time, often find that it is extremely difficult to change formal written rules

and procedures and institutional norms and/or shift toward a less formal approach to

coordination, such as mutual adjustment. In fact, companies may find that the “old” rules



16 and norms have become so much a part of the way that the organization works and

employees think that it is difficult to change behavior patterns that have now become too

comfortable. As such, it should not be surprising that the transition toward mutual

adjustment can be a bumpy road and that there may be a significant amount of disruption

and anxiety before the new methods are accepted and begin to become effective.

Another issue to be considered by organizations as they attempt to introduce mutual

adjustment into their culture is just how much of their preexisting norms should be

retained in order to maintain a strong shared belief system within the workforce. Finally,

it must be recognized that different functions within the organization may require a

specific solution with respect to the level of formality and standardization. For example,

it is not surprising that the accounting department will prefer the use of detailed rules and

procedures for every foreseeable transaction or exchange within the organization;

however, departments heavily involved in the development of new products and

technologies, which requires a high level of creatively, will likely flourish when scientists

and engineers can attack problems and opportunities through mutual adjustment.

How an organization decides to balance standardization and mutual adjustment is also

tied to the other important structural design challenges, such as centralization versus

decentralization and the implementation of integrating mechanisms. Organizations that

rely heavily on formal rules and procedures as opposed to allowing employees to act

autonomously in various situations will generally opt for centralization of authority. On

the other hand, organizations that have allowed and trained their employees to engage in

cross-departmental communications and mutual adjustment in order to resolve problems

and conflicts at lower levels of the organizational structure have made a decision to

decentralize authority. In fact, some degree of decentralization is a necessary condition

to successful implementation of mutual adjustment since employees at lower levels of the

organization must have the legitimate authority to make final decisions regarding their

activities and how the organizational resources under their control are used. Also, if an

organization decides to increase its reliance on mutual adjustment it should

simultaneously bolster its integrating mechanisms (i.e., teams and task forces) to be sure

that there is constant communication between departments so that they can use mutual

adjustment as a way to resolve conflicts and effectively coordinate their activities.

§3:6 Special topics

The following sections cover several additional special topics that are constantly debated

among researchers focusing on organizational structure. One topic, which begins with

increasing vertical differentiation, is the appropriate “height” of the organizational structure. A so-called “tall” organization has a relatively large number of levels of managerial and supervisorial positions while a “flat” organization is less hierarchical. A second topic is the appropriate “span of control” for managers and supervisors with the span being measured by reference to the number of persons who report directly to a

manager or supervisor. A third topic is mechanistic versus organic organizational

structures. An organization that is highly reliant on standardization and formal rules and

procedures for making decisions is said to be mechanistic while an organization that

tolerate mutual adjustment and permits and encourages decentralization is characterized



17 as organic. While these topics are treated separately below, they are, of course, tightly

interrelated. For example, a traditional, so-called “bureaucratic,” structure places authority at the top of the hierarchical pyramid, has a number of managerial levels (“tall”) and narrow spans of control at each level and relies heavily on standardization that

discourages employees at lower levels of the organization from acting autonomously

(“mechanistic”). On the other hand, smaller organizations, particularly emerging

companies competing in dynamic and rapidly changing business environments, operate

with far fewer managerial layers (“flat”) and delegate opportunities to employees throughout the organization to take initiative and make decisions on their own (a decision

that also has the effect of expanding the span of control of those serving in managerial

positions). There is no “best practice” for each of these topics and organizations typically change their approach to each topic as time goes by and new circumstances emerge.

§3:7 --Tall versus flat organizational structures

The decisions made regarding the issues described above will ultimately determine where

the degree of hierarchy of the chosen organizational structure falls on a continuum

between tall at the one end and flat at the other extreme. A tall organization is one in

which there are many levels of management authority in the structure in relation to the

size of the organization (i.e., the total number of employees). On the other hand, a flat

organization has relatively few levels of management authority in its structure. Studies

have shown that by the time the size of an organization has grown to around 1,000

employees it will typically have, on average, four levels in its hierarchy—the CEO, the

senior managers of the functional departments and other divisions, the supervisors within

the departments and divisions, and the rank-and-file employees. As the organization

grows to around 3,000 employees the number of hierarchical levels will likely increase to

seven. Whether or not the number of levels in a particular organizational structure makes

the structure tall or flat depends on the number of employees. For example, if an

organization with 3,000 employees has just four levels in its hierarchy it would be

considered to be flat in relation to the average for organizations of that size; however, if

there were nine or ten levels in its hierarchy it would be classified as tall. Interestingly,

as companies grow even larger to 10,000 or more employees the rate of increase in the

number of levels in their hierarchy slows dramatically and it is uncommon to find more

than nine or ten levels in the hierarchy of these very large organizations.8

Tall organizations have many more managers involved in the direction of the activities of

their employees, particularly at the lower levels of the organizational structure. While

this approach has advantages with respect to the degree of control over the tasks

performed by the employees it does have the potential for seriously impairing

organizational effectiveness. The first problem is that as the number of levels in the

hierarchy increases, communication within the organization also becomes more difficult.

This is an obvious hazard given that information will take longer to flow up and down the

hierarchy between managers at the top and bottom of the pyramid. Moreover, as the

8 J. Child, Organization: A Guide for Managers and Administrators (New York: Harper and Row, 1977),

10-15; P. Blau, “A Formal Theory of Differentiation”; W.R. Scott, Organizations: Rational, Natural, and Open Systems (Upper Saddle River, NJ: Prentice Hall, 1981), 235-240.



18 information moves through the hands and heads of different managers it is likely to get

distorted so that senior managers get a story that often is very different than the reality

confronting managers lower in the organizational structure who are directly involved

with an issue or problem. Distortion may be accidental; however, in some cases

managers intentionally manipulate information to suit their own interests. The bottom

line with regard to communication is that decisions take longer to make in a tall

organization and are often made by senior managers who have lost control over, and

insight into, the day-to-day activities to which their decisions pertain.

A second issue that arises when the hierarchy becomes taller relates to the potentially

negative impact on motivation and morale within the management group. As the

organizational structure becomes taller the span of control and authority for the managers

at each level decreases. Correspondingly, as the organizational structure becomes flatter,

and hierarchical levels are removed, the remaining managers experience a widening in

their spans of control and authority. Studies indicate that as managers are given more

control, authority and responsibility they tend to become more motivated to perform their

roles within the organization and achieve the goals and objectives established by senior

management. Accordingly, it would seem that keeping the number of hierarchical levels

in the organization structure to a manageable number (i.e., a flatter organization) would

have the strongest motivational pull on the managers. However, caution is advised since

wider spans of control and authority can quickly overwhelm managers and vitiate any

gains with respect to morale and enthusiasm.

A third issue that accompanies expansion of the organizational hierarchy is the increased

costs associated with recruiting new managers to staff each new hierarchical level. New

managers carry various direct expenses including salary, bonus, benefits and office space.

In addition, the administrative costs of operating the organization increase as more

managers are added since the organization will need to invest in more sophisticated

communications and information processing systems to make sure that managers have all

the data necessary to accomplish their duties and keep their superiors informed of

progress at the lower levels of the organizational pyramid. Another hidden, yet very real,

issue with bringing in a number of new managers is the need to train them about the way

that organization works and ensure that they are properly acclimated to the pre-existing

cultural values and norms of the organization so that they can be effective in carrying out

their managerial responsibilities and securing the trust and loyalty of their subordinates.

When business is good and growing quickly organizations tend to drift toward taller

organizational structures without much thought regarding the potential consequences of

such a change in the hierarchy. Growth comes naturally as the organization identifies

and engages with new customers and markets and seeks to exploit new business

opportunities. Moreover, the managers that are already in the organizational hierarchy

tend to engage in certain activities that will ultimately lead to more hierarchical levels

and a taller organization. For example, C.N. Parkinson, who articulated the well-known

“Parkinson’s Law”, conducted field studies to support his argument that increases in the

number of managers in an organization, along with increases in the number of

hierarchical levels in the organizational structure, occur because of two fundamental



19 principles—managers want to multiply subordinates, not rivals; and managers make more

work for one another.9 Managers typically crave a higher rank and greater status within

their organization and believe they can achieve those goals not by increasing the number

of managers on the same level but by expanding the number of subordinates below them

in the organizational hierarchy who must report to them, including others who are

themselves engaged in managerial activities. As this phenomenon continues the number

of managers increases and the organizational structure becomes taller and more complex.

In addition, as the number of managers increases the amount of work also expands since

managers create more activities to justify their need for a large group of subordinates and

also spend more time and effort controlling their subordinates and protecting the

resources they have fought to collect.

Clearly, creeping and uncontrolled growth in the number of hierarchical levels of

authority within the organizational structure is a significant problem and it is incumbent

on senior management to establish and enforce certain basic guiding principles for

measuring whether or not another managerial position should be created. Ideally

managers would not bring in a new manager unless the new value created by the last

manager employed exceeds the costs associated with recruiting and maintaining the last

management position. Simply put, why hire a new manager when the last management

position created has not improved the situation in terms of value generation.

Unfortunately, many managers do not see things this way and are more interested in

improving their own status within the organization even if it is not the best use of the

organization’s resources. In order to control this situation companies organizations

require that creation of any new management position must be approved by the CEO and

that information that the CEO can use to make a decision must be provided by senior

level managers who are in the best position to objectively evaluate the need for additional

managers and hierarchical levels at lower levels of the organizational structure. Another

strategy is for the organization to consciously embrace and follow a principle of

“minimum chain of command” which requires that the number of hierarchical levels be

limited to what is absolutely necessary for the organization achieve its goals and survive

within its specific environment. This means that organizations should have a bias toward

flattening their structure and should create incentives for senior managers to follow suit

by using evaluation systems that reward those who are able to effectively monitor and

control activities without creating excessive numbers of lower-level management

positions.10

If possible, changes in the organizational culture should be encouraged so

that managers are recognized and celebrated for the performance, rather than the size, of

their reporting group.

Senior management must also consciously monitor the effectiveness of the organizational

structure at all times and be prepared to manage and, if necessary, flatten the hierarchy as

necessary in light of changes in the organization’s environment. Not surprisingly, mid-

level managers are especially at risk in times of financial trouble and organizations often

eliminate hierarchical levels, and the managers associated with them, as one of the first

9 C.N. Parkinson, Parkinson’s Law (New York: Ballantine Books, 1964).

10 “Preparing the Organization Manual,” Studies in Personnel Policy, No. 157 (New York: National

Industrial Conference Board, 1957), 28.



20 steps to cut costs and improve the profitability of the business conducted by the

organization. It is also common to combine two or more managerial positions into one as

a means for improving coordination of activities among the employees who previously

reported to the eliminated position. Elimination of entire levels in the hierarchy is also a

good way to improve communications and improve the speed of decision making within

the organization. For example, organizations may seek to become more responsive to

customer requirements by reducing the number of hierarchical levels between field

salespeople and senior management. When this is done the salespeople can provide

customers with quick answers on pricing and credit issues and get new information about

customer requirements to the organization’s product development team much more quickly. The anticipated result is higher sales, more loyal customers, better morale

within the sales group, and a stronger stream of new and/or improved products

specifically suited to the actual requirements of customers. There are, of course,

situations where a tall structure may be inevitable in light of the operational activities of

the organization. For example, organizations engaged in hazardous activities, such as

operation of nuclear power plants, must have a structure that closely monitors and

controls the activities of employees given the substantial risks associated with making a

mistake. In that case, rules and standard operating procedures, and the organizational

infrastructure to make sure that they are followed, are essential to the viability of the

organization and are often required by external factors such as regulation.

§3:8 --Span of control

Another important issue is creating an appropriate and efficient organizational structure is

setting the managers’ span of control, which is determined by the number of employees that managers are expected to oversee and control through direct reporting relationships.

Organizations with the same number of non-managerial employees are likely to have

different spans of control and, of course, there will be variations in the spans of control

for managers within a single organization. For example, one organization with ten non-

managerial employees may have a CEO and five managers and each manager may have

two employees reporting to him or her. In that case the span of control for each manager

is two. On the other hand, another organization that also has ten non-managerial

employees may have a CEO and just two managers and one manager may supervise three

employees while the other manager has seven direct reports. Each of these organizations

has the same number of hierarchical levels, which means that their organizational

hierarchies are the same height, yet the roles and responsibilities of the managers as

evidenced by their spans of control are very different.

In general, the most critical limitation on the span of control of a particular manager is his

or her ability to effectively supervise the activities of the subordinates that report to the

manager. A manager must not only manage his or her direct relationship with each

subordinate but also must be involved in the relationships between each of his or her

subordinates. The challenges become more difficult as the number of subordinates

increases since the number of relationships accelerates more rapidly than the headcount

in the reporting group. For example, if manager MA has two subordinates—B and C—MA must manage three relationships: MA and B; MA and C; and B and C. However,



21 add just one more subordinate—D—and the manager suddenly becomes responsible for

six relationships: MA and B; MA and C; MA and D; B and C; B and D; and C and D. If

the number of persons involved—the manager and the number of subordinates—equals

“n”, the number of relationships that are created and must be managed can be calculated by using the formula (n(n-1))/2. Accordingly, a manager with 10 direct reports must

keep track of 55 (11(11-1)/2) relationships on a daily basis.

In the past, when organizations tended to gravitate toward tall hierarchical structures as

they grew, it was typical to find that the average span of control for a manager was no

more than 1:10—on average each manager has ten employees reporting directly to him or

her—and often less. As noted above, this meant that the average manager was involved

in managing 55 relationships on a daily basis. However, beginning with the movement

toward flatter organizations in the 1980s the average span of control increased

dramatically and moved closer to 1:100 as growing organizations sought to reduce the

need to add more managers and hierarchical levels as their businesses expanded. While a

flat organization is associated with efficiency and empowerment for increasing numbers

of managers and employees another strong driving force for larger spans of control was

cost reduction through the elimination of middle management positions. The movement

toward expanded spans of control was also made possible by advances in information

technology, including computing capabilities, that made it easier and cheaper for one

person to perform the main tasks of a middle manager--collecting information about the

activities of his or her subordinates, compiling the information, reporting the results to

senior management, and disseminating new directions from the top back out to the

subordinates. New software applications also facilitated collaboration between the

members of a business unit or sub-unit.

While the reasons for expanding spans of control to reduce the height of the

organizational structure are understandable, there are serious problems that can arise.

The most obvious and important is that a manager can quickly become overwhelmed by

the number of relationships that he or she must control and any failure to control can have

dire consequences for the effectiveness and morale of the group—subordinates, thinking

that the manager is not paying attention, may stop performing their duties or simply “free ride” on the work of others; subordinates may begin pursuing their own goals and objectives and ignoring the needs of the group; and/or subordinates may withhold support

and information from others in the group. The overall effect can be a devastating blow to

the morale and performance within the group. As such, expanded spans of control should

be pursued judiciously with careful attention to several key variables that should be taken

into account when determining the size and limits of the span of control of particular

managers.11

A key factor in evaluating whether the particular span of control is appropriate and

efficient is the complexity and similarity of the tasks to be performed by the employees

reporting to a single manager. In general, when employees are engaged in activities that

involve tasks that are complex and dissimilar the challenges for the manager with respect

11

D.D. Van Fleet, “Span of Management Research and Issues,” Academy of Management Journal, 4 (1983), 546-552.



22 to control and oversight are greater and a smaller span of control is dictated. On the other

hand, when the tasks are relatively simple and similar, as is often the case in a production

setting, the span of control can be widened. For example, it is common to find managers

in manufacturing facilities supervising the activities of 30 to 40 workers on an assembly

line because the tasks involved are standardized, repetitive and objectively measurable.

On the other hand, management of a research and development group usually requires a

tighter span of control because there is no standard pattern of work and the manager must

ensure that the scientists and engineers to do not drift too far away from the general goals

and objectives of the group. The relationship between span of control and complexity is

even relevant at the very top of the organizational hierarchy and it is common

recommended that a CEO should limit his or her direct reports to no more than six to

eight senior executives given the complexity of the job responsibilities of each of those

executives in overseeing large and diverse operations and activities.

Any factor to consider when determining the maximum span of control that a manager

can effectively handle is the degree of interrelatedness between the tasks performed by

the employees within a specific reporting group. If the tasks performed by the employees

are not closely related the manager can afford to invest less time in monitoring the

relationships between employees and thus can handle a bigger group (i.e., expand his or

her span of control). In turn, a higher level of interrelatedness of tasks means more time

will need to be spent focusing on communications between employees, including

mediating disagreements, and on reviewing whether the results of collaboration to ensure

that they are consistent with group goals and that each employee has made an appropriate

contribution. In this situation a smaller span of control is necessary in order for the

manager to perform his or her duties. All this can be illustrated by returning to the

example above of a manager, MA, with three subordinates—B, C and D. If the tasks of

the subordinates are closely related MA would expect to invest time in overseeing six

relationships: MA and B; MA and C; MA and D; B and C; B and D; and C and D.

However, if the tasks of the subordinates are not closely related MA may be freed from

worrying too much about relationships between the subordinates (i.e., B and C, B and D,

and C and D) and would thus have just three primary relationships to consider. In

principle, the span of control of MA could be expanded to six subordinates by adding

three new subordinates with similarly un-interrelated without creating any more of an

overload than would have existed had MA been supervising three subordinates with

closely related tasks.

Complexity and interrelatedness are such important and widely-applicable determinants

of span of control that they tend to explain why the typical representation of the structural

hierarchy of an organization takes the form of a pyramid. At the highest levels of the

hierarchy the senior managers are engaged in highly complex activities overseeing

essential functional and market-based activities that must be coordinated with activities

of other senior managers at the same level. Accordingly, the “superiors” of these managers, including the CEO, must have limited spans of control in order to under the all

that is going on in the areas overseen by their direct reports and effectively control and

coordinate their activities. This explains the “top of the pyramid” and the narrow spans

of control in the top two or three hierarchical levels. On the other hand, the lowest levels



23 of the organizational hierarchy will house those jobs with tasks that are relatively simple

and un-interrelated and thus suited to oversight by lower-level managers with larger

spans of control illustrated by the wide base of the pyramid.

While complexity and the interrelatedness of the tasks to be performed by the

subordinates appear to be the most important and relevant determinants of the appropriate

span of control, other factors should be considered including the overall structure of the

organization; the technology available within the organization to support communications

and the flow of information; the managerial skills of the particular person being placed in

the oversight role; and the abilities, intelligence, motives and morale of the employees

reporting to the particular manager.12

Another important factor is the incentives created

by the organization for accepting the decision to eliminate levels in the managerial

hierarchy and expand the responsibilities of the remaining managers. Organizations

should create reward systems for the managers and their subordinates that encourage all

parties to avoid the potential relationship issues described above. For example, all

members of the group, the manager and each of the subordinates, should have a

significant portion of their compensation based on group performance factors to

encourage communication and cooperation. In addition, managers should be evaluated

on their ability to develop the skills of their subordinates so that they can become more

autonomous with respect to their particular tasks and thus require less monitoring and

control from the manager. Managers should also be provided with technological tools to

easily monitor the performance of their subordinates when it is not possible to interact

with them face-to-face.

§3:9 --Mechanistic and organic organizational structures

Obviously each of the challenges confronting organizational designers regarding

organizational structure, while discussed separately, must be addressed simultaneously

and involve issues, problems and conflicts that are often overlapping. The structure

adopted by a particular organization is a combination of the choices made by senior

management in addressing each of these challenges. The end result is an organizational

structure that falls somewhere on a continuum between purely mechanistic organizational

structures and purely organic organizational structures. A mechanistic organizational

structure is used as a means for maximizing the likelihood that employees will behave in

predictable and accountable ways when discharging the duties associated with their

organizational roles. On the other hand, an organic organizational structure will be

actively cultivated to encourage employees to be flexible and adapt quickly to changing

environmental conditions and opportunities to be creative and innovative. While the

foundation of the mechanistic structure was clearly defined job responsibilities, formal

rules and procedures and strict lines of control and authority, the organic model is

substantially less formal and seeks to decentralize authority and broaden the scope of the

job responsibilities of all employees so that they can determine on their own, without

excessive interference from managers well above them in the organizational hierarchy,

what is necessary in order to achieve the specific goals that have been set for them.

12

http://en.wikipedia.org/wiki/Span_of_control (11.01.07).



24 In general, it can be expected that a mechanistic organizational structure will emerge

from make the following choices with respect to the key issues discussed above:

High degree of specialization in the tasks and activities assigned to employees;

Reliance on a well-defined hierarchy of authority as the principle means for

integrating and coordinating the activities of employees;

Centralized decision-making structure with most of the power and authority over use

of organization resources vested in managers at the higher levels of the hierarchy;

Most of the communications and information within the organizational structure

flows vertically up and down the hierarchy of authority; and

High degree of standardization including extensive use of formal written rules,

standard operating procedures, predicable work processes and written

communications.

Several striking attributes of a mechanistic organizational structure are worth

emphasizing. First, the organization itself is essentially a network of organizational roles,

each of which is defined by a specific task or group of tasks, and persons in each role are

expected to limit their activities exclusively to the assigned tasks. Also, informal status

within the organization is closely related to the number of organizational roles that a

manager has been asked to oversee and this often results in managers resisting change in

order to preserve their personal “empires” within the organization, an issue discussed above with respect to tall versus flat organizational structures. In general, opportunities

for promotion and moving up the hierarchy in a mechanistic organizational structure are

based on performance and seniority and career paths are generally well defined. Because

a mechanistic organizational structure is relatively rigid and difficult to change quickly it

is generally thought that it is best suited for a competitive environment that is stable and

which does not change quickly or frequently.

At the other end of the continuum is the organic organizational structure that can be

expected to emerge from making the following choices with respect to the key issues

discussed above:

Rather than specializing in one single task or group of tasks, two or more employees

with specialized skills will work together to coordinate completion of a set of

necessary tasks;

Use of wide range of integrating mechanisms particularly complex solutions such as

tasks forces and teams;

Decentralized decision-making structure in which authority to make decisions and

control the use of organizational resources is delegated to lower levels of the

hierarchy of authority;

Most of the communications and information within the structure flows laterally from

side-to-side in order to facilitate coordination; and

Coordination is based largely on mutual adjustment and face-to-face contact as

opposed to relying on the traditional standardization mechanisms such as formal rules

and standard operating procedures.



25 The organic structural model emphasizes that decisions should be made, and goals should

be set, at all levels within the organization and that information should flow freely across

departmental boundaries to ensure that employees have the knowledge and understanding

to make appropriate decisions and efficiently carry out their duties. In order to

implement the organic model organizations have begun to rely more heavily on the

creation of self-directed cross-function work teams that are responsible for setting team

goals, deciding the best way to achieve those goals, and monitoring the performance of

the team and each of its members. For example, a manufacturer may form production

teams that will be responsible for identifying and solving all of the issues associated with

the manufacture of a particular product or component. One of the most important

potential benefits of the organic model is that employees feel more empowered, perform

better, and report higher levels of motivation and job satisfaction.

Organic organizational structures are much more fluid than mechanistic organizational

structures and are particularly useful and appropriate when the work process is relatively

unpredictable. Rather than working in relative isolation on routine tasks day after day

without deviation, employees can expect to be part of a formal or informal network of

related organizational roles within which decisions are continuously made about how best

to divide certain tasks and activities. As a result, while employees may be primarily

responsible for certain tasks and activities they are also likely to have opportunities to

learn new skills and develop new talents that allow them to take on different

organizational responsibilities. Another byproduct of an organic structure is that it is

more difficult for any manager to build an empire and it is more common and likely to

see that informal status within an organic structure will be based on talent, expertise and

the ability to successfully adapt to environmental changes and come up with new ideas.

Organic organizational structures are more likely to assign status to creative leaders at all

levels of the hierarchy as opposed to limiting status to those with fancy titles at the

highest levels. The organic structure is thought to be most appropriate for organizations

competing in rapidly changing and uncertain environments and for solving problems and

issues that lend themselves to creative and novel solutions and cross-departmental

collaboration—new product development, enhanced product quality or improved

customer service.

While it is useful to recognize and contrast the characteristics of mechanistic and organic

structures the reality is that most organizations will need to use elements of both

structural paradigms as they respond to environmental challenges. For example, simple,

straightforward vertical reporting relationships coupled with standardized rules and

procedures (i.e., a predominantly mechanistic structure) generally make sense in certain

functional departments such as accounting; however, decentralization, high integration

and mutual adjustment (i.e., a predominantly organic structure) are considered to be

essential for other functional departments—marketing and new product development—where creativity and innovation are needed. Problems may arise due to what amount to

cultural clashes between personnel working within mechanistic and organic departments

since they tend to see the world and the way people should act in very different ways.

For example, salespersons eager to extend additional credit to a customer to close new

sales always chafe at what they perceive as being unnecessarily delays by staffers in the



26 credit department who are used to proceeding more deliberatively as they collect and

evaluate financial information on the customer before making their decision regarding the

size of the credit line.

The external environment in which the organization operates is also an important factor

in choosing between organic and mechanistic organizational structure. Research

conducted by Burns and Stalker lends support to the belief that an organic structure is the

preferred choice when an organization is confronted with an unstable and constantly

changing external environment and that the mechanistic structure is the most effective

solution when the external environment is relatively stable. Organic structures work well

in an unstable environment because they empower lower level employees to make

decisions that must be made quickly in order to address the large number of problems and

opportunities that suddenly arise when technology and markets are rapidly changing.

Moreover, organic structures are most effective in facilitating communication and

information sharing between departments—factors that are crucial in reducing the time

required to develop new products and responding to the needs of customers. In contrast,

the mechanistic structure is appropriate for organizations operating in a relatively stable

environment because they can expect that most decisions about the use of the resources

of the organization will be routine and thus can be efficiently managed through

standardization and a hierarchy of authority in which top management retains authority

and control over most aspects of the business of the organization.13

§3:10 Informal organizational structures

While it is important, and recommended, that some form of organizational chart be

developed to outline the formal reporting and consultative relationships between various

department and divisions, it must also be recognized that all organizations have their own

informal network of relationships that can be just as important in getting projects

completed, generating new ideas and improving and maintaining overall employee

morale. Almost every organization can make its own contribution to the large body of

anecdotal evidence regarding the existence and influence of the informal organization—middle managers that have been around so long that they are far more effective in getting

proposals through and accessing necessary resources than new hires who may be higher

on the formal organization chart, bottlenecks in communication between two key

departments because of personal conflicts between the department heads and the

continuous exchange of information between departments that occurs at the side of the

building where smokers congregate. Informal organizations are not a complete substitute

for the fundamental principles underlying the organization chart—task description,

supervision and authority; however, informal organizations do provide clues to who

within the organizations are looked to as leaders and senior managers should know and

understand some of the tools that are available for gathering knowledge about the

informal organization and be prepared to look for ways to use what is known about the

informal organization to improve performance and pave the way for more efficient and

less painful changes in the formal organizational structure as they are needed.

13

See T. Burns and G.M. Stalker, The Management of Innovation (Oxford University Press, 1961).



27 A common tool that organizations use for identifying the boundaries of their informal

organizational structure is “social network analysis” (“SNA”), which is sometimes promoted by management consultants as “organizational network analysis.” While there are multiple definitions of a “social network,” the consensus seems to be that a network consists of “nodes,” which can be individuals, formal or informal groups or other organizations, that are have developed interdependencies, referred to as “ties,” with one another within the defined network based on certain relationships—friendship, conflicts,

values and ideas, or business transactions. SNA is the art and science of attempt to map

and measure the relationships within a network and identify how information and

knowledge flows back and forth between the nodes using the ties that are identified

during the course of the analysis. A significant amount of research has been conducted in

this area and social networks have been identified on a number of levels—from families

to groups of nations—and the general conclusion in the business area has been that these

networks can and do play a crucial role in how business organizations operate and

address opportunities and threats and how the employees conduct their day-to-day

activities and develop perceptions about how the organization is managed.

In order to understand how a social network operates, analysts perform certain tests to

determine the “location” of each node, measured by its level of “centrality,” and its relationships to other parts of the network. Social network analysts produce maps of the

network that show how all the nodes are tied together (“connected”) and identify who is

in the core of the network, who is on the periphery of the network, groupings of nodes

and their members, and the roles that certain nodes play in the operation of the network

(e.g., leaders, connectors, etc.). The first step in creating the map is to chart the

connections between nodes, which exist whenever two nodes regularly communicate or

interact in some meaningful way. This information is then used to generate various

measures, or metrics, that track the centrality of each node and the strength and

importance of the connections between the various nodes. The most commonly cited

measures of the individual centrality of a node are as follows:

The level of “degree centrality” refers to the number of direct connections associated with a node. Nodes with the most connections are referred to as a “connector” or “hub” in a network; however, the number of connections is just one part of the story and role and importance of the node in the network is also heavily influenced by

which nodes are at the other end of these connections and how those nodes are

connected to other parts of the network.

The level of “betweenness centrality” focuses on connections with different groups within the network. A node may have a relatively low level of degree centrality due

to a small number of direct connections; however, if the node is the sole link between

two important groups that are not otherwise directly connection with one another it

can play a powerful role as a “broker” of relations between the groups and a conduit

of information and knowledge between different parts of the network that otherwise

would not communicate.

The level of “closeness centrality” measures the relative distance of a node from all other parts of the network based on the node’s direct and indirect connections. Nodes



28 with high closeness centrality are best positioned to monitor information from all

parts of the network through their “grapevine”.

After the data regarding the network is collected and categorized, social network analysts

can determine the relative importance of each node in a network by aggregating those

measures taken of the node with respect to the number and strength of connections, the

degree to which the node connects groups that are not otherwise linked to one another,

and the amount and quality of information that actually flows through the node to other

parts of the network. In addition, SNA facilitates the development of various conclusions

regarding the characteristics of the network as a whole and various clusters of nodes

within the network. For example, networks can be characterized as centralized or

decentralized depending on the degree to which key links are associated with a relatively

few number of nodes (i.e., hubs that have high levels of both degree and betweenness

centrality). In addition, the relative cohesiveness of groups of connected nodes can be

determined and nodes that are closely linked to one another at the expense of less direct

ties to other nodes can be classified as “cliques.” Group cohesiveness is also important in

determining the effect that removing members would have on the connectivity within the

group. For example, removing one key node may cause communication among the other

members to collapse completely due to the unique role that the node played in ensuring

that information flowed to each member.

The results of SNA should be evaluated closely to ensure that the correct conclusions are

drawn from the particular measures and to determine cautionary measures that could be

taken to preserve the value and efficiency of the network. For example, a node may have

a high level of degree centrality (i.e., a large number of direct connections); however, the

influence of the person occupying that node may be relatively limited if the connections

are limited only to other nodes close by in his or her immediate cluster. Also, the

importance of what appears to be a connector or hub really depends on how much

information does in fact flow through that node. Another important feature of SNA is the

way in which it can identify nodes that have drifted away from the central network. SNA

usually identifies one or more nodes, or clusters of nodes, with relatively low centrality

scores meaning that they are no more than peripheral members of the particular network.

There may be a number of reasons for this such as personality factors, the nature of the

activities performed by the persons occupying those nodes and problems with the flow of

information within the network. However, peripheral nodes can be very valuable for the

network either by virtue of the skills they represent or the connections that they

themselves have to resources and information from outside of the network and it is

therefore important for the organization to find a way to create higher levels of

connectivity with these peripheral nodes. As for nodes that serve as brokers (i.e., a high

level of betweenness centrality), care must be taken to anticipate the consequences of a

break down in the flow of information through that node because the occupant leaves the

company or becomes disenchanted with management policies to the point where he or

she abandons the role of connector. Finally, a very centralized network with a handful of

hubs can be quite dynamic; however, there are clearly risks associated with the possibility

that one central node will suddenly become disabled and bring the entire network to a

complete standstill. Put another way, it does not take much for a “connector” to turn into



29 a “bottleneck,” either because the person in the node is simply overworked and unable to

push information or along or simply decides that it is in his or her interest to hoard

information and dispense it selectively even though it slows down initiatives that the

organization is anxious to pursue.

Organizations can use SNA to tap into underutilized human resources that have

accumulated social capital and influence within the informal organizational structure

even though they do not have lofty titles and formal spheres of influence on the

company’s formal organizational chart. For example, an organization that has been

having trouble changing its culture to embrace more entrepreneurial and innovative

values may supplement formal training with a search for low- and mid-level managers

who have demonstrated the traits and talents the organization is most anxious to instill

throughout its workforce—passion, commitment, tolerance for calculated risk-taking,

competitiveness, solution orientation, and an ability to inspire colleagues and build trust.

Experts in SNA might work with the human resources department to develop surveys,

canvass existing information such as performance reviews, and interview executives and

other senior managers to identify a small group of managers at lower levels of the formal

organizational hierarchy that appear to have the desired traits and talents and who are

already serving important roles in facilitating the flow of information and brokering

internal transactions between groups in order to get projects completed. The members of

that group would go through extensive interviews and asked to provide the names of

other employees that they believe share most or all of the characteristics that the

organization is seeking. The immediate result of this process should be identification of a

core group of talented managers and other employees who had earned the respect of their

peers and are well positioned, through their connections within the organization’s social network, to exert tremendous influence over their colleagues to drive them to take the

organization in a different direction provided the group can be convinced to buy into new

goals and objectives established by senior management.

The first step for mobilizing the leaders of the informal organizational network should be

a focused meeting with the CEO and other members of the senior management group to

discuss possible organizational goals and objectives and the strategies that might be used

to achieve them. The CEO should not dictate and instead should be prepared to listen

very carefully to the feedback that is provided by everyone in attendance. Proper respect

should be shown for the social capital that has been accumulated by the key persons

within the informal organizational network and the CEO must realize that they cannot be

expected to fritter away that capital on ideas and directions that are not consistent with

their own values and interests. The CEO and other senior managers should also be

prepared to abandon micro-management of strategy and tactics and avoid constraining

the informal network by changing the formal organizational structure in a way that will

lead to conflicts as new projects are launched. Once these leaders of the informal

organizational network understand what is being asked for by the CEO and the other

senior managers they should be empowered to organize on their own and provided with

the resources that are reasonably necessary to influence and educate other employees.

For example, they may hold meetings and conferences to share information and discuss

particular topics and brainstorm about new ways to do certain operational activities. In



30 addition, plans should be made for monitoring the impact of supporting the leaders of the

informal organizational network, such as by conducting surveys of employee and

customer satisfaction. Finally, an effort should be made to continue identifying

additional candidates for leadership in the informal network. Ironically, if the process is

successful the informal organizational network will itself become more institutionalized

and companies may set aside resources, such as administrative staff, to support its

activities. However, organizations need to be careful about the size and formality of their

encouraged social network activities since research confirms that networks that grow too

large lose their effectiveness.

§3:11 Changes to the organizational structure

While the organizational structure must necessary be somewhat formal, it is impossible

and impractical to think any particular structure as permanent. Change is a constant with

respect to organization structure and will inevitably be required as the organization grows

and improvements are needed in the manner in which the day-to-day activities of the

organization are executed and controlled. In fact, a number of events can trigger the need

to evaluate the efficiency and adequacy of the current organizational structure. For

example, changes may occur in the external environment including advances in

technology, strategic changes by competitors, new regulations or deregulation in areas

important to the products and services of the organization, and shifts in consumer

preferences. Internal changes include turnover in key personnel, political skirmishes

among departments and strategic changes such as entering into new markets or launching

new products.14

All of these changes, both external and internal, create challenges for

managers in controlling organizational activities that need to be addressed by shifting the

building blocks of the organizational structure.

Regardless of the reason for an organizational change, several questions should be raised

and answered before embarking on the arduous change process. First, will the change

add significantly to the strength of the business and improve operations in a way that is

readily apparent to all interested parties? Careful consideration should be given to

weighing the advantages of making the change (i.e., the benefits to be obtained from

modifying the control mechanism) against the costs and disruption of the change

including the challenges of new reporting mechanisms and more complexity and the

expense of transferring and acquiring new resources. Second, is the change directed at a

source of a performance gap or merely on a symptom? For example, structural change is

appropriate when there is a need to reconfigure groups in order to foster more efficient

communication and coordination; however, if the real problem is ill feelings between

groups of employees then structural change alone will not resolve the issue. Third, how

will the proposed changes be interpreted by the affected parties (i.e., managers and

employees), particularly those that are not part of the management team that has decided

to implement the changes? Unless the reasons for the changes are clearly communicated,

mid-level managers and line employees may view the changes as punitive or as changes

in values that are not intended by senior management. Therefore it is important for senior

14

Sally J. Power, “Organizational Structure,” in Carl Heyel and Belden Menkus, Handbook of Management for the Growing Business, Van Nostrand Reinhold Company, New York (1986), 406.



31 management to consider in advance how the changes will be perceived from different

vantages points within the organization and this requires insight into how the informal

structures of the organization work. Finally, is the change consistent with the values of

the company and its reward systems? In particular, there must be ways for managers and

employees to demonstrate that they are implementing the changes and incentives must be

established to recognize those that support the implementation.15

Change is necessary, and appropriate, in order to efficiently and successfully pursue a

chosen organizational strategy, but changes in structure alone will not be sufficient and

attention must also be paid to other key organizational design elements including

organizational culture, compensation and rewards, human resources management,

technology and business processes.16

Senior executives should carefully plan any

organizational redesign process to ensure that the resulting structure meets the needs of

the organization and demonstrably improves the manner in which it interacts with its

customers, markets, suppliers and other business partners (see Table 3.1). Organizational

leaders need to collect information about the requirements of customers and other

business partners and disseminate that information throughout the organization so that

each business unit is best positioned to cooperate and deliver the organization’s products

and services to the marketplace in the most efficient manner. Several possible structures

should be selected and vetted to be sure that information will flow smoothly through the

organization and that responsibility for decisions will be vested in those organization

roles that have the best access to the necessary information. Decisions regarding changes

in organizational structure should also be supported by clear policies regarding lateral

processes and rewards.

Table 3.1

Organizational Redesign Checklist

How do each of the units and roles in the current organizational structure contribute to the way in

which the organization interacts with its customers, markets, suppliers and other business partners?

What role does each functional department play in creating and delivering the organization’s products and services?

How is the information gathered from customers, suppliers and other business partners of the

organization?

How is the information gathered from customers, suppliers and other business partners of the

organization disseminated throughout the organization?

Who is responsible for making and executing key decisions relating to the organization’s strategy with respect to development and marketing of its products and services?

What are the advantages (i.e., strengths) associated with the current organizational structure?

What are the disadvantages (i.e., weaknesses) associated with the current organizational structure?

What specific weakness are apparent with respect to collection, dissemination and use of information

(e.g., are key parties denied access to information necessary to make decisions or are their weaknesses

in the way in which information is stored)?

What performance metrics are being used when evaluating the organizational structure and are they

accurate and appropriate?

15

S. Power, “Organizational Structure,” in Carl Heyel and Belden Menkus, Handbook of Management for the Growing Business (New York: Van Nostrand Reinhold Company, 1986), 406-407. 16

For further discussion, see the Part on “Organizational Design” in this Guide.



32 Does the performance goals established for the entire organization fairly take into account the

contributions required of each organizational unit?

What specific changes should be made in the organizational structure to improve the way in which the

organization interacts with its customers and markets?

How would the proposed changes impact current organizational roles?

What changes in business processes (including information technology) would be needed in order for

the proposed changes in the organizational structure to be effective?

Does the proposed change provide for orderly collection and dissemination of information regarding

customers, suppliers and other business partners of the organization?

What effect would the proposed changes have on the people within the organization?

What should be the composition of the team that would be responsible for planning and executing the

proposed changes in the organizational structure?

Who are the key managers and employees in the current structure and what organizational roles would

be set aside for them in the proposed new structure?

What other constituencies within the current organizational structure need to be consulted in

connection with changes in the organizational structure?

What would the ideal form of the new organizational structure look like including business units,

organizational roles, processes and key managers?

How would the organizational fill all of the key managerial roles included in the new organizational

structure?

What new resources (i.e., capital, equipment, technology, people, skills or systems) would be needed

in order to effectively implement the new organizational structure?

What factors in the organization’s external environment (i.e., economic/technological; political/legal

and social/cultural) might need to be overcome or changed in order to implement the proposed change

in the organizational structure?

What steps should be taken to prepare employees for the implementation of the proposed change in the

organizational structure?

What changes might be required in the reward and compensation systems in order for the proposed

change in the organizational structure to be effective and for the organization to achieve its post-

change performance goals?

What is the timeline for the proposed change and what will be the preferred sequence of steps to

implement the change?

Who will be responsible for overseeing specific activities necessary to implement the changes in the

organizational structure (e.g., sponsors, project managers, oversight committees, cross-functional

teams etc.)?

What procedures will be established for monitoring the implementation process (e.g., monitoring

meetings involving persons in oversight roles and senior management)?

§3:12 Emerging trends

In general, the organizational structures that have long been used by larger organizations

have typically emphasized the vertical dimension—control and authority and reporting

relationships up and down the organizational “chain of command”. As a result, most organizations drifted toward a tall organizational structure in which there were multiple

layers of management and the process for making decisions was based on

communications that needed to go up to the top of the hierarchy and then back down to

the point where the issue had arisen. This often caused delays and led to decisions being

made by persons far removed from those who have the most information about, and the

largest vested interest in, the specific issue or activity that is the subject matter of the

decision. Lately, however, there has been a growing recognition of the importance of

horizontal relationships and communications and the need for people from multiple



33 functional departments to work together to solve larger problems. It is not surprising

then that new ideas about organizational structure have tended to deemphasize the

vertical hierarchy and look to build horizontal links through creation of cross-functional

teams. At the same time there has been a growing push to reduce the number of vertical

management layers, or flatten the organizational structure, not only to improve

communications but also a way to reduce costs.

Organizational design, and the way in which employees interact with one another and

with external stakeholders, is also being profoundly impacted by advances in information

technology that increase the speed of communications and the exchange of information

needed for decisions to be made and jobs to be performed. For example, organizations

have launched intranets to consolidate and disseminate information to employees. New

“virtual organizations” have sprung up based on interactions between members that are

largely or exclusively electronic (i.e., via e-mail, teleconferencing and

videoconferencing). Similarly, organizations are using electronic tools to provide service

and support to their customers, design new products and complete transactions with

suppliers, distributors and other key business partners. All of these advances, while

sometimes controversial, have contributed to the flattening of organizational structures

and the weakening or elimination of artificial boundaries between work groups that have

been a fundamental characteristic of traditional organizational structures.

There is really nothing new about the recent calls for, and predictions of, the

disintegration of organizational hierarchies and the embracement of flat and flexible

organizations that adapt to employees, rather than the other way around, in order to reap

the benefits of creativity and individualism. In fact, management gurus from past

decades have written the obituary for the “organizational man” and forecast that

companies would eventually see and discard the emotional damage caused by adhering to

impersonal “assembly line” managerial philosophies. The reality, however, has been somewhat different and a hierarchy of some sort has remained a staple of the

organizational structure for most companies and it is likely that this will continue into the

future for several reasons. First of all, even though more respect is being given to

flexibility and individualism it nonetheless remains true that employees are expected to

follow the directions issued by their supervisors and participate in activities that are

consistent with the goals and objectives established by senior management. In addition,

while the hierarchical organization often has hard edges it has nonetheless proven to be

extremely effective in achieving benefits of efficiency and productivity that would likely

be impossible to replicate if employees were left to “do their own thing” and define their own roles. It is also true that managers tend to be most comfortable with the command-

and-control model that has traditionally been taught and are uneasy about how the

concept of “empowerment” will work in practice. For their part, while employees enjoy having more freedom they often become anxious when told they must also assume more

accountability for their results.

The real challenges and opportunities for organizational designers and senior

management is not eliminating hierarchies but in seeking ways for them to integrate the

people-oriented approach to managing an organization. One thing to realize and



34 appreciate is that the traditional hierarchical structure has led to the creation of tools and

technologies, particularly in the information processing and communications areas, that

have eliminated many of the tedious activities that employees have had to ensure in the

past and thus have freed those employees to indulge in more creative pursuits. In

addition, globalization has allowed organizations to outsource some of the more routine

and boring tasks for workers in foreign countries, which also means that employees in the

US should have more time for more sophisticated projects. Organizations can

acknowledge, encourage and reward individual initiative provided that employees,

particularly knowledge workers, focus their innovative energies on breakthroughs that

complement and enhance the organization’s existing core competencies.

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