Understanding Organizational Structures

November 30, 2015
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ScopeThis article provides an overview of the importance and impact of organizational structure in achieving strategic business objectives. It discusses the characteristics, advantages and disadvantages of different types of organizational structures, as well as when particular structures may be effective. The article addresses HR’s potential role in designing and implementing effective organizational structures and highlights metrics, communications, technology, global and legal issues relating to organizational structures. This article does not cover the related topic of developing an organization’s culture.

 Overview

Organizational structure aligns and relates parts of an organization, so it can achieve its maximum performance. The structure chosen affects an organization's success in carrying out its strategy and objectives. HR professionals should understand the characteristics, benefits and limitations of various organizational structures to assist in this strategic alignment.

This article addresses the following topics related to organizational structure:

  • The case for aligning organizational structure with the enterprise's business strategy.

  • HR's role in evaluating and implementing organizational structures.

  • Key elements of organizational structure.

  • Types of organizational structures and the possible benefits and limitations of each.

  • The impact of an organization's stage of development on its structure.

  • Communications, technology, metrics, global and legal issues.

See Introduction to the Human Resources Discipline of Organizational and Employee Development.

This article does not address the related, but distinct, topic of developing an organization's culture.

For information about organizational culture, see:

2015 Employee Job Satisfaction and Engagement Report: Optimizing Organizational Culture for Success

Dig Deep to Uncover Culture

Understanding and Developing Organizational Culture

Background

Organizational structure is the method by which work flows through an organization. It allows groups to work together within their individual functions to manage tasks. Traditional organizational structures tend to be more formalized—with employees grouped by function (such as finance or operations), region or product line. Less traditional structures are more loosely woven and flexible, with the ability to respond quickly to changing business environments.

Organizational structures have evolved since the 1800s. In the Industrial Revolution, individuals were organized to add parts to the manufacture of the product moving down the assembly line. Frederick Taylor's scientific management theory optimized the way tasks were performed, so workers performed only one task in the most efficient way. In the 20th century, General Motors pioneered a revolutionary organizational design in which each major division made its own cars.

Today, organizational structures are changing swiftly—from virtual organizations to other flexible structures. The future will likely bring functional, product and matrix organizational structures. However, as companies continue to evolve and increase their global presence, future organizations may embody a fluid, free-forming organization, member ownership and an entrepreneurial approach among all members.

Business Case

A hallmark of a well-aligned organization is its ability to adapt and realign as needed. To ensure long-term viability, an organization must adjust its structure to fit new economic realities without diminishing core capabilities and competitive differentiation. Organizational realignment involves closing the structural gaps impeding organizational performance.

Problems created by a misaligned organizational structure

Rapid reorganization of business units, divisions or functions can lead to ineffective, misaligned organizational structures that do not support the business. Poorly conceived reorganizations may create significant problems, including the following:

  • Structural gaps in roles, work processes, accountabilities and critical information flows can occur when companies eliminate middle management levels without eliminating the work, forcing employees to take on additional responsibilities.

  • Diminished capacity, capability and agility issues can arise when a) lower-level employees who step in when middle management is eliminated are ill-equipped to perform the required duties and b) when higher-level executives must take on more tactical responsibilities, minimizing the value of their leadership skills.

  • Disorganization and improper staffing can affect a company's cost structure, cash flow and ability to deliver goods or services. Agile organizations can rapidly deploy people to address shifting business needs. With resources cut to the bone, however, most organizations' staff members can focus only on their immediate responsibilities, leaving little time, energy or desire to work outside their current job scope. Ultimately, diminished capacity and lagging response times affect an organization's ability to remain competitive.

  • Declining workforce engagement can reduce retention, decrease customer loyalty and limit organizational performance and stakeholder value.

See:

Developing and Sustaining Employee Engagement

SHRM Research Spotlight: Employee job Satisfaction and Engagement (PDF)

The importance of aligning the structure with the business strategy

The key to profitable performance is the extent to which four business elements are aligned:

Leadership. The individuals responsible for developing and deploying the strategy and monitoring results.

Organization. The structure, processes and operations by which the strategy is deployed.

Jobs. The necessary roles and responsibilities.

People. The experience, skills and competencies needed to execute the strategy.

An understanding of the interdependencies of these business elements and the need for them to adapt to change quickly and strategically are essential for success in the high-performance organization. When these four elements are in sync, outstanding performance is more likely.

The organizational design process is the pivotal connector between the business of the organization (e.g., top-level leadership and organizational strategy and goals) and forms of HR support (e.g., workflow process design, selection, development and compensation). Strategy must continually drive structure and people decisions, and the structure and design must reflect and enable effective leadership.

Achieving alignment and sustaining organizational capacity requires time and critical thinking. Organizations must identify outcomes the new structure or process is intended to produce. This typically requires recalibrating the following:

  • Which work is mission-critical, can be scaled back or should be eliminated.

  • Existing role requirements, while identifying necessary new or modified roles.

  • Key metrics and accountabilities.

  • Critical information flows.

  • Decision-making authority by organization level.

See:

Alignment Is Essential to Effective Performance, Profitability

Collective Leadership

Organizational Design, Diagnostics Go Agile

HR's Role

The right leadership and buy-in from top executives is imperative for any organizational design process and is instrumental in unifying the organization behind a strategic direction and business priorities. HR can serve as a valuable partner in the organizational design process.

Most of HR's organizational design work occurs when changes in the competitive environment require redesigning the organization and its goals or maintaining or achieving alignment with a firm's business strategy.

HR's roles and responsibilities in organizational design should include the following:

  • Providing leaders with a structural diagnosis by identifying the root causes of organizational performance issues.

  • Helping leaders evaluate a range of clear design options.

  • Ensuring that leaders align organizational design decisions with short- and long-term strategic goals by identifying critical activities, strengths and weaknesses.

  • Helping leaders ensure the structure is properly implemented.

  • Continually monitoring the structure for alignment with the organization's business strategy.

Fulfilling these responsibilities enhances HR's contributions to the organizational design and implementation process by:

  • Providing tools to measure the current internal and external environment and organizational structure.

  • Demonstrating knowledge of the pros and cons of various organizational structures.

  • Encouraging leaders to consider strategy as a cornerstone in design and structure decisions.

  • Creating relevant and accurate job designs after the organizational structure is determined. This task includes determining the knowledge, skills and abilities (KSAs) needed and addressing degree of autonomy, task identity and significance, skill variety versus job specialization, and work pace.

  • Helping managers perform effectively through training on appropriate management skills and leadership qualities (such as dealing with ambiguity and conducting performance appraisals with another manager in a matrix structure).

  • Helping employees understand the link between organizational structure and their contributions, where to get what they need, and how the structure is aligned with the corporate strategy.

See:

Leading Effective Change: A Primer for the HR Professional

Designing for Growth and Success

Managing the Matrix

Reach New Heights

Key Elements of Organizational Structures

Five elements create an organizational structure: job design, departmentation, delegation, span of control and chain of command. These elements comprise an organizational chart and create the organizational structure itself. "Departmentation" refers to the way an organization structures its jobs to coordinate work. "Span of control" means the number of individuals who report to a manager. "Chain of command" refers to a line of authority.

The company's strategy of managerial centralization or decentralization also influences organizational structures. "Centralization," the degree to which decision-making authority is restricted to higher levels of management, typically leads to a pyramid structure. Centralization is generally recommended when conflicting goals and strategies among operating units create a need for a uniform policy. "Decentralization," the degree to which lower levels of the hierarchy have decision-making authority, typically leads to a leaner, flatter organization. Decentralization is recommended when conflicting strategies, uncertainty or complexity require local adaptability and decision-making.

Types of Organizational Structures

Organizational structures have evolved from rigid, vertically integrated, hierarchical, autocratic structures to relatively boundary-less, empowered, networked organizations designed to respond quickly to customer needs with customized products and services.

Today, organizations are usually structured vertically, vertically and horizontally, or with open boundaries. Specific types of structures within each of these categories are the following:

  • Verticalfunctional and divisional.

  • Vertical and horizontalmatrix.

  • Boundary-less (also referred to as "open boundary")—modular, virtual and cellular.

See:

What are commonly-used organization structures?

Is Management Obsolete?

Vertical structures (functional and divisional)

Two main types of vertical structure exist, functional and divisional. The functional structure divides work and employees by specialization. It is a hierarchical, usually vertically integrated, structure. It emphasizes standardization in organization and processes for specialized employees in relatively narrow jobs.

This traditional type of organization forms departments such as production, sales, research and development, accounting, HR, and marketing. Each department has a separate function and specializes in that area. For example, all HR professionals are part of the same function and report to a senior leader of HR. The same reporting process would be true for other functions, such as finance or operations.

In functional structures, employees report directly to managers within their functional areas who in turn report to a chief officer of the organization. Management from above must centrally coordinate the specialized departments.

A functional organizational chart might look something like this:

chart.jpg

Advantages of a functional structure include the following:

  • The organization develops experts in its respective areas.

  • Individuals perform only tasks in which they are most proficient.

  • This form is logical and easy to understand.

Disadvantages center on coordination or lack thereof:

  • People are in specialized "silos" and often fail to coordinate or communicate with other departments.

  • Cross-functional activity is more difficult to promote.

  • The structure tends to be resistant to change.

This structure works best for organizations that remain centralized (i.e., a majority of the decision-making occurs at higher levels of the organization) because there are few shared concerns or objectives between functional areas (e.g., marketing, production, purchasing, IT). Given the centralized decision-making, the organization can take advantage of economies of scale in that there are likely centralized purchasing functions.

An appropriate management system to coordinate the departments is essential. The management system may be a special leader, like a vice president, a computer system or some other format.

Also a vertical arrangement, a divisional structure most often divides work and employees by output, although a divisional structure could be divided by another variable such as market or region. For example, a business that sells men's, women's and children's clothing through retail, e-commerce and catalog sales in the Northeast, Southeast and Southwest could be using a divisional structure in one of three ways:

  • Productmen's wear, women's wear and children's clothing.

  • Marketretail store, e-commerce and catalog.

  • RegionNortheast, Southeast and Southwest.

This type of organizational structure might look like this:

chart 2.jpg

The advantages of this type of structure are the following:

  • It provides more focus and flexibility on each division's core competency.

  • It allows the divisions to focus on producing specialized products while also using knowledge gained from related divisions.

  • It allows for more coordination than the functional structure.

  • Decision-making authority pushed to lower levels of the organization enables faster, customized decisions.

The disadvantages of this structure include the following:

  • It can result in a loss of efficiency and a duplication of effort because each division needs to acquire the same resources.

  • Each division often has its own research and development, marketing, and other units that could otherwise be helping each other.

  • Employees with similar technical career paths have less interaction.

  • Divisions may be competing for the same customers.

  • Each division often buys similar supplies in smaller quantities and may pay more per item.

This type of structure is helpful when the product base expands in quantity or complexity. But when competition among divisions becomes significant, the organization is not adapting quickly enough, or when economies of scale are lacking, the organization may require a more sophisticated matrix structure.

Matrix organizational structures

A matrix structure combines the functional and divisional structures to create a dual-command situation. In a matrix structure, an employee reports to two managers who are jointly responsible for the employee's performance. Typically, one manager works in an administrative function, such as finance, HR, information technology, sales or marketing, and the other works in a business unit related to a product, service, customer or geography.

A typical matrix organizational structure might look like this:

chart 3.jpg
Advantages of the matrix structure include the following:

  • It creates a functional and divisional partnership and focuses on the work more than on the people.

  • It minimizes costs by sharing key people.

  • It creates a better balance between time of completion and cost.

  • It provides a better overview of a product that is manufactured in several areas or sold by various subsidiaries in different markets.

Disadvantages of matrix organizations include the following:

  • Responsibilities may be unclear, thus complicating governance and control.

  • Reporting to more than one manager at a time can be confusing for the employee and supervisors.

  • The dual chain of command requires cooperation between two direct supervisors to determine an employee's work priorities, work assignments and performance standards.

  • When the function leader and the product leader make conflicting demands on the employee, the employee's stress level increases, and performance may decrease.

  • Employees spend more time in meetings and coordinating with other employees.

These disadvantages can be exacerbated if the matrix goes beyond two-dimensional (e.g., employees report to two managers) to multidimensional (e.g., employees report to three or more managers).

Matrix structures are common in heavily project-driven organizations, such as construction companies. These structures have grown out of project structures in which employees from different functions formed teams until completing a project, and then reverted to their own functions. In a matrix organization, each project manager reports directly to the vice president and the general manager. Each project is, in essence, a mini profit center, and therefore, general managers usually make business decisions.

The matrix-structured organization also provides greater visibility, stronger governance and more control in large, complex companies. It is also well suited for development of business areas and coordination of complex processes with strong dependencies.

Matrix structures pose difficult challenges for HR professionals charged with ensuring equity and fairness across the organization. HR professionals working in matrix structures should be prepared to intervene via communication and training if the structure compromises these objectives. Furthermore, HR should monitor relationships between managers who share direct reports. These relationships between an employee's managers are crucial to the success of a matrix structure.

See:

Managing the Matrix

Five Ways to Lead Through Influence

Tying Workforce Planning to Business Strategy Still a Challenge for Most

Open boundary structures (hollow, modular and virtual)

More recent trends in structural forms remove the traditional boundaries of an organization. Typical internal and external barriers and organizational boxes are eliminated, and all organizational units are effectively and flexibly connected. Teams replace departments, and the organization and suppliers work as closely together as parts of one company. The hierarchy is flat; status and rank are minimal. Everyone—including top management, managers and employees—participates in the decision-making process. The use of 360-degree feedback performance appraisals is common as well. See Assess Pros and Cons of 360-Degree Performance Appraisal.

Advantages of boundary-less organizations include the following:

  • Ability to leverage all employees' talents.

  • Faster response to market changes.

  • Enhanced cooperation and information sharing among functions, divisions and staff.

Disadvantages include the following:

  • Difficulty in overcoming silos inside the organization.

  • Lack of strong leadership and common vision.

  • Time-consuming processes.

  • The possibility of employees being adversely affected by efficiency efforts.

  • The possibility of organizations abandoning change if restructuring does not improve effectiveness quickly.

Boundary-less organizational structures can be created in varied forms, including hollow, modular and virtual organizations.

Hollow organizations. Hollow structures divide work and employees by core and noncore competencies. Hollow structures are an outsourcing model in which the organization maintains its core processes internally but outsources noncore processes. Hollow structures are most effective when the industry is price competitive and choices for outsourcing exist. An example of a hollow structure is a sports organization that has its HR functions (e.g., payroll and benefits) handled by outside organizations.

Advantages of this type of structure include the following:

  • Minimizing overhead.

  • Enabling the organization to focus on its core product and eliminating the need to develop expertise in noncore functions.

Disadvantages include:

  • Loss of control over functions that affect employees regularly.

  • Restriction by certain industries (e.g., health care) on the extent of outsourcing.

  • Lack of competitive outsourcing options.

Modular organizations. Modular structures differ from hollow organizations in that components of a product are outsourced. Modular structures may keep a core part of the product in-house and outsource noncore portions of the product. Networks are added or subtracted as needs change. For a modular structure to be an option, the product must be able to be broken into chunks. For example, computer manufacturer Dell buys parts from various suppliers and assembles them at one central location. Suppliers at one end and customers at the other become part of the organization; the organization shares information and innovations with all. Customization of products and services results from flexibility, creativity, teamwork and responsiveness. Business decisions are made at corporate, divisional, project and individual team member levels.

Advantages include the following:

  • Minimizing the specialization and specialists needed.

  • Minimizing overhead.

  • Enabling the company to outsource parts supply and coordinate the assembly of quality products.

Disadvantages include concerns about the actions of suppliers outside the control of the core management company. Risk occurs if the partner organization removes itself form the quality check on the end product or if the outsourced organization uses a second outsourced organization. Examples of supplier concerns include the following:

  • Suppliers, or subcontractors, must have access to—and safeguard—most, if not all, of the core company's data and trade secrets.

  • Suppliers could suddenly raise prices on or cease production of key parts.

  • Knowing where one organization ends and another begins may become difficult.

Virtual organizations. A virtual organization is cooperation among companies, institutions or individuals delivering a product or service under a common business understanding. Organizations form partnerships with others—often competitors—that complement each other. The collaborating units present themselves as a unified organization.

The advantages of virtual structures include the following:

  • Contributions from each part of the unit.

  • Elimination of physical boundaries.

  • Responsiveness to a rapidly changing environment.

  • Lower or nonexistent organizational overhead.

The disadvantages of virtual organizations include the following:

  • Potential lack of trust between organizations.

  • Potential lack of organizational identification among employees.

  • Need for increased communication.

Virtual structures are collaborative and created to respond to an exceptional and often temporary marketing opportunity. An example of a virtual structure is an environmental conservancy in which multiple organizations supply a virtual organization with employees to save, for example, a historic site, possibly with the intent of economic gain for the partners.

See:

5 Jobs of the Future: Virtual Culture Architect

Virtual Teams

Fostering Virtual Working Relationships Isn't Easy

Successfully Transitioning to a Virtual Organization: Challenges, Impact, and Technology

Understanding the organizational environment is crucial in open boundary models. For example, some industries cannot outsource noncore processes due to government regulation. (For example, health insurance organizations may be unable to outsource Medicare processes). Or, in some cases, outsourcing may have to be negotiated with a union.

The key to effective boundary-less organizations is placing adaptable employees at all levels. Management must give up traditional autocratic control to coach employees toward creativity and the achievement of organizational goals. Employees must apply initiative and creativity to benefit the organization, and reward systems should recognize such employees.

Stage of Development's Impact on Organizational Structure and HR Strategies

Organizations typically mature in a consistent and predictable manner. As they move through various stages of growth, they must address various problems. This process creates the need for different structures, management skills and priorities.

The four stages of development in an organization's life cycle include the following:

Startup

The beginning stage of development is characterized by an inconsistent growth rate, a simple structure and informal systems. At this stage the organization is typically highly centralized. "Dotcom" companies are a good example of startup companies.

Expansion

The expansion stage is evidenced by rapid, positive growth and the emergence of formal systems. Organizations at this stage typically focus on centralization with limited delegation.

Consolidation

The consolidation stage is characterized by slower growth, departmentalization, formalized systems and moderate centralization.

Diversification

The diversification stage occurs when older, larger organizations experience rapid growth, bureaucracy and decentralization.

As an organization grows or passes from one stage of development to another, carefully planned and well-conceived changes in HR practices and strategies may be necessary to maximize effectiveness. There are no guarantees that an organization will make it from one stage to the next. In fact, a key opportunity for HR professionals is to recognize indicators that suggest an organization is in a risky or unhealthy stage and to aid company leadership in making appropriate structural adjustments and in aligning HR strategies and practices accordingly. 

Metrics

The art of organizational design is assessing the environment's essential aspects and their meaning for the organization's future. Translating those characteristics into the right structure is critical to increasing efficiency and controlling costs. When selecting the best structure for the organization, company leaders and the HR team should examine and evaluate current key structural dimensions and contextual factors. See How do I determine which HR metrics to measure and report? and Creating Metrics for Senior Management.

Structural dimensions

Leaders can develop an understanding of the organization's internal environment through measurement and analysis of its structural dimensions. Key dimensions, which are usually measured through a survey, include:

Specialization. The extent to which an organization's activities are divided into specialized roles.

Standardization. The degree to which an organization operates under standard rules or procedures.

Formalization. The extent to which instructions and procedures are documented.

Centralization. The degree to which leaders at the top of the management hierarchy have authority to make certain decisions.

Configuration. The shape of the organization's role structure, which includes:

  • Chain of command. The number of vertical levels or layers on the organizational chart.

  • Span of control. The number of direct reports per manager or the number of horizontal levels or layers on the organizational chart.

Contextual factors

A review of contextual factors will provide a better understanding of the external environment and the relationship between the internal and external environment. Some of the significant contextual factors to consider in this review include:

Origin and history. Was the organization privately founded? What changes have occurred in ownership or location?

Ownership and control. Is the organization private or public? Is control divided among a few individuals or many?

Size. How many employees does the organization have? What are its net assets? What is its market position?

Location. How many operating sites does the organization maintain?

Products and services. What types of goods and services does the organization manufacture and provide?

Technology. Are the organization's work processes effectively integrated?

Interdependence. What is the degree to which the organization depends on customers, suppliers, trade unions or other related entities?

After examining the structural dimensions and contextual factors and developing an understanding of the connection between an organization's structure and strategy, organization leaders and HR professionals can consider alternative structures. They may use diagnostic models and tools to guide the design process.

Communications and Technology

The last few years have seen an unprecedented expansion and improvement of online communication. Software has pushed the boundaries of workplace communication beyond e-mail into collaborative social media platforms and innovative intranets. Experts predict that the decline in traditional communication methods and the dramatic increase in cyber communication will have a major impact on the workplace and lead to its radical restructuring.

As organizations continue to restructure to remain competitive, communications can drive the transition to an effective new organizational structure. Research suggests that companies can positively affect their credibility with employees through various organizational communication programs.

In establishing internal communication channels, HR professionals must be aware of the advantages and shortcomings of communication technologies and match them to the organization's needs, strategic goals and structure. HR professionals should also be cognizant of, and be prepared to deal with, the common communication challenges in various organizational structures. For example, communications technology has enabled organizations to create virtual workplaces and teams. In a virtual team, members from various geographical locations work together on a task, communicating via e-mail, instant messaging, teleconferencing, videoconferencing and web-based workspaces. Although virtual teams have significant advantages—most notably reduced travel costs and flexibility in staffing and work schedules—they also pose challenges. Virtual teams often find coordinating team logistics and mastering new technologies difficult. Communication is also a major challenge because of the absence of visual (body language) and verbal (intonation) clues. Research suggests that organizations can overcome these challenges through effective support and training.

Global Issues

Organizational structures often need to change as companies expand around the globe. An organization's leaders and HR executives should plan carefully before opening offices in another country.

Many issues arise when an employer plans to open an international branch, hire international workers and formulate a globalized HR strategy. Among the questions that must be answered are:

  • How do human resource legal requirements and practices vary from country to country?

  • Should HR officials at headquarters do the work, or should a company open HR offices in the other country?

  • Should an organization hire consultants to handle local hiring and personnel services?

Unless employers have a sound HR strategy ready before leaping into another country, they could fail. See CEOs Say HR Plays Critical Role in Growing Businesses Globally

When an organization opens international offices, HR professionals and other business leaders should be able to communicate as effectively with workers across the globe as around the corner. That can be a challenge. Having a robust intranet and using videoconferencing are alternatives to face-to-face communication.

As rapid changes in technology affect global communication, employees must be aware of linguistic, cultural, religious and social differences among colleagues and business contacts. The organization should train all employees (not just managers and CEOs who travel) in cultural literacy. See Global Communication Brings Challenges, Opportunities and Creating a Platform for Global Communication.

Moreover, HR professionals should be aware that language difficulties, time‐and‐distance challenges, the absence of face‐to‐face contact, and, above all, the barriers posed by cultural differences and personal communication styles make global virtual work far more complex than local structures. These practices can enhance global virtual team relationships:

  • Using online chats, video- and audioconferencing in addition to one-on-one conversations and e-mail.

  • Posting profiles of team members that outline their expertise and roles in the organization.

  • Being sensitive to the level of engagement team members are likely to deliver if they must meet at inconvenient hours across multiple time zones.

See: Fostering Virtual Working Relationships Isn't Easy and Global Training Sought for Leaders of Multicultural Teams.

Legal Issues

Regardless of the type of structure, HR professionals must ensure compliance with legal requirements in the countries where their organizations operate. Some of those requirements will be quite extensive (for example, HR professionals in public companies must ensure compliance with the Sarbanes-Oxley Act, and most organizations must ensure compliance with the Fair Labor Standards Act and its related state laws). When organizational structures change, or if the chain of command is weak or fails to keep up-to-date with changes in the business, a company may have compliance problems because the structure has not been evaluated with regard to these laws. Imagine, for example, a restructuring that reduces the number of direct reports for an entire layer of management, which perhaps leads to those individuals no longer being exempt.

As an organization moves internationally, laws in the host countries must also be evaluated and a plan put in place for compliance before the expansion occurs. HR professionals must anticipate and plan for laws affecting all aspects of the employee experience, including hiring, benefits, leaves and termination. See, Lawful Cross-Border Transfers of Employees'' Personal Data.

Templates and Tools

Information tools

Toolkit: Managing Organizational Communication




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