Organizational Structure: Types and Importance

An organizational structure is a system set in place, by which work flows within a firm, that helps the firm achieve its goals.

Organizational Structure: Types and Importance

Here, we take a look at the importance of organisational structure in terms of the overall success of a business. Experts have stressed that key factors have to be taken into account when identifying the need for organisational change, and the importance of matching the structure of the business to its strategy.

What are Organisation Structures?

According to Robbins, Judge and Millet(2013), the methods and ways in which jobs are formally divided into groups and teams which further, coordinate to complete tasks on a daily basis.
Robbins, S., Judge, T. and Millett, B. (2013). Organisational behaviour. 7th ed. PEARSON, p.398.

Relationship between the organisation and individuals

One of the main objectives of the structure of an organisation is to reduce uncertainty and confusion that typically occurs when bringing people together to achieve a common goal or purpose:

• The structure defines the relationships among members of the organisation, and the relationships with the external environment
• The structure defines the authority by means of a graphical illustration referred to as an organisation chart

Features of an Organisation Structure

1) CHAIN OF COMMAND- Number of Subordinates reporting to a single manager in a company.
More the number of subordinates LONGER the chain of command and less number of subordinates SHORTER the chain of command.

2) DEPARTMENTALISATION- Grouping of jobs and functions into separate departments.
More the number of Departments HIGHER the departmentalisation and less number of departments LOWER the departmentalisation.

3) CENTRALISATION and DECENTRALISATION – Decision making is done only by the senior management and delegated to the junior level management is called CENTRALISATION.
In contrary to the above, DECENTRALISATION is when, decision making is carried out by the middle level and lower level management as well.

4) SPAN OF CONTROL- The number of employees that can be managed/supervised effectively by a single manager is called a span of control.
Wide Span of Contol: When a manager can manage, supervise and control a LARGE number of employees, that’s when the span of control is Wide.
Narrow Span of Control: When a manager can manage, supervise and control only a SMALL number of employees, that’s when the span of control is Narrow.

5) FORMALISATION- Formalisation can be defined as the written procedures, records, rules and regulations that an organisation prepares that are to be followed by all the management levels in an organisation.

This is required to create standard operating procedures(SOPs), in order to coordinate between departments of the organisation.

More the rules and regulations, HIGHER the FORMALISATION in an organisation; lesser the regulations, LOWER the FORMALISATION.

‘There is no such thing as a good or a bad organizational structure; there are only
appropriate or inappropriate ones’ – Harold Kerzner (1979, p.93)

Since organizations are understood to be a concoction of resources with the aim of achieving objectives, it is important to establish a structure of responsibility, authority and accountability. This framework is coined as organisational structure by Montana and Charnov (2000, p.165). Daft et al. (2010) not only agrees with Montana and Charnov, but adds to the above definition by recognizing the importance of grouping together individuals into 12 departments, known as departmentalization, along with introducing systems to ensure ‘effective communication, coordination and integration of efforts across departments.’

The importance of adopting a well-fitted organisational structure is widely recognized due to the negative consequences that arise in its lack. As identified by Corkindale (2011), an inadequate structure can lead to ambiguity and confusion in the organisation that can have a bearing on the achievement of goals. Thus, adopting an appropriate organisational structure is imperative for the growth of a company.

For measurement purposes, D.S. Pugh (1973; See also Daft 2010) defines six structural factors of organisational structure. These include (a) specialization of activities, (b) standardization of rules and procedures, (c) standardization of employment practices, (d) formalization of instructions, procedures, etc., (e) centralization of decision-making power with top-management and (f) configuration or shape of the organizations role structure.

Moreover, Pugh and Daft (1973; 2010) both claim that these factors are also influenced by non-structural or contextual factors. These include (a) size, (b) organisational technology, (c) environment, (d) organisational goals and strategies and (e) organization culture. In addition, Pugh (1973) also includes (a) origin and history, (b) ownership and control, (c) location and (d) interdependence.

Therefore, based on an understanding of both contextual and non-contextual factors, for the purposes of this research, organisational structure is understood as consisting of three core characteristics. These are (a) centralization vs decentralization of decision-making, (b) formal vs informal communication and (c) disinvestment of power. Centralization means the concentration of decision-making power with top-management whereas decentralization is the dispersal of this power (Marume and Jubenkanda, 2014). This characteristic examines the
location of the decision-making power in an organisation. Scholars agree that arguments advanced for centralization stem from efficiency, while those for decentralization deal with effectiveness (Lawrence 1983).

Formal vs informal communication systems evaluate the existence of channels through which messages travel in an organisation (BBC, 2014). As stated by Kathryn A. Baker (2002), communication in small organizations is largely informal and as the organization grows, there is an establishment of top-down communication. The last
characteristic, disinvestment of power, relates to the dissemination of power and authority through the levels of the organisation. This can vary between distribution and non-distribution of authority among the management levels (Marume and Jubenkanda, 2014). Varying degrees of these characteristics gives rise to different types of organisational structures.

Types of organizational structures

• TALL/HIERARCHIAL/TOP-DOWN STRUCTURES
• FLAT/LEAN/LINE STRUCTURES
• Functional Structure
• Divisional Structure
• MATRIX/HYBRID/PROJECT-BASED STRUCTURES
• NETWORK STRUCTURE

As an organisation grows and evolves, it innovates its structure based on its core activities which are departmentalized. Daft, Murphy and Willmott (2010) identify seven types of structures that are created using various departmentalization bases.

Tall / Hierarchial / Top-down structures

Many levels of management (long chain of command)
Narrow span of control – close supervision possible
There is a clear management structure.
The function of each layer will be clear and distinct.
Clear progression and promotion ladder.
Freedom and responsibility of employees is restricted.
Decision making could be slowed down
Communication can be slow.
High management costs

Flat Organisation

Few layers or just one layer of management Short chain of command but a large span of control)
Better team spirit
Less bureaucracy and faster and easier decision making.
Lower management costs
Better communication between management and workers.
Workers may have more than one manager/boss.
Structure limited to small organisations such as partnerships, co-operatives and some private limited companies.
Function of each department/person could be blurred and merge into the job roles of others.

Functional structure
In this structure, the organisation is designed around the main functions of the business such as marketing, R&D, etc., whereby all skills and knowledge relating to that function are consolidated, leading to high degree of specialization as well as economies of scale. However, Daft et al. (2010) argue that this structure may lead to coordination problems across departments such as lack of innovation and responsiveness to external changes.
Figure 1. Functional Structure (Daft et al., 2010)

Functional structure with horizontal linkages
This structure is similar to the functional structure, but along with specific information systems to improve horizontal coordination across the various functional departments (Daft et al. 2010).
Figure 2. Functional Structure with horizontal linkages (Daft et al., 2010)

Divisional structure
This structure comprises of self-contained, independent divisions. A divisional structure can be formed based on multiple factors (Gibson et al., 2012; Stewart and Rogers, 2012) including
(a) geographic, wherein each geographical area is a separate division, (b) product, wherein each product is a self-contained division and (c) market, wherein major markets form the different divisions.

Matrix Structure
This structure combines the functional and divisional aspects of the structure and is adopted by organizations whereby these aspects are assessed to be of equal importance.
Figure 4. Matrix Structure (Daft et al., 2010)

• Specialists assigned to projects led by project managers.
• Project participants have two managers.
• Employees work continuously on projects;
• Moving on to another project as each project is completed.
• Fluid and flexible design
• Complexity of assigning people to projects.
• Task and personality conflicts.

Horizontal structure
This structure is adopted to cut through the vertical hierarchy and instead work is structured around cross-functional core processes, whereby the work is conducted in teams rather than by individuals.

Network Organization

Small core of functional and technical staff.
Temporarily hires specialists to work on opportunities that arise.
Outsources its major business functions.
Highly specialized teams.
Low Departmentalization.
High knowledge transfer amongst teams and employees.

Virtual network structure
Several organizations outsource functions that are highly specialized as they are better controlled by an external company, leading to inter-organisational relationships and giving rise to this structure.

Hybrid structure
Due to the dynamic business environment, some may adopt any combination of the above structures which is best suited for it. Thus, giving rise to a hybrid structure.

The organisational structures defined above are, however, not perennial due to the rapidly evolving organisational environment. They constantly evolve and change. Thus, it is necessary to determine the basis of this change and understand how this change occurs. Several authors relate this change to the change in the lifecycle of the organisation.

Organisation Size

In very small organisations there is little need for a formal structure. With increasing size there is the needs for more formalised relationships

Size is a major factor impacting on structure:

• Increased size is associated with the need to include greater specialisation and formalization
• Increased scale of operations increases the frequency of recurrent events and the repetition of decisions which making standardisation preferable
• Child and Mansfield 1972 suggests “Larger organisations are more specialized, have more rules, more documentation, more extended hierarchies, and a greater decentralization of decision-making further down such hierarchies.”
• Organisation size is related positively to specialisation
• Organisation size is related positively to formalisation
• Organisation size is related positively to vertical span
• Organisation size is related negatively to centralization

Relationship between organizational structure and organizational lifecycle

As stated above, organisational structure is determined by core factors such as decision making, communication and disinvestment of power. Similarly, various stages of the organisation lifecycle are associated with different characteristics relating to the organisational structure in particular. Thus, it seems possible to find a relationship between the characteristics of these two. To the extent of my review, there are no explicit models developed to assess this relationship. However, different scholars do attempt to define the different type of structures that companies adopt in each stage.

In the entrepreneurial stage, Quinn and Cameron (1983) describe the structure of the organisation to be fluid and flexible, as it is this flexibility that is the main force for its growth. Moreover, the owner single-handedly controls decision-making and communication, and therefore, there is no hierarchy for the same (Greiner, 1998). Thus, the structure is shaped as centralized management. A gap is felt in this structure when the crisis of leadership arises (Daft et al., 2010) as it is inadequate to cope with the growing size of the organisation. In the next stage of collectivity, some sort of formalization is adopted by the owner.

However, it is not completely incorporated in the organisation due to lack of delegation (Adizes, 1985). Thus, the structure from the previous stage continues, along with adoption of some rules and procedures. This leads to the crisis of autonomy, as the prevalent structure lacks a system of delegation and assignment of roles and duties.

In the formalization stage, a management structure with departments, designations, and delegation of duties starts to develop. A functional organisational structure tends to be adopted by firms in this stage (Greiner, 1998). Moreover, communication is no longer informal and instead follows a hierarchy. This structure helps the firm achieve specialization and improve effectiveness. However, high levels of bureaucracy in the firm leads to rigidity and the need for change in structure is felt yet again.

In the final stage of elaboration, when formalization and centralization reaches its peak, the need for innovation and flexibility is felt again. Steps are taken for reducing the rigidity in procedures and chain of communication. At this stage, the organisation structure required needs to be a balance of a vertical hierarchical structure, but along with the horizontal linkages (Greiner, 1998).

An organisation exists in a rapidly changing environment. As the organisation moves from one stage of the lifecycle to another, the strategic goal of the organisation changes as well.

This, in turn, has a bearing on the organisational structure as it is this structure, defining the relationship between the human and physical elements, that facilitates the attainment of organisational goals. Collectively, this shows that, every stage of the organisational lifecycle calls for an adaptation of the existing structure of the organisation to enable not only its movement onto the next stage, but also, for allowing the firm to fully realize the benefits associated with each stage of the lifecycle.

Impact of organisational structure on management and development of resources

The implications of organisational structure for the management and development of people and resources can be categorized under the following:

• Developing staff
• Management of change
• Financial implications

Developing staff

Developing staff – Organisational Development (OD)

We define organisation development (OD) as ‘planned and systematic approach to enabling sustained organisation performance through the involvement of its people’.

OD applies to changes in the strategy, structure, and/or processes of an entire system, such as an organisation, a single plant of a multi-plant firm, a department or work group, or individual role or job.

• OD is based on the application and transfer of behavioural science knowledge and practice (such as leadership, group dynamics and work design), and is distinguished by its ability to transfer such knowledge and skill so that the system is capable of carrying out more planned change in the future
• OD is concerned with managing planned change, in a flexible manner that can be revised as new information is gathered
• OD involves both the creation and the subsequent reinforcement of change by institutionalising change

OD is focussed on improving organisational effectiveness by:

• Assisting members of the organisation to gain the skills and knowledge necessary to solve problems by involving them in the change process
• Promoting high performance including financial returns, high quality products and services, high productivity, continuous improvement and a high quality of working life

Management development is the structured process by which managers enhance their skills, competencies and/or knowledge, via formal or informal learning methods, to the benefit of both individual and organisational performance.

• The development of managers helps sustain their performance at the highest levels possible is a particularly crucial element of wider organisational learning strategies
• Managing involves the planning, organisation, co-ordination and implementation of strategies, programmes, tactics and policies in respect of people, resources, information, operations and finance
• Management development interventions may therefore cover any or all of these areas, depending on the level and nature of the management role as well as other factors such as the stage of the individual’s career.

The vastly divergent nature and characteristics of the management base means that the task of identifying and providing effective learning opportunities for managers presents a significant challenge for HR and L&D professionals.

For senior managers, there is often a need for individually tailored development solutions.

Some very senior people, such as managers at board level, may have the perception that others in the organisation fail to understand the pressures they face. However, they can also be sensitive to their senior status, and may reject the idea that they need to learn, although the neutrality of the term ‘development’ often appeals.

There are differences too in respect of company size or nature.

• Small firms are not simply smaller versions of big companies in terms of managerial roles but have different priorities and needs. Their senior management development needs may relate to functional skills more normally demonstrated in large environments by specialists
• Large global firms, meanwhile, often need to consider the issues involved in international management development when deploying managers on overseas assignments, for example, developing them to deal with potentially widely differing approaches to negotiating styles or marketing techniques, in addition to the more obvious fundamental needs such as training in language skills and cultural awareness. They can often have added pressures of dispersed family or challenges of relocating their home. These can impact on their ability to learn and work.

Managers at all levels need a certain set of skills associated with their people management role, and these need to be developed. It should also not be assumed that well-qualified professionals who attain promotion to posts involving line management responsibilities will automatically be able assimilate the people management role.

The approach taken to management development needs to originate from the highest organisational levels, reflecting the organisation’s strategy and aims, while company culture is also a key determinant of management style and attitudes to management development.

Larger organisations often have the capacity to identify the requirements for effective management in the form of specific competence frameworks, which will include many of the specialist areas such as:

• the skills of managing others
• knowledge of management techniques and the development of strategy
• interpersonal skills such as communicating, influencing and negotiating.

Management of change

Reasons for changing your organisational structure

Organisations change their structure for many different reasons. These can be planned or unplanned, and caused by external and internal factors.

What causes organisational change?

The main reason for restructuring your business is to allow it to achieve its strategic objectives. A business often needs to make changes when it reaches a new stage in its life cycle. This can include moving from an entrepreneurial organisation to one with a more stable, planned development.

You may also choose to restructure your business due to:

• Business growth
• Change in management, e.g. taking on a partner
• Moving into new product lines
• Expanding your business overseas

Other factors, both internal and external, can also prompt change to your organisational structure.

External factors that might prompt a change in your business’ structure include having to:

• Address new markets
• React to changes in product or service demand
• Keep up with new technologies or products from competitors

Other external events that can affect either your business or your rivals can also stimulate organisational change. These include, for example:

• mergers and acquisitions – Common ways to expand your business include making a strategic acquisition or merging with another business.
• joint ventures and business partnerships – A joint venture is when two or more businesses pool their resources and expertise to achieve a particular goal. They also share the risks and rewards of the enterprise.
• preparing to sell your business

Internal factors affecting organisational change

Internal business needs can also prompt positive business change. For example, these may include the need to:

• Raise additional capital, improve cash flow or profitability of your business
• Address outdated and inefficient working practices and processes
• Eliminate excess job positions and remove duplicate management roles
• Reorganise internal functions for efficiency, such as sales and marketing

Financial implications

Finances fuel all businesses, whether they are on the upswing or a downturn. An organization making good money is more likely to add employees and managers to accommodate future growth, while a financial crisis forces top management to trim the organizational structure. Whichever direction the financial picture steers a company, it must smoothly adapt to changing needs.

When Finances Look Good

An upturn in business signals a time of expansion for many companies. Growth, new acquisitions and new product or service lines mark a business on its way up. This also affects the organizational structure, with new positions created and new departments springing up to meet increasing demand.

When Finances Look Bad

A financial crisis forces companies into survival mode. Instead of planning for growth, staying solvent becomes the biggest issue. Saving money will be the order of the day. Business management may panic during a financial crunch, concentrating on short-term answers instead of building for the future. A stunted economy, mismanagement or strong competition will cause financial crises, forcing large and small businesses to change their organizational structures to streamline operations as necessary.

Structural Changes in an Upturn

Business owners take financial issues into account when deciding the best time to grow and expand the workforce. Maintaining that success and pushing forward is the main emphasis during good times. Increasing customer demand not only creates the need for more employees, but more departments and upgraded equipment.

Structural Changes in a Downturn

Financial problems will cause business owners to rethink which departments are essential. Some will be eliminated entirely, and others absorbed by other departments. Even in a small business, the first cuts are often seen in departments geared toward the future. If the cuts are made blindly, the departments most geared toward future growth may be the first to go. If departments have natural rivalries between them — such as sales vs. production, these rifts will widen. Financial worries will cause management to cut back on production jobs, laying off some workers. Those who stay will find their duties increased to keep pace. Even if business improves, the company may be slow to rebuild its staff and continue to have employees doing double duty.

As your business grows, you might need to add departments, bring outsourced functions in house, downsize or otherwise take steps to restructure your organization. While organizational restructuring aims to make a business more efficient, it can also have negative consequences. Before making significant changes to your business structure, consider all of the positive and negative impacts your changes might bring.

More Control

One way to restructure an organisation is to create departments to handle tasks you previously outsourced. This might include hiring a full-time bookkeeper, information technology person, human resources manager and marketing director. Unlike contractors, employees are at your beck and call, with no other boss to work for, giving you more control over their work.

Improved Efficiency

When many businesses launch, a handful of people often share the large workload associated with running a company. This can lead to different areas of your business being underserved as employees multitask and make choices about what work to put on a back burner. Restructuring results in stronger employee job descriptions, brings specialists to work in each area and results in more accountability and greater focus on individual tasks. A common example of an organizational restructuring improving efficiency is moving human resources out of accounting and creating two separate departments.

Workforce Characteristics

Human resources should influence the strategic choices leading to restructuring. To develop strategy, the owner must consider the company’s competitive position, including employees’ strengths and weaknesses. HR supplies the owner with a workplace assessment — a thorough inventory of the employees’ skills and other characteristics such as talent, turnover, education and experience. The inventory is compared against the strategies under consideration to calculate how well the company’s workforce can enact them. Once strategy is chosen, HR then evaluates how it must transform the company’s workforce to fill the company’s needs in the context of the restructuring and strategy.

Organizational Structure

Organizational structure determines job scope, working relationships and resource sharing, so it has a profound impact on how business gets done. Keeping the company’s strategy at the centre of structural decisions allows HR to make the best choices. For instance, if a small business wants to focus on fine, custom-built products, the organizational structure must promote individual accomplishment instead of mass production.

Job Design

An article in Pepperdine University’s “Graziadio Business Review” listed job design and talent choice as most critical in implementing new organizational structure. HR must reassess the tasks and workflows needed to effectively do business and compare those to the organization’s existing jobs and processes. Positions may stay the same, change or be removed. Some tasks may require new positions. Considerations when designing jobs include how specialized a job should be, how much authority an employee needs to accomplish work and how much supervision is needed.