Organizational Structure Notes

Foundations of Organization Structure

Organizational Structure

• Organizational structure is the way job tasks are formally divided, grouped, and coordinated.
• Managers need to address six key elements when designing their organization’s structure.

Elements of Organizational Structure

Key Design Questions and Answers

• Work Specialization: To what degree are activities subdivided into separate jobs?
  • The answer is provided by work specialization.
• Departmentalization: On what basis will jobs be grouped together?
  • The answer is provided by departmentalization.
• Chain of Command: To whom do individuals and groups report?
  • The answer is provided by the chain of command.
• Span of Control: How many individuals can a manager efficiently and effectively direct?
  • The answer is provided by the span of control.
• Centralization and Decentralization: Where does decision-making authority lie?
  • The answer is provided by centralization and decentralization.
• Formalization: To what degree will there be rules and regulations to direct employees and managers?
  • The answer is provided by formalization.

1. Work Specialization

• Work specialization is the degree to which tasks in an organization are subdivided into separate jobs.
• Human diseconomies from specialization:
  • Boredom
  • Fatigue
  • Stress
  • Low productivity
  • Poor quality
  • Increased absenteeism
  • High turnover
    These offset the economic advantage.

2. Departmentalization

• Departmentalization is the basis by which jobs in an organization are grouped together.
  1. By functions performed: Efficiencies gained from putting like specialists together (e.g., Accounting).
  2. By the type of product or service: Increased accountability for performance because all activities related to a specific product or service are under the direction of a single manager (e.g., Wealth Management).
  3. On the basis of geography or territory: Valuable if customers are scattered over a large geographical area and have similar needs based on their location (e.g., North American Market).
  4. Process departmentalization: Works for processing customers as well as products (e.g., Visa Issuance, Driving Licence Exam Department).
  5. By customer: Customers in each department have a common set of problems and needs best met by having specialists for each (e.g., SME).

3. Chain of Command

• Chain of command is the unbroken line of authority that extends from the top of the organization to the lowest echelon and clarifies who reports to whom.
• Authority: The rights inherent in a managerial position to give orders and to expect the orders to be obeyed. To facilitate coordination, each managerial position is given a place in the chain of command, and each manager is given a degree of authority in order to meet his or her responsibilities.
• Unity of command: The idea that a subordinate should have only one superior to whom he or she is directly responsible. If the unity of command is broken, an employee might have to cope with conflicting demands or priorities from several superiors.

4. Span of Control

• Span of control is the number of subordinates a manager can efficiently and effectively direct.
• Wider spans:
  • More efficient in terms of costs.
  • However, at some point, supervisors no longer have time to provide the necessary leadership and support, and they reduce effectiveness and employee performance suffers.
• Narrow spans:
  • Drawbacks:
    • Expensive because they add levels of management.
    • Make vertical communication more complex.
    • Slows down decision making.
    • Tend to isolate upper management.
    • Encourage overly tight supervision and discourage employee autonomy.

5. Centralization and Decentralization

• Centralization: The degree to which decision-making takes place at upper levels of the organization.
• Decentralization: The degree to which lower-level managers provide input or actually make decisions.

6. Formalization

• Formalization is how standardized an organization’s jobs are and the extent to which employee behavior is guided by rules and procedures, formal training, and other mechanisms (e.g., McDonald's, Starbucks).
• Advantages:
  • Makes employees' behavior more predictable and accountable.
  • Leads to consistency in behavior.
  • Less time and cost in training
• Disadvantages:
  • Might lack flexibility and slow response to the factors of the external environment.
  • Low job satisfaction and engagement.
  • High cost of supervision.
  • No new challenges.

Organizational Designs

Common Organizational Designs

• Simple structure: An organization structure characterized by a low degree of departmentalization, wide spans of control, authority centralized in a single person, and little formalization (e.g., Italian family companies).
• Bureaucracy: An organization structure with highly routine operating tasks achieved through specialization, very formalized rules and regulations, tasks that are grouped into functional departments, centralized authority, narrow spans of control, and decision making that follows the chain of command (e.g., government offices).

Matrix Organization (MO)

• Matrix structure involves having employees report to both a functional manager and a project manager.
• The structure diagram depicts project managers (Project A, Project B, Project C) and functional managers (Manufacturing, Sales, Finance, Human Resources) overseeing respective units.

New Organizational Designs

• Virtual organization: A small, core organization that outsources major business functions; is highly centralized, with little or no departmentalization.
• Managers in virtual structures spend most of their time coordinating and controlling external relations.

Case in Point: Spotify Organizational Structure

• Born-global company (founded 2006, launched 2008, HQ: Stockholm, revenues FY 2017: $4.99$ billion, employs $2960+$ people, $159$ million users, $71$ million paying customers).
• Flat organizational structure.
• Imperative that it can work in a fast-moving way.
• The organizational structure of Spotify allows it to react fast to the outside environmental changes and for people to be creative.
• Organizational structure based upon squads, chapters, tribes, and guilds.
  • Squads: Building blocks of the organizational structure, small teams.
    • Working in a shared space.
    • On one long-term mission, usually improving a specific area or part of the Spotify Experience.
    • No manager but a Product Owner.
  • Tribes: Groups of squads that work in similar areas (e.g., web-based services).
    • Works independently and autonomously, with very little traditional management.
    • Squads of a tribe sit close to each other in the office.
    • But ethos of Spotify discourages building dependencies among the squads in the tribes.
  • Chapters: Collections of people who have similar skills but who work in different squads.
    • For example, all the programmers.
    • Facilitates the management of staff and structure.
    • More linked to traditional management (horizontal management).
  • Guild: The only time people tend to work outside their tribes is when taking part in ‘Guild’ activities.
    • People with similar interests.
    • Working on projects or problems that interest them.
    • Autonomous and self-managed.