Fundamentals of Organizational Structure
3 Key Components to Organizational Structure
1. Organizational structure designates formal reporting relationships, levels of hierarchy, and span of control. (vertical
2. Organizational structure identifies groups of individuals into departments. (vertical structure)
3. Organizational structure includes the design of systems to ensure effective communication, coordination, and integration
of efforts across departments. (horizontal structure)
Reflected in the organization chart – a visual representation of a whole set of underlying activities and processes in an
organization at a particular point in time.
Information-Processing Perspective on Structure
Organizations should be designed to provide both vertical and horizontal information flow as necessary to accomplish
the organization’s overall goals.
Organizations must choose whether they want to be centralized and efficiency-oriented (vertical) or decentralized and
Communication composed of information and interpretation.
Vertical Information Linkages
Vertical Linkages are used to coordinate activities between the top and bottom of an organization, and are designed primarily for
control of the organization.
Hierarchical Referral – if a problem can’t be solved it is passed up to the next level, when it is solved it is passed back
down, here the lines of command act as lines of communication.
Rules and Plans – exists so that employees can use them as a reference without having to directly communicate with
their manager. Most widely used plan is the budget.
Vertical Information Systems – include periodic reports, written information, and computer-based communications
distributed to managers. Makes communication up and down the hierarchy more efficient.
Horizontal Information Linkages
Horizontal Linkages refers to the amount of communication and coordination horizontally across organizational departments (in
order of linkage and cost of coordination in time and hr)
Cross Functional Information Systems – use of cross functional information system to promote horizontal linkage can
enable managers or front-line workers throughout the organization to exchange information about problems,
opportunities, activities and decisions, and build relationships.
Direct Contact – between managers and employees; create a liaison role – responsibility for communicating and
achieving coordination with another department.
Task Forces – when linkage occurs between several departments then task forces are assembled where a
representative from each department meets to carry information back to their department (temporary committee).
Full-time Integrator – creating a role or department whose sole purpose is coordination of several departments (e.g.
brand manager, project manager, etc.). Also responsible for an innovation or change project – new product. Have lots
of responsibility but little authority.
Teams – project teams (permanent task forces) in conjunction with a full-time integrator.
Organizational Design Alternatives
Required Work Activities
Departments are created to perform tasks considered strategically important to the company.
The chain of command is represented by vertical lines on an organization chart; defines how employees should be
grouped into departments and shows who reports to whom.
Departmental Grouping Options
5 Departmental Groupings – share a common supervisor and common resources, are jointly responsible for
performance, and tend to identify and collaborate with one another.
Functional Grouping places together employees who perform similar functions or work processes or who bring similar
knowledge or skills (e.g. all marketing people work together under the same supervisor).
Divisional Grouping means people are organized according to what the organization produces.
Multifocused Grouping means an organization embraces two structural grouping alternatives simultaneously.
Horizontal Grouping means employees are organized around core work processes, the end-to-end work, information,
and material flows that provide value directly to customers.
Virtual Grouping allows departments to be electronically connected for the sharing of information and the completion of
tasks. Functional, Divisional, and Geographical Design
Functional Structure – activities are grouped together by common function from the bottom to the top of the organization.
Require stronger horizontal linkages as the organization grows larger and flatter.
o Allows economy of scale within functional departments.
o Enables in-depth knowledge and skill development.
o Enables organization to accomplish functional goals.
o Is best with only one or a few products.
o Slow response time to environmental changes.
o May cause decisions to pile up, hierarchy overload.
o Leads to poor horizontal coordination among departments.
o Results in less innovation.
o Involves restricted view of organizational goals.
Divisional Structure (a.k.a. Product structure or SBUs) – divisions are organized according to individual products, services,
product groups, major projects, or programs, businesses, divisions, profit centres. Grouping is based on organizational output!
o Suited to fast change in unstable environment.
o Leads to customer satisfaction because product responsibility and contact points are clear.
o Involves high coordination across functions.
o Allows units to adapt to differences in products, regions, customers.
o Best in large organizations with several products.
o Decentralizes decision-making.
o Eliminates economies of scale in functional departments.
o Leads to poor coordination across product lines.
o Eliminates in-depth competence and technical specialization.
o Makes integration and standardization across product lines difficult.
Geographical Structure – grouping of the organization’s users or customers since each region may have distinct tastes and
needs, and each geographic unit consists of all functional units needed to produce and sell product/servic