Organizational Structure

Organizational structure refers to the formal and informal manner in which people, job tasks, and other organizational resources are configured and coordinated. Although organizational structure sounds like a singular characteristic, it is composed of a number of dimensions, because there are multiple ways the employees within an organization and the job tasks that are carried out can be structured. The most commonly studied aspects of organizational structure include formalization, centralization, and complexity.

Fundamental Elements of Organizational Structure

Formalization refers to the extent to which organizational policies, practices, and ways of completing tasks are standardized. Specifically, highly formalized organizations are those in which rules for expected behavior are clearly articulated and followed. Conversely, organizations that exhibit low levels of formalization have few standardized practices or rules. Formalization is often conveyed through formal means and documents such as job descriptions, but it need not be. Informal activities, such as practices that are reinforced through group norms or informal conversations with other members of the organization, also serve to reinforce the level of formalization.

Centralization refers to the distribution of decision-making authority, information, and power throughout an organization. In some organizations all or most decisions are made by a small group of individuals, often the top management team. Such organizations are considered highly centralized because power is maintained by a select few individuals, for example, when decisions are made by a central group of individuals. Conversely, in highly decentralized organizations, power and decision making are spread across individuals throughout the organization. Individual employees in these organizations have the opportunities and authority to make day-to-day decisions and other important decisions that affect their work. The centralization of power in an organization may be dictated and described in formal rules, policies, and job descriptions. It is also common, however, that centralization occurs informally through the behaviors and norms introduced and reinforced by those in power, such as a leader who purposefully limits access to key information.

Complexity has represented a number of different aspects of organizational structure throughout history (additional historical background is presented in a later section). Among the structural aspects that have been labeled complexity are specialization, interdependency span of control, and height. Although each is somewhat unique, they all share the recognition that the organization of workers and work processes can range in design from simple to complex. Specialization refers to the extent to which job tasks require highly specific (i.e., specialized) work skills or, conversely, can be success-fully carried out by individuals who possess more broadly available knowledge, skills, and abilities. Research- and development-based organizations are examples of organizations that are likely to be highly specialized because such activities often require unique content knowledge and skills. Interdependency (also called integration) refers to the integration of tasks and activities across different workers. Highly integrated organizations require the cooperation and collaboration of many different employees to get work done. Nonintegrated organizations are composed of individuals who work largely on their own and do not require assistance or products from other employees. Span of control refers to the number of subordinates who report to a single manager. The size of the managerial span is often associated with the varying levels of the hierarchy within an organization (height). Large spans of control are associated with flatter organizations, such as those with fewer layers between entry-level positions and top management); small spans typically correspond with tall hierarchical organizations in which there are many levels from the bottom to the top.

Structural dimensions receiving less attention include departmentalization and physical dispersion. Departmentalization refers to the existence of formal and informal divisions within an organization. These divisions are often, but not always, created by grouping subsets of jobs, and often comprise similar (or related) jobs. Highly departmentalized organizations are those that have created many internal divisions, whereas highly nondepartmentalized organizations have few. Physical dispersion refers to the extent to which organizational members are physically spread apart from one another. This may refer to the dispersion of individuals within a single building or, in highly dispersed organizations, the spread of employees across numerous locations throughout the world.

Factors Relevant to the Elements of Organizational Structure

There is convincing evidence that no one structure is best for all organizations. Because there are many factors that determine the structure most effective for any given organization, researchers have adopted an approach called contingency theory. Contingency theory in this context refers to the idea that relevant circumstances must be considered before applying a specific organizational design. A number of contingencies determine structure; environment, technology, strategy,, and size are among the most influential.

Environment is the total of the factors that occur outside of the organization but are relevant to the decision making of the management of the organization. These external forces include social and cultural norms, governmental regulations, economic conditions, market competition, the relevant labor pool, availability and nature of raw materials, and industry type.

Technology represents one aspect of the environment affecting an organization. Because of its importance historically (see the brief description of the seminal Woodward studies that follows) and strong impact on modern organization, technology is often separated out for special consideration in its effect on organizational structure. Although in 2006 technology is often considered interchangeable with computerization, technology in its broadest sense may be defined as the knowledge necessary to process raw material. Depending on the organizational product or service, the raw material might be objects or people. Further, technological processes can be categorized as routine or nonroutine. Routine processes are well understood and standardized. Routine technology typically leads to more traditional organization structure with higher levels of centralization and formalization.

When taken together, environmental factors are often categorized by their complexity. Complexity here refers to the heterogeneity and incompatibility of the various elements of environment enumerated earlier. Large organizations often face more complex environments because of the sometimes conflicting objectives of the various stakeholders, such as governmental regulations and resource acquisition costs, found in the environment. Generally, the more complex the environment, the more complex the organizational structure to accommodate that environmental complexity.

Environmental factors can also be categorized as stable or volatile based on an overall assessment of the predictability of change in the environment. To meet the demands of these two types of environments, organizations may be said to employ two primary approaches to structure themselves: mechanistic and organic. Mechanistic models of structure are denoted by high specialization, rigid departmentalization, strong centralization and formalization, and narrow spans of control with clear authority lines. In contrast, the organic model has decentralized authority and decision making, low standardization, and formalization with self-directed teams or work groups as the primary departmentalization strategy. It should be noted that the two classifications, mechanistic and organic, might be considered as ends of a continuum rather than definitive categories; for example, few organizations use all elements of a strictly mechanistic or organic structure but instead use some combination of the two.

To survive, an organization must have a strategy for providing its products or services. The strategy of an organization will differ relative to the target customer market and industry type within which the organization functions; but within these constraints, an organization can select from many types of strategy with innovation and imitation strategies representing classic types. Innovation strategies emphasize being the leader in the industry in introducing new products or services. Organizations that choose the imitation strategy do not produce new products or services until another organization has demonstrated that those products and ser-vices are in demand. A subtype of imitation strategy is minimizing costs in an effort to generate high profits with lowered risk. The implications of different organizational strategies—innovation or imitation—lead to structures that vary along the continuum of the mechanistic and organic models described previously. Innovation strategies are more likely to require organic types of structure, whereas imitation (and cost minimization) strategies are more apt to lead to mechanistic models of organizational structure.

Size of organization is most often represented by the number of employees but may alternatively be represented by the number of plant locations or offices, net assets (manufacturing), gross sales (manufacturing or service industries), or number of units that can be produced or people who can be served. Number of employees correlates more strongly than other indicators to structural features, and the size of an organization has a strong impact on resulting structure. Large organizations have more specialization in job types, more standardization of rules and formalization of procedures, and often more decentralization of decision making.

How Modern Conceptualizations of Organizational Structure Developed

How to organize the people and the tasks of work has been of interest from the earliest of times. Although concerns for structure can be dated to the Roman legions, modern interest among management theorists stems most directly from Henri Fayol’s prescriptions for management in the early 1900s. In his principles of management, Fayol recommended specialization, centralization, clear lines of authority with one superior for each employee, and unity of direction. Unity of direction refers to the proposal that all effort within a group be directed toward recognized organizational goals and is inherent in the hierarchical structures of many organizations.

Another pioneer in defining organization structure was sociologist and economist Max Weber. In the early 1900s Weber conceptualized the ideal bureaucracy as an organization with a hierarchical division of labor in which explicit rules were applied objectively to employees. This organizational design is widely used today and is characterized by high levels of specialization, strong formalization, functional departmentalization, narrow spans of control, and centralized authority and decision making, for example, following the mechanistic model noted earlier. Since Weber’s original work, the term bureaucracy has also come to be used as a pejorative reference to the constraints incumbent in the rules governing organizational life.

In the 1950s Joan Woodward studied 100 manufacturing firms in England and categorized, from simple to complex, the technical complexity of their operations into three types: unit production, mass production, and continuous processing. She determined that the type of operating process an industry used determined the best structure for an organization; her findings brought to an end the search for one best structure and heralded the start of the contingency approach noted earlier. During the 1960s Paul R. Lawrence and Jay W. Lorsch continued the study of environment-structure fit and concluded that the contingencies of the environment were critical to selecting a suitable organizational configuration. More specifically, they found that organizations with stable environments were most successful if they used traditional hierarchical (i.e., mechanistic) structures; organizations with organic structures were more successful in volatile environments.

Among the best known and longest running (approximately 40 years, starting in the 1950s) studies of organizational structure are those that emanated from the University of Aston group in England. A collection of researchers headed by Derek S. Pugh examined a wide range of organizations and codified and developed measures of such concepts as centralization, specialization, and formalization described previously. Their work bridges the early modern era with the current era.

Emerging Issues of Organizational Structure

The globalization of work and expansion of multinational firms has provided one element of the environment that has fomented changes in prevailing organizational structures. In addition, the rapid changes brought about by the widespread use of computers and other elements of information technology have especially had a large impact on the functioning of organizations. These changes are expected to force changes in organizational structure. In fact, information technology has already influenced organizational structure. Large-scale users of information technology tend to have more decentralized and less formalized structures and more flexibility in responding to the challenges of a volatile environment. Further, with the globalization of work and markets, some organizations have capitalized on the advances of information technology to implement new structural forms. The boundaryless (also called virtual, network, shadow, barrier-free) organization may have only a small number of core employees and, in its most extreme case, no physical location beyond that needed to house the small cadre of management employees. Production or services that constitute the core of the organization’s mission may be outsourced completely to sites around the globe with information technologies serving as the primary communication links.

The Role of Structure in Organizations

A key role of organizational structure is its relationship to organizational strategy. Depending on an organization’s strategy, certain structures will be more or less effective. Therefore, matching structure and strategy is important. Ultimately, a recursive relationship exists whereby the effective implementation of strategy creates an appropriate matching structure that, in turn, produces outcomes and processes that support the intended strategy. For example, an organization that has innovation as a core strategy would likely produce a structure with low levels of formalization and high levels of decentralization, among other characteristics. Individuals who work in such a structure experience greater autonomy, freedom, and flexibility in carrying out their work tasks and, as a consequence, are likely to emerge as an innovative workforce. Thus structure and strategy should reinforce each other. Mismatch between structure and strategy often leads to organizational failure.

Structure is also important because of the direct and meaningful impact it may have on valued individual outcomes. A number of studies have demonstrated that organizational structure affects important individual worker attitudes including job satisfaction, work alienation, role ambiguity, role conflict, perceptions of justice, motivation, and job involvement. Structure has also been shown to affect employee behaviors such as performance, turnover, and organizational citizenship. Although some relationships are direct (i.e., increased formalization is associated with lower levels of role ambiguity), most require consideration of individual characteristics and other contextual factors to understand their impact.

Environmental demands such as changing technology and globalization have heightened the importance of organizational flexibility in many industries. Basic structural characteristics such as centralization, formalization, and complexity directly influence an organization’s capacity to respond quickly to changes in the environment. One response to the demand for flexibility has been the increased dependence on self-guided teams. Further, formally hierarchical structures have become much flatter, resulting in greater decentralization, generally less formalization, and, in many cases, increased departmentalization.

Summary

Organizational structure is the way people and the work to be accomplished within organizations are configured and coordinated. The primary elements of structure are centralization, formalization, and complexity. These elements are affected by forces outside the organization as well as by organizational size. Information technology and globalization are especially potent factors likely to alter the future of organizational structures. Meaningful relationships exist between organizational structure and organizational strategy, performance, and individual attitudes and behaviors.

References:

  1. Dibrell, C. C., & Miller, T. R. (2002). Organization design: The continuing influence of information technology. Management Decision, 40(5/6), 620-627.
  2. Hall, R. H. (1991). Organizations: Structure, processes, and outcomes (5th ed.). Englewood Cliffs, NJ: Prentice Hall.
  3. James, L. R., & Jones, A. P. (1976). Organizational structure: A review of structural dimensions and their conceptual relationships with individual attitudes and behavior. Organizational Behavior and Human Performance, 16, 74-113.
  4. Mintzberg, H. (1979). The structuring of organizations. Englewood Cliffs, NJ: Prentice Hall.
  5. Pugh, D. S. (Ed.). (1998). The Aston Programme, Vols. 1-111. The Aston Study and its developments. Burlington, VT: Ashgate.

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