Organizational Structure
Traditional Organizational Structures
Organizations exist to enable a group of
people to effectively coordinate their
efforts to get things done
Organizational structure refers to the
formalized arrangement of interaction
between and responsibility for the tasks,
people, and resources in an organization
It is most often seen as a chart, often a
pyramidal chart, with positions or titles
and roles in cascading fashion
Organization structure- Importance
Key to implementation of strategy
Organic or inorganic growth demands a unique
organizational structure
Organizational structures should aim to achieve
two objectives : Structural Stability & Structural
Flexibility
Organization structure bears a direct impact on
the performance of the firm
Important Debate: Structure follows strategy or
vice versa?
Strategy & Structure as reciprocal
MATCHING STRUCTURE WITH
STRATEGY
Changes in strategy
Changes in structure
(1) structure largely dictates how objectives and
policies will be
established and
(2) structure dictates how resources will be allocated
Structure should be designed to facilitate the strategic
pursuit of a firm and, therefore, follow strategy.
When a firm changes its strategy, the existing
organizational structure may become ineffective.
Stages of corporate development
Simple Structure
Functional Structure
Divisional Structure
Beyond SBUs
Simple Organizational
Structure
A simple organizational structure is one
where there is an owner and a few
employees and where the arrangement of
tasks, responsibilities, and communication
is highly informal and accomplished
through direct supervision
All strategic decisions are taken by the
owner
Most businesses in and around the world
are of this type
Simple Organizational
Structure
Strategic Advantages
Strategic Disadvantages
Less need to formalize roles,
communication and procedures
Structure maximizes owner
control, with little room for
maneuver for others
Rapid response to
product/market shifts
Suitable for small firms & in
local areas
Accommodate unique customer
demands faster
Employees can multitask
Demanding on the time and
energy of the owner
Functional Organizational
Structure
Tasks, people, and technologies necessary to do
the work of the business are divided into separate
functional groups (such as marketing, operations,
and finance) with increasingly formal procedures
for coordinating and integrating their activities to
provide products and services of the business
Predominant in firms with single/narrow product
focus which has experienced success
High level of specializations to build competitive
advantage
Small & Medium Sized Businesses
Functional Structure
Functional Organizational
Structure
Strategic Advantages
Strategic Disadvantages
Efficiency through specialization Narrow specialization leading to
& delegation
functional rivalry
Develops functional expertise
Difficulty in functional
coordination & inter-functional
decision making
Retains centralized control of
strategic decision
Limits development of general
managers
Tightly links structure to
strategy by designating key
activities as separate units
May cost more to do a function
that it does outside the
company (i.e. outsourced)
Divisional Structure
A set of relatively autonomous units, or
divisions, are governed by a central
corporate office but where each
operating division has its own functional
specialists who provide products or
services different from those of other
divisions
Division can be on the basis of product
groups/services/geography
Authority delegated by corporate office
to divisions - expedites decision making
The division usually is given profit
Divisional Structure
Strategic Advantages
Strategic Disadvantages
Forces coordination & necessary
Potentially dysfunctional
authority down to the appropriate competition for corporate level
level for rapid response
resources
Strategy development &
How much authority should be
implementation in close proximity given to divisional managers?
to unique divisional environments
Frees top managements time for Potential for policy
broader strategic decision making inconsistencies among divisions
Accountability for performance
How to distribute corporate level
resources among divisions?
Retains functional specialization
within each division
Extra cost through duplication
functions
Good training ground for strategic Difficulty maintaining overall
managers
corporate image
Divisional Structure
Strategic Business Unit
The strategic business unit (SBU) is an
adaptation of the divisional structure whereby
various divisions or parts of divisions are
grouped together based on some common
strategic elements, usually linked to distinct
product/market differences
Advantages/ Disadvantages are similar to
divisional structure
Added disadvantage is the increased cost of
coordination with another pricy level of
management
Strategic Business Unit
Holding Company Structure
A final form of the divisional organization is the holding
company structure, where the corporate entity is a broad
collection of often unrelated businesses and divisions such
that it (the corporate entity) acts as financial overseer
holding the ownership interest in the various parts of the
company but has little direct managerial involvement
E.g. SHV
Offers financial support & manages these companies
through final goals and annual levels of performance
Strategic & operating decisions are left to individual
company/division
Offers cost savings as no added layer of management exists
Disadvantages: Lack of control; excess dependence on each
divisions management team.
Matrix Organizational
Structure
The matrix organizational structure is one in
which functional and staff personnel are assigned
to both a basic functional area and to a project or
product manager
It provides dual channels of authority, performance
responsibility, evaluation and control.
Its intended to make the best use of talented
people within a firm by combining the advantages
of functional specialization and product-project
specialization
Consulting Firms (PwC)
Matrix
Structure
Two-boss employee
Matrix Organizational
Structure
Strategic Advantages
Strategic Disadvantages
Accommodates a wide variety of
project oriented business
activities
May result in confusion and
contradictory policies
Offers good training ground for
strategic managers
Necessitates tremendous vertical
and horizontal coordination
Maximizes efficient use of
functional managers
Can lead to information logjam
and excess reporting
Fosters creativity and multiple
sources of diversity
Can trigger turf battles and loss
of accountability
Offers middle management broad
exposure to strategic issues
Product-Team Structure
To address the deficiencies of a permanent
matrix structure , firms are adopting a
temporary/flexible overlay structure (e.g.
Motorola, Mitshubishi etc)
It adopts a temporary matrix-type team while
preserving an underlying divisional structure
The product-team structure seeks to
simplify and amplify the focus of resources on
a narrow but strategically important product,
project, market, customer, or innovation
Product-Team Structure
Product-Team Structure
This structure assigns functional managers to a
new product/project team that is empowered to
make major decisions about it
Speeds of innovation and customer
responsiveness as decision authority rests with
the team
Team members are assigned permanently in
most cases, resulting in much lower
coordination costs
Since every function is represented, it usually
reduces the number of management layers
Network Structure
non structure elimination of
in-house business functions
Termed virtual organization
Useful in unstable environments
Need for innovation and quick
response
23
Network Structure
Packagers
Designers
Suppliers
Corporate
Headquarters
(Broker)
Manufacturers
Distributors
Promotion/
Advertising
Agencies
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A Small Exercise
Design a pharma organization with
its major functional structure that
supports a cost leadership
strategy?
Design an organization with
functional structure that supports a
product differentiation strategy?
