Types of Organizational Structure

Structure matters! There are seven basic types of organizational structure: (1) functional, (2) divi­sional by geographic area, (3) divisional by product, (4) divisional by customer, (5) divisional by process, (6) strategic business unit (SBU), and (7) matrix. Companies, like people and armies, strive to be better organized/structured than rivals, because better organization can yield tre­mendous competitive advantages. There are countless examples throughout history of incidents, battles, and companies where superior organization overcame massive odds against the entity.

1. The Functional Structure

The most widely used structure is the functional or centralized type because this structure is the simplest and least expensive of the seven alternatives. A functional structure groups tasks and activities by business function, such as production and operations, marketing, finance and account­ing, research and development, and management information systems. A university may structure its activities by major functions that include academic affairs, student services, alumni relations, athletics, maintenance, and accounting. Besides being simple and inexpensive, a functional struc­ture also promotes specialization of labor, encourages efficient use of managerial and technical talent, minimizes the need for an elaborate control system, and allows rapid decision making. Some disadvantages of a functional structure are that it forces accountability to the top, minimizes career development opportunities, and is sometimes characterized by low employee morale, line or staff conflicts, poor delegation of authority, and inadequate planning for products and markets. Table 7-7 summarizes the advantages and disadvantages of a functional organizational structure.

A functional structure often leads to short-term and narrow thinking that may undermine what is best for the firm as a whole. For example, the research and development department may strive to overdesign products and components to achieve technical elegance, whereas manufac­turing may argue for low-frills products that can be mass produced more easily. Thus, communi­cation is often not as good in a functional structure. Schein gives an example of a communication problem in a functional structure:

The word “marketing” will mean product development to the engineer, studying customers through market research to the product manager, merchandising to the salesperson, and constant change in design to the manufacturing manager. then when these managers try to work together, they often attribute disagreements to personalities and fail to notice the deeper, shared assumptions that vary and dictate how each function thinks.⁴

Most large companies have abandoned the functional structure in favor of decentralization and improved accountability. However, a large company that still operates from a functional type of organizational design is Nucor. Headquartered in Charlotte, North Carolina, Nucor’s execu­tive management team consists of eight white, male persons (lack of diversity is not good; see http://www.nucor.com/governance/executives/). A large producer of steel products, Nucor has no apparent division heads, and John Ferriola is both CEO and Chairman of the Board (holding those two titles is not good).

2. The Divisional Structure

The divisional (decentralized) structure is the second-most common type. Divisions are some­times referred to as segments, profit centers, or business units. As a small organization grows, it has more difficulty managing different products and services in different markets. Some form of divisional structure generally becomes necessary to motivate employees, control operations, and compete successfully in diverse locations. The divisional structure can be organized in one of four ways: (1) by geographic area, (2) by product or service, (3) by customer, or (4) by pro­cess. With a divisional structure, functional activities are performed both centrally and in each separate division.

Sun Microsystems recently reduced the number of its business units from seven to four. Kodak recently reduced its number of business units from seven by-customer divisions to five by-product divisions. As consumption patterns become increasingly similar worldwide, a by­product structure is becoming more effective than a by-customer or a by-geographic type of divisional structure. In the restructuring, Kodak eliminated its global operations division and distributed those responsibilities across the new by-product divisions.

A divisional structure has some clear advantages. First and perhaps foremost, accountability is clear. That is, divisional managers can be held responsible for sales and profit levels. Because a divisional structure is based on extensive delegation of authority, managers and employees can easily see the results of their good or bad performances. As a result, employee morale is gener­ally higher in a divisional structure than it is in a centralized structure. other advantages of the divisional design are that it creates career development opportunities for managers, allows local control of situations, leads to a competitive climate within an organization, and allows new busi­nesses and products to be added easily.

the divisional design is not without some limitations, however. perhaps the most important limitation is that a divisional structure is costly, for a number of reasons. First, each division requires functional specialists who must be paid. Second, there exists some duplication of staff services, facilities, and personnel; for instance, functional specialists are also needed centrally (at headquarters) to coordinate divisional activities. third, managers must be well qualified because the divisional design forces delegation of authority; better-qualified individuals require higher salaries. A divisional structure can also be costly because it requires an elaborate, headquarters- driven control system. Fourth, competition between divisions may become so intense that it is dysfunctional and leads to limited sharing of ideas and resources for the common good of the firm. table 7-8 summarizes the advantages and disadvantages of divisional organizational structure.

A divisional structure by geographic area is appropriate for organizations whose strategies need to be tailored to fit the particular needs and characteristics of customers in different geo­graphic areas. this type of structure can be most appropriate for organizations that have similar branch facilities located in widely dispersed areas. A divisional structure by geographic area allows local participation in decision making and improved coordination within a region. Due to steady declines in revenues among its U.S. restaurants, McDonald’s recently created a new organizational structure for its operations in the United States, replacing three regions with four geographic zones to better respond to local tastes. McDonald’s U.S. President Mike Andres said, “What has worked for McDonald’s USA for the past decade is not sufficient to propel the busi­ness forward in the future.” The footwear maker, Crocs, Inc., also uses the divisional-by-region type of structure, as illustrated in Figure 7-4.

The divisional structure by product (or services) is most effective for implementing strate­gies when specific products or services need special emphasis. Also, this type of structure is widely used when an organization offers only a few products or services or when an organiza­tion’s products or services differ substantially. The divisional structure allows strict control over and attention to product lines, but it may also require a more skilled management force and reduced top management control.

When a few major customers are of paramount importance and many different services are provided to these customers, then a divisional structure by customer can be the most effective way to implement strategies. This structure allows an organization to cater effectively to the requirements of clearly defined customer groups. For example, book-publishing companies often organize their activities around customer groups, such as colleges, secondary schools, and private commercial schools. Some airline companies have two major customer divisions: (1) passengers and (2) freight or cargo services. Utility companies often use (1) commercial, (2) residential, and (3) industrial as their divisions by customer.

Headquartered in New York City, time Warner Cable (TWC) recently changed its organiza­tional structure from a divisional-by-geographic region to a divisional-by-customer design. Time Warner is now organized by reference to its customer groups served (residential, business, or media clients) and the functions necessary to serve those customers. The company now has three business units—(1) Residential Services, (2) Business Services, and (3) Media Services—report­ing to the chief operating officer (Coo) rob Marcus.

A divisional structure by process is similar to a functional structure, because activities are organized according to the way work is actually performed. However, a key difference between these two designs is that functional departments are not accountable for profits or revenues, whereas divisional process departments are evaluated on these criteria. An example of a divi­sional structure by process is a manufacturing business organized into six divisions: electrical work, glass cutting, welding, grinding, painting, and foundry work. In this case, all operations related to these specific processes would be grouped under the separate divisions. Each process (division) would be responsible for generating revenues and profits. The divisional structure by process can be particularly effective in achieving objectives when distinct production processes represent the thrust of competitiveness in an industry.

3. The Strategic Business Unit (SBU) Structure

As the number, size, and diversity of divisions in an organization increase, controlling and evaluating divisional operations become increasingly difficult for strategists. Increases in sales often are not accompanied by similar increases in profitability. The span of control becomes too large at top levels of the firm. For example, in a large conglomerate organization composed of 90 divisions, such as ConAgra, the chief executive officer could have difficulty even remember­ing the first names of divisional presidents. In multidivisional organizations, an SBU structure can greatly facilitate strategy-implementation efforts. ConAgra has put its many divisions into two primary SBUs: (1) consumer foods and (2) private brands and commercial foods. ConAgra’s SBU structure is illustrated in Figure 7-5. Commercial foods are “food for restaurants,” whereas consumer foods are “food in grocery stores.”

The strategic business unit structure groups similar divisions into SBUs and delegates authority and responsibility for each unit to a senior executive who reports directly to the chief executive officer. this change in structure can facilitate strategy implementation by improving coordination between similar divisions and channeling accountability to distinct business units. In a 100-division conglomerate, the divisions could perhaps be regrouped into 10 SBUs accord­ing to certain common characteristics, such as competing in the same industry, being located in the same area, or having the same customers.

Two disadvantages of an SBU structure are that it requires an additional layer of man­agement, which increases salary expenses. Also, the role of the group vice president is often ambiguous. However, these limitations often do not outweigh the advantages of improved coor­dination and accountability. another advantage of the SBU structure is that it makes the tasks of planning and control by the corporate office more manageable. Halliburton operates from an SBU structure with the divisions based on process, as described at www.halliburton.com (click on about Us, then click Company profile). In June 2015, Microsoft changed its organizational structure to become three by-product strategic business units: (1) Windows and Devices Group (WDG), (2) Cloud and Enterprise (C+E), and (3) applications and Services group (ASG).

4. The Matrix Structure

A matrix structure is the most complex of all designs because it depends on both vertical and horizontal flows of authority and communication (hence the term matrix). In contrast, functional and divisional structures depend primarily on vertical flows of authority and communication. A matrix structure can result in higher overhead because it creates more management positions. other disadvantages of a matrix structure that contribute to overall complexity include dual lines of budget authority (a violation of the unity-of-command principle), dual sources of reward and punishment, shared authority, dual reporting channels, and a need for an extensive and effective communication system.

Despite its complexity, the matrix structure is widely used in many industries, including construction, health care, research, and defense. As indicated in table 7-9, some advantages of a matrix structure are that project objectives are clear, there are many channels of communication, workers can see the visible results of their work, shutting down a project can be accomplished relatively easily, and it facilitates the use of specialized personnel, equipment, and facilities. Functional resources are shared in a matrix structure, rather than duplicated as in a divisional structure. Individuals with a high degree of expertise can divide their time as needed among proj­ects, and they in turn develop their own skills and competencies more than in other structures.

A typical matrix structure is illustrated in Figure 7-6. Note that the letters (A through Z4) refer to managers. For example, if you were manager a, you would be responsible for financial aspects of project 1, and you would have two bosses: the project 1 Manager on site and the CFo off site.

For a matrix structure to be effective, organizations need participative planning, training, clear mutual understanding of roles and responsibilities, excellent internal communication, and mutual trust and confidence. The matrix structure is being used more frequently by U.S. businesses because firms are pursuing strategies that add new products, customer groups, and technology to their range of activities. out of these changes are coming product managers, functional managers, and geographic-area managers, all of whom have important strategic responsibilities. When several variables, such as product, customer, technology, geography, functional area, and line of business, have roughly equal strategic priorities, a matrix organization can be an effective structural form.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).