Chapter 8: Organizational Structure and Design

Organizational Structure

Organizations have existed since human beings’ first attempts to seek ways to survive in nature. Hunting and gathering, defending the society from external threats and establishing order in the society all require job division, hierarchical relations and rules that govern behavior of individuals. Therefore, it is possible to state that organizations did not suddenly emerge right after the industrial revolution. Workshops, army, state and religious institutions are among the examples of historical organizational forms. However, guiding principles of modern organizations and the term “structure” that we use today frequently to explain features of organizations are related to the studies of Max Weber.

Weber named the ideal type of organization as “bureaucracy” and he defined basic features of bureaucratic forms (Scott, 2007);
a) a fixed division of labor among participants,
b) a hierarchy of offices,
c) a set of general rules that governs performance,
d) a separation of personnel from official property,
e) selection of personnel based on technical qualifications,
f) employment viewed as a career by participants

Weber was criticized because of designing an iron cage for the employees, which decreases creativity, increases dissatisfaction and demotivation (Adler and Borys, 1996). Despite negative assessments, it is not possible to imagine an organization without bureaucracy in contemporary business life.

Bureaucracy has a mission to convert organizational participants to “ideal employees” by using guidelines, instructions, rules and strict hierarchy. Bureaucracy may seem as an outdated, rigorous and time wasting system for contemporary business organizations, but it is still not possible to think especially complex and large organizations without bureaucracy.

Individual talents, skills and abilities that are not directly related to the predefined features of a position are meaningless for traditional bureaucracy because conformity to the system is more important than personal characteristics of actors. Employees may feel useless, alienated and frustrated in such a system. The contributions of Max Weber concerning design and management of modern day organizations are undeniable, but business environment nowadays requires speed, creativity and dynamism.

Components of Organizational Structure

Organizations are composed of physical and social structures. The term physical structure refers to tangible assets such as buildings, plants, plots and institutional design. Social structure refers to formal interaction and communication patterns; hierarchical relations; organization of departments and units; written rules, instructions and procedures.

Formalization

When organizations reach a certain size in terms of number of employees, managers frequently face with challenges of establishing a system of control over organizational participants. Workplace relations, ways of doing business, usage of equipment, internal and external communication methods must be standardized in such large and complex organizations. Otherwise, it will not be possible to establish an order in these organizations.

Formalization refers to the number of written documents comprising procedures, job descriptions, regulations, instructions and guidelines (Daft, 2007). The existence of written communication among hierarchical levels and units is another indicator of formalization. Formalization is often measured by counting the number of written pages in an organization (Daft, 2007). Therefore, the term “formal organization” means tendency of organizations to record all business-related activities by written documents.

Most state organizations such as army, ministries, educational institutions, governmental agencies and hospitals have highly formalized systems. Yet, private firms in knowledge intensive sectors may adopt a less formal system to increase creativity of their employees.

Age and size are the other factors that lead to the emergence of formal systems in organizations. According to organizational life cycle model (Grenier, 1972; Adizes, 1979; Churchill and Levis, 1983; Lester, Parnell and Carraher, 2003), it is not required to have any kind of formal systems at the entrepreneurial stage of an organization because entrepreneur-managers can easily control work processes of few employees. When organizations get larger after the start-up stage, entrepreneurs must delegate their authorities to the managers. Control capacity of managers might be insufficient after organizations reach a certain size, and which in turn, establishment of formal systems will become inevitable.

Hierarchy of Authority

Organizational hierarchy looks like a pyramidal structure because the number of managers decreases while passing through lower management to middle management and finally to top management. Hierarchy of authority refers to the number of managerial levels in an organization, and it is closely related to span of control – the number of employees reporting to a supervisor (Daft, 2007).

Centralization

Top-level managers generally undertake all responsibility of decisionmaking in centralized organizations. Employees must react according to top management’s directions and commands; they should not take initiatives concerning their work routines in a centralized system. Top-managers transfer their authorities to lower-levels in decentralized organizations to create a flexible work environment where people can actively involve in decision-making.

The term, which is based on the idea “a whole is the sum of its parts”, is called as reductionism. Reductionism has a very significant effect on the development of scientific research as well as organization of work in modern society. Adam Smith, father of economics, believed the benefits of applying job division for daily work routines. Frederic Winslow Taylor used these ideas to organize job in modern organizations. He suggested job simplification principle, which means jobs should be broken into simple tasks to achieve efficiency and order in his revolutionary book Principles of Scientific Management published in 1911.

Frederic Winslow Taylor claimed that job simplification could be used to teach simple pieces of production to a crowded unqualified workforce. His fundamental principles about organizing work were adopted by an industrialist called Henry Ford right after the publication of Taylor’s book. Henry Ford used his ideas to develop mass production techniques. The idea of job simplification was not only applied in the firms in manufacturing sector but also in other sectors such as finance and service.

Specialization refers to the degree to which organizational tasks or work processes are subdivided into separate jobs (Daft, 2007). Employees are generally responsible for narrowly defined tasks in case of high level of specialization in organizations. Low level of specialization in an organization leads to assignment of multiple tasks and responsibilities to an employee. High level of specialization is a method to convert complex tasks into simple and more understandable pieces.

Departmentalization

Henri Fayol suggested that similar or related activities should be grouped in the same administrative units to achieve high level of coordination among employees working on relevant tasks. Thus, employees working physically close to each other can easily communicate and collaborate with the others in their departments.

Organizational Design

Vertical versus Horizontal Design / Mechanic versus Organic Design

Mechanic versus Organic Design An ideal organizational structure should enable information flow among hierarchical layers and units to achieve collaboration and control. Vertical design aims at increasing control over employees and work processes in organizations. Horizontal design approach gives priority to increase collaboration and information sharing among organizational units.

Strict hierarchy, high level of formalization and centralized decision making are the common features of vertical structure. The main purpose of this alternative design is to make sure that employees obey the predefined and standardized work methods. Employee creativity and innovativeness are not considered to be important in vertical design perspective. These types of organizations reward employees’ consistency with authority, written rules and standardized work processes. Military, ministries and other state organizations are the typical examples of the vertically designed organizations.

There is a duality between vertical and horizontal design perspectives. Organizational design with an emphasis on vertical structure may help to increase control over the work processes, but coordination among departments will suffer. This may lead to unawareness of employees in a specific unit about ongoing activities in other units.

Organizational Environment and Technology

There might be numerous factors that are directly or indirectly related to mission of a firm. These factors can generally be classified as industry sector, raw materials sector, human resources sector, financial resources sector, market sector, technology sector, economic conditions sector, government sector, sociocultural sector, international sector and industry sector (Daft, 2007). Organizations interact more or less with these factors depending on the nature of their business activities (Hodge, Antony and Gales, 2003). When organizations have to interact with various dissimilar factors, the internal system should be designed according to the requirements of the complex environment (Jones, 2007). Organizations must establish units that are responsible for managing interactions with each of the factors in the external environment.

Organizations have to make internal adjustments to cope with environmental uncertainty. James Thompson (1967) examines organizational subsystems under three different levels. These are institutional, managerial and technical levels.

Organizational technology is another factor that affects design approach of decision makers. Organizational technology refers to the tools, techniques and work processes used to generate outputs (Daft, 2007). It simply means that all elements are related to transformation of inputs to outputs in organizations.

Firms classified under three categories by Woodward (1965);

1. Small batch and unit production
2. Large batch and mass production
3. Continuous process production

James Thompson developed another contingent model concerning organizational technology and structure. Thompson claimed that structure should be designed according to workflow interdependence among departments. Interdependence refers to the degree of dependence among departments to each other to accomplish their tasks. It simply means that any kind of activity may have variable effects over the activities in another department.

Organizations, which have pooled form of interdependence, do not have to locate units close to each other because all units are responsible to handle their own workloads.

Coordination and communication requirements gain importance for the organizations having sequential interdependence. In this type of workflow, a unit’s or an employee’s work output is an input for the next step in the sequential workflow.

The organizations representing high level of reciprocal interdependence are the most challenging ones for managers because any kind of work done in any unit may have direct and exponential effects on organizational outputs.