Organizational Behavior Course Notes – Organizational Structure


Class notes from my core MBA Organizational Behavior (OB) course. These focus on organizational structure

How is the Organization Structured?

Functional Form

When an organization grows beyond the affairs that can be handled by a single group and one boss, it usually adopts a functional structure. This creates an initial division of labor in terms of functions that need to be performed by the organization such as production, sales, engineering, finance, etc

In a functional structure, activities are grouped together by common function, from the bottom to the top of the organization. All engineers are in engineering department which is headed by VP of Engineering. Activities are coordinated vertically within the function by hierarchical supervision, rules and plans. Planning and Budgeting is by function.

Employees in each department get differentiated, adopting similar values, goals, and orientations. Similarity encourages collaboration, efficiency, and quality within the function but makes coordination, cooperation or integration with other departments more difficult.

This form requires a good deal of information processes among the functions. This is usually coordinated by a General Manager.

Strengths of Functional Structure:

  • Works best when the dominant competitive issues and goals of the organization stress functional expertise, efficiency and quality.
  • Promotes economies of scale.
  • Promotes in-depth skill development of employees by providing a well-defined functional career ladder that allows employees’ exposure to many activities in their own functional expertise.

Weakness of Functional Structure:

  • Inability to respond to environmental changes that require coordination between departments.
  • Each employee has a restricted view of the overall goals of the organization.
  • Dispersed accountability.

Best Suited for small to Medium sized organizations where the firm’s strategy calls for a single or closely related set of products/services to be produced efficiently.

Divisional Form

  • Groups diverse functions into divisions.
  • Organized according to the various outputs of the organization (marketing, manufacturing, and R and D are in same division).
  • May have one product, region, or market-segment.
  • Cross Functional Coordination is maximized.
  • Employees identify with division rather than function.
  • Budgeting and Planning on profit basis because each division can run as separate business (thus accountable for profit/loss).
  • Promotions based on management and integration skills rather than functional expertise.
  • Very autonomous.
  • Excellent when environmental uncertainty is moderate to high and dominant competitive issue and goal of organization is innovate, satisfy clients, or maintain market segment.
  • Adapts quickly to changes in client/market needs.


  • Lose economies of scale.
  • Coordination across divisions can be difficult.
  • In-depth competence and technical specialization may be weakened because employees invest in division rather than functional specialty.

Works best in: Medium to Large sized firms that operate in heterogeneous environments and produce multiple products, operate in different businesses and markets, serve different clients, and / or sell products in different geographical regions.

Hybrid Forms

Most large companies don’t have pure functional or divisional structure. They combine the two to form hybrid structures.

Two hybrid types:

  1. Project or product groups may be overlaid on the functional structure so that these groups facilitate coordination across functions.
  2. Some key functions such as manufacturing or sales that require economies of scale and specialization may be centralized and located at headquarters, thus superimposing a functional structure on a divisional one.

Matrix Form

This form provides benefits of both the functional (technical expertise) and divisional (horizontal coordination) structures. It simultaneously implements both functional and divisional structures. Example: Engineer assigned to engineering department and to specific project. He reports to both project and department manager.

Strength is that it enables the organization to meet multiple demands from the environment. Organization can adapt to changing external environments and provides an opportunity for employees to acquire either functional or general management skills.

Problem is determining responsibility and authority. Spend a great deal of time in meetings. Dual reporting and assignments can cause role ambiguity, hamper career development, and weaken ties with professional reference groups and employees.

Fails usually because one side of the authority structure dominates, or employees have not learned to work in a collaborative fashion.

Network Structure

  • Division of labor is realized in terms of different types of “knowledge workers” who may act as individual contributors or be a part of a cluster defined in terms of the expertise it provides.
  • Coordination takes place primarily through cross-functional teams. These teams bring together different combinations of knowledge workers and operate under little formal supervision.
  • Decision rights are pushed as far down as possible.
  • A flatter organization means no need for middle managers.
  • Informal structure.

Advantage: Adaptability (fast and responsive to environmental demands).
Disadvantage: Resources are often duplicated and accountability is diffuse and poorly defined.
Best Suited for: Volatile (unstable) environments that change rapidly and dramatically and when innovation is the primary basis for strategic advantage.

Summary: “An organization’s structure is not an end in itself. It merely sets the context for managerial action. The most wonderfully designed structure provides no guarantee that the desired actions will follow. … Structure is just one useful tool that managers can employ to achieve this objective.”

Notes on Organization Structure

Organizations exist to enable people to coordinate efforts and get things done. The structure of an organization serves the following functions:

  1. The specialization, standardization, and departmentalization of tasks and functions
  2. Coordinates activities through hierarchical supervision, formal rules and procedures, and training and specialization
  3. Defines boundaries and interfaces with the environment

Organization Structure

Things to think about when designing an organization’s structure:

  1. Division of Labor – how various tasks should be divided
    • the extent of horizontal and vertical specialization
    • the grouping of activities
    • key trade-offs: highly specialized jobs focus attention and develop skills, but extreme specialization increases coordination costs and leads to monotonous jobs.
  2. Coordination Mechanisms – the need to coordinate the independent activities of the members. Examples of vertical and horizontal coordination: direct supervision, rules, procedures, plans, budgets, meetings, and task forces.
  3. Distribution of Decision Rights – how information flows and who should make what decisions. Ideally, decision rights should go to the people with the best information, typically people working on the front line.
  4. Organizational Boundaries – deciding what to do inside and outside the boundaries of the firm. This includes making decisions about horizontal and vertical integration, make-versus-buy, and strategic alliances.
  5. Informal Structure – managers should be aware of the informal relationships in an organization and know how changes in an organization will affect those relationships.
  6. Political Structure – there are political coalitions inside organizations that have competing agendas and viewpoints. A manager needs to assess the political landscape in the organization.
  7. Legitimate Basis of Authority – Rank, title, expertise, charisma, and social status are all sources of authority that define legitimate authority.

Basic Forms

  • Functional
  • The functional form groups activities by common function, from the bottom to the top of the organization. Similarity within each department encourages collaboration, efficiency, and quality but makes coordination and cooperation with other departments difficult. The general manager is responsible for setting procedures that cut across functions and for mediating conflicts between departments.

    The functional form works when the competitive issues and goals of the organization stress functional expertise, efficiency, and quality because it promotes economies of scale. This form is best suited for small to medium-sized firms where the strategy calls for a closely related set of products and services to be produced efficiently. The weakness of functional form is its inability to respond to environmental changes that require coordination between departments. Another weakness is that each employee has a restricted view of the overall goals of the organization.

  • Divisional
  • The divisional form is organized according to the various outputs that enable an organization to produce goods and services. All the necessary resources such as manufacturing, R & D, and marketing are contained within each division. Coordination across functions within each division is maximized. Employees identify with their division rather than their function. A corporate headquarters oversees the divisions but the divisions are given the freedom to make their own decisions.

    The divisional form works in an uncertain environment. The division can respond to the requirements of individual products, customers, or regions and adapt quickly to changes. A disadvantage is that the division loses economies of scale. Another problem is that coordination across divisions can be difficult and in pursuing their own goals, divisions may work at odds with each other.

  • Hybrid
  • Most large corporations do not have either a pure functional or a pure divisional structure, but some combination of both. Two hybrid structures exist, in one form, project or product groups may be overlaid on the functional structure so that these groups facilitate coordination across functions. In the other form, some key functions that require economies of scale are centralized. By combining characteristics hybrid structures can take advantage of both forms of structure and avoid some of their weaknesses.

  • Matrix
  • This form is applied when the organization needs both technological expertise within functions and horizontal coordination across functions. Both the functional and divisional structures are implemented simultaneously. Employees report to two managers with equal authority.

    The strength of the matrix is that it enables the organization to meet multiple demands form the environment. Resources can be flexibly allocated and the organization can adapt to changing external environments. A basic problem is determining the responsibility and authority relationships between functional and project managers. Also, people spend a lot of time in meetings.

Emerging organizational structures

Labor is divided among specialists who act as the building blocks of the organization. Coordination takes place through cross-functional teams that are more or less permanent. Teams have varying responsibilities and operate under little supervision. Decision rights are pushed down as far as possible and middle management layers are reduced. The boundaries between the organization and its environment become blurred as partnerships and strategic alliances are formed. A dynamic, informal structure dominates. The formal structure is meaningless. Authority is based on expertise and the resources one possesses.

The main advantage of this structure is its adaptability, however resources are often duplicated and accountability can be scattered and poorly defined.

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