DEVELOPMENT OF THE TRADITIONAL ORGANIZATIONAL STRUCTURE
DIFFERENT ORGANIZATIONAL STRUCTURES
BASIS FOR DEPARTMENTALIZATION
TRADITIONAL ORGANIZATIONAL STRUCTURE
MATRIX ORGANIZATIONAL STRUCTURE
STRATEGIC BUSINESS UNITS
EMERGING TRENDS IN ORGANIZATIONAL STRUCTURE
Organizational structure refers to the way that an organization arranges people and jobs so that its work can be performed and its goals can be met. When a work group is very small, and face-to-face communication is frequent, formal structure may be unnecessary, but in a larger organization decisions have to be made about the delegation of various tasks. Thus, procedures are established that assign responsibilities for various functions. It is these decisions that determine the organizational structure.
In an organization of any size or complexity, employees' responsibilities typically are defined by what they do, who they report to, and for managers, who reports to them. Over time these definitions are assigned to positions in the organization rather than to specific individuals. The relationships among these positions are illustrated graphically in an organizational chart. The best organizational structure for any organization depends on many factors including the work it does; its size in terms of employees, revenue, and the geographic dispersion of its facilities; and the range of its businesses (the degree to which it is diversified across markets).
Understanding the historical context from which some of today's dominant organizational structures have developed helps to explain why some structures are the way they are. For instance, why are the old, but still operational steel mills such as U.S. Steel and Bethlehem Steel structured using vertical hierarchies? Why are newer steel mini-mills such as Chaparral Steel structured more horizontally, capitalizing on the innovativeness of their employees? Part of the reason, as this section discusses, is that organizational structure has a certain inertia—the idea borrowed from physics and chemistry that something in motion tends to continue on that same path. Changing
an organization's structure is a daunting managerial task, and the immensity of such a project is at least partly responsible for why organizational structures change infrequently.
At the beginning of the twentieth century the United States business sector was thriving. Industry was shifting from job-shop manufacturing to mass production, and thinkers like Frederick Taylor in the United States and Henri Fayol in France studied the new systems and developed principles to determine how to structure organizations for the greatest efficiency and productivity, which in their view was very much like a machine. Even before this, German sociologist and engineer Max Weber had concluded that when societies embrace capitalism, bureaucracy is the inevitable result. Yet, because his writings were not translated into English until 1949, Weber's work had little influence on American management practice until the middle of the twentieth century.
Management thought during this period did match Weber's ideas of bureaucracy, where power is ascribed to positions rather than to the individuals holding those positions. It also was influenced by Taylor's scientific management, or the “one best way” to accomplish a task using scientifically-determined studies of time and motion. Also influential were Fayol's ideas of invoking unity within the chain-of-command, authority, discipline, task specialization, and other aspects of organizational power and job separation. This created the context for vertically-structured organizations characterized by distinct job classifications and top-down authority structures, or what became known as the traditional or classical organizational structure.
Job specialization, a hierarchical reporting structure through a tightly-knit chain-of-command, and the subordination of individual interests to the superordinate goals of the organization combined to result in organizations arranged by functional departments with order and discipline maintained by rules, regulations, and standard operating procedures. This classical view, or bureaucratic structure, of organizations was the dominant pattern, as small organizations grew increasingly larger during the economic boom that occurred from the 1900s until the Great Depression of the 1930s. Henry Ford's plants were typical of this growth, as the emerging Ford Motor Company grew into the largest U.S. automaker by the 1920s.
The Great Depression temporarily stifled U.S. economic growth, but organizations that survived emerged with their vertically-oriented, bureaucratic structures intact as public attention shifted to World War II. Post-war rebuilding reignited economic growth, powering organizations that survived the Great Depression toward increasing size in terms of sales revenue, employees, and geographic dispersion. Along with increasing growth, however, came increasing complexity. Problems in U.S. business structures became apparent and new ideas began to appear. Studies of employee motivation raised questions about the traditional model. The “one best way” to do a job gradually disappeared as the dominant logic. It was replaced by concerns that traditional organizational structures might prevent, rather than help, promote creativity and innovation—both of which were necessary as the century wore on and pressures to compete globally mounted.
There are multiple structural variations that organizations can take on, but there are a few basic principles that apply and a small number of common patterns. The structure of every organization is unique in some respect, but all organizational structures develop or are consciously designed to enable the organization to accomplish its work. Typically, the structure of an organization evolves as the organization grows and changes over time.
Researchers generally identify four basic decisions that managers have to make as they develop an organizational structure, although they may not be explicitly aware of these decisions.
- Division of labor. The organization's work must be divided into specific jobs.
- Departmentalization. Unless the organization is very small, the jobs must be grouped in some way.
- Span of control. The number of people and jobs that are to be grouped together must be decided, which is related to the number of people that are to be managed by one person.
- Authority. The way decision-making authority is to be distributed must be determined.
In making each of these design decisions, a range of choices are possible. At one end of the spectrum, jobs are highly specialized with employees performing a narrow range of activities; while at the other end of the spectrum employees perform a variety of tasks. In traditional bureaucratic structures, there is a tendency to increase task specialization as the organization grows larger. In grouping jobs into departments, the manager must decide the basis on which to group them. The most common basis, at least until the last few decades, was by function. For example, all accounting jobs in the organization can be grouped into an accounting department, all engineers can be grouped into an engineering department, and so on.
The size of the groupings also can range from small to large depending on the number of people the managers supervise. The degree to which authority is distributed throughout the organization can vary as well, but
traditionally structured organizations typically vest final decision-making authority by those highest in the vertically structured hierarchy. Even as pressures to include employees in decision-making increased during the 1950s and 1960s, top management usually made final decisions. The traditional model of organizational structure is thus characterized by high job specialization, functional departments, narrow spans of control, and centralized authority. Such a structure has been referred to as traditional, classical, bureaucratic, formal, mechanistic, or command and control. A structure formed by choices at the opposite end of the spectrum for each design decision is called unstructured, informal, or organic.
Many organizations group jobs in various ways in different parts of the organization, but the basis that is used at the highest level plays a fundamental role in shaping the organization. There are four commonly used bases: functional, geographic, product, and customer/market.
Functional Departmentalization . Every organization of a given type must perform certain jobs in order to do its work. For example, key functions of a manufacturing company include production, purchasing, marketing, accounting, and personnel. The functions of a hospital include surgery, psychiatry, nursing, housekeeping, and billing. Using such functions as the basis for structuring the organization may, in some instances, have the advantage of efficiency. Grouping jobs that require the same knowledge, skills, and resources allows them to be done efficiently and promotes the development of greater expertise. A disadvantage of functional groupings is that people with the same skills and knowledge may develop a narrow departmental focus and have difficulty appreciating any other view of what is important to the organization; in this case, organizational goals may be sacrificed in favor of departmental goals. In addition, coordination of work across functional boundaries can become a difficult management challenge, especially as the organization grows in size and spreads to multiple geographical locations.
Geographic Departmentalization . Organizations that are spread over a wide area may find advantages in organizing along geographic lines so that all the activities performed in a region are managed together. In a large organization, simple physical separation makes centralized coordination more difficult. Also, important characteristics of a region may make it advantageous to promote a local focus. For example, marketing a product in Western Europe may have different requirements than marketing the same product in Southeast Asia. Companies that market products globally sometimes adopt a geographic structure. In addition, experience gained in a regional division is often excellent training for management at higher levels.
Product Departmentalization . Large, diversified companies are often organized according to product. All the activities necessary to produce and market a product or group of similar products are grouped together. In such an arrangement, the top manager of the product group typically has considerable autonomy over the operation. The advantage of this type of structure is that the personnel in the group can focus on the particular needs of their product line and become experts in its development, production, and distribution. A disadvantage, at least in terms of larger organizations, is the duplication of resources. Each product group requires most of the functional areas such as finance, marketing, production, and other functions. The top leadership of the organization must decide how much redundancy it can afford.
Customer/Market Departmentalization . An organization may find it advantageous to organize according to the types of customers it serves. For example, a distribution company that sells to consumers, government clients, large businesses, and small businesses may decide to base its primary divisions on these different markets. Its personnel can then become proficient in meeting the needs of these different customers. In the same way, an organization that provides services such as accounting or consulting may group its personnel according to these types of customers. Figure 1 depicts an organization grouped by customers and markets.
The traditional approach is the vertically-arranged organizational structure that came to dominate in the first half of the twentieth century. This traditional model is easily represented in a graphical form by an organizational chart. It is a hierarchical or pyramidal structure with a president or other executive at the top, a small number of vice presidents or senior managers under the president, and several layers of management below this, with the majority of employees at the bottom of the pyramid. The number of management layers depends largely on the size of the organization. The jobs in the traditional organizational structure usually are grouped by function into departments such as accounting, sales, human resources, and so on. Figures 2a and 2b illustrate such an organization grouped by functional areas of operations, marketing, and finance.
Some organizations find that none of the aforementioned structures meet their needs. One approach that attempts to overcome the inadequacies is the matrix structure, which is the combination of two or more different structures. Functional departmentalization commonly is combined with product groups on a project basis. For example, a product group wants to develop a new addition to its line; for this project, it obtains personnel from functional departments such as research, engineering, production, and marketing. These personnel then work under the manager of the product group for the duration of the project, which can vary greatly. These personnel are responsible to two managers (as shown in Figure 3).
One advantage of a matrix structure is that it facilitates the use of highly specialized staff and equipment. Rather than duplicating functions as would be done in a simple product department structure, resources are shared as needed. In some cases, highly specialized staff may divide their time among more than one project. In addition, maintaining functional departments promotes functional expertise, while at the same time working in project groups with experts from other functions fosters cross-fertilization of ideas.
The disadvantages of a matrix organization arise from the dual reporting structure. The organization's top management must take particular care to establish proper procedures for the development of projects and to keep communication channels clear so that potential conflicts do not arise and hinder organizational functioning. In theory at least, top management is responsible for arbitrating such conflicts, but in practice power struggles between the functional and product manager can prevent successful implementation of matrix structural arrangements. Besides the product/function matrix, other bases can be related in a matrix. Large multinational corporations that use a matrix structure most commonly combine product groups with geographic units. Product managers have global responsibility for the development, manufacturing, and distribution of their own product or service line, while managers of geographic regions have responsibility for the success of the business in their regions.
As corporations become very large they often restructure as a means of revitalizing the organization. Growth of a business often is accompanied by a growth in bureaucracy, as positions are created to facilitate developing needs or opportunities. Continued changes in the organization or in the external business environment may make this bureaucracy a hindrance rather than a help, not simply because of the size or complexity of the organization but due to a sluggish bureaucratic way of thinking. One approach to encourage new ways of thinking and acting
is to reorganize parts of the company into largely autonomous groups, called strategic business units (SBUs). Such units generally are set up like separate companies, with full profit and loss responsibility invested in the top management of the unit—often the president of the unit and/or a senior vice president of the larger corporation. This manager is responsible to the top management of the corporation. This arrangement can be seen as taking any of the aforementioned departmentalization schemes one step further. The SBUs might be based on product lines, geographic markets, or other differentiating factors. Figure 4 depicts SBUs organized by geographic area.
Except for the matrix organization, all the structures described above focus on the vertical organization; that is, who reports to whom, who has responsibility and authority for what parts of the organization, and so on. Such vertical integration is sometimes necessary, but may be a hindrance in rapidly changing environments. A detailed organizational chart of a large corporation structured on the traditional model would show many layers of managers; decision-making flows vertically up and down the layers, but mostly downward. In general terms, this is an issue of interdependence.
In any organization, the different people and functions do not operate completely independently. To a greater or lesser degree, all parts of the organization need each other. Important developments in organizational design in the last few decades of the twentieth century and the early part of the twenty-first century have been attempts to understand the nature of interdependence and improve the functioning of organizations in respect to this factor. One approach is to flatten the organization, to develop the horizontal connections and de-emphasize vertical reporting relationships. At times, this involves simply eliminating layers of middle management. For example, some Japanese companies—even very large manufacturing firms—have only four levels of management: top management, plant management, department management, and section management. Some U.S. companies also have drastically reduced the number of managers as part of a downsizing strategy; not just to reduce salary expense, but also to streamline the organization in order to improve communication and decision-making.
In a virtual sense, technology is another means of flattening the organization. The use of computer networks and software designed to facilitate group work within an organization can speed communications and decision-making. Even more effective is the use of intranets to make company information readily accessible throughout the organization. The rapid rise of such technology has made virtual organizations and boundaryless organizations possible, where managers, technicians, suppliers, distributors, and customers connect digitally rather than physically.
A different perspective on the issue of interdependence can be seen by comparing the organic model of organization with the mechanistic model. The traditional, mechanistic structure is characterized as highly complex because of its emphasis on job specialization, highly formalized emphasis on definite procedures and protocols, and centralized authority and accountability. Yet, despite the advantages of coordination that these structures present, they may hinder tasks that are interdependent. In contrast, the organic model of organization is relatively simple because it de-emphasizes job specialization, is relatively informal, and decentralizes authority. Decision-making and goal-setting processes are shared at all levels, and communication ideally flows more freely throughout the organization.
A common way that modern business organizations move toward the organic model is by the implementation of various kinds of teams. Some organizations establish self-directed work teams as the basic production group. Examples include production cells in a manufacturing firm or customer service teams in an insurance company. At other organizational levels, cross-functional teams may be established, either on an ad hoc basis (e.g., for problem solving) or on a permanent basis as the regular means of conducting the organization's work. Aid Association for Lutherans is a large insurance organization that has adopted the self-directed work team approach. Part of the impetus toward the organic model is the belief that this kind of structure is more effective for employee motivation. Various studies have suggested that steps such as expanding the scope of jobs, involving workers in problem solving and planning, and fostering open communications bring greater job satisfaction and better performance.
Saturn Corporation, a subsidiary of General Motors (GM), emphasizes horizontal organization. It was started in 1985 with the intention to learn and incorporate the best in business practices in order to be a successful U.S. auto manufacturer. The organizational structure that it adopted is described as a set of nested circles, rather than a pyramid. At the center is the self-directed production cell, called a Work Unit. These teams make most, if not all, decisions that affect only team members. Several such teams make up a wider circle called a Work Unit Module. Representatives from each team form the decision circle of the module, which makes decisions affecting more than one team or other modules. A number of modules form a Business Team, of which there are three in manufacturing. Leaders from the modules form the decision circle of the Business Team. Representatives of each Business Team form the Manufacturing Action Council, which oversees manufacturing. At all levels, decision-making is done on a consensus basis, at least in theory.
Saturn was originally established as an independently administered subsidiary of General Motors. Poor financial performance in the early twenty-first century led to a 2006 decision to reintegrate the company into the traditional GM divisional structure. GM executives hoped that the positive lessons learned from the Saturn experiment
would help improve the rest of GM's operation, making the company as a whole more competitive. In 2008, GM announced plans to sell Saturn. Despite these financial moves, GM has never repudiated the structural experiment, and many commentators continue to laud Saturn for its innovative approach to corporate organization.
Industry consolidation—creating huge global corporations through joint ventures, mergers, alliances, and other kinds of interorganizational cooperative efforts—has become increasingly important in the twenty-first century. Among organizations of all sizes, concepts such as agile manufacturing, just-in-time inventory management, and ambidextrous organizations are impacting managers' thinking about their organizational structure. Indeed, few leaders were likely to blindly implement the traditional hierarchical structure common in the first half of the twentieth century. The early twenty-first century has been dominated by the thinking that changing organizational structures, while still a monumental managerial challenge, can be a necessary condition for competitive success. As the authors of Designing Organizations to Create Value (2003) write, “a poor design can lead to lost profits and even result in the failure of the institution.”
Indeed, corporate restructuring has become a popular response to financial difficulties in the twenty-first century. However, there are dangers to following the path of reorganization. Removing layers of bureaucracy to cut costs is tempting, but it can often be the case that removed layers of management creep back into the organization. It can also be difficult to reshape an organization with a strong organizational culture, as many well-established firms have. Further, reorganization may not be an appropriate response to trouble. According to a 2008 article in the Harvard Business Review, “in efforts to improve performance, most organizations go right to structural measures because moving lines around the org chart seems the most obvious solution and the changes are visible and concrete.” However, the article notes, such changes are generally only short-term and “Several years later, companies usually end up in the same place they started.”
Whatever the potential dangers, structural reorganization is likely to remain a popular corporate strategy in the fast-paced global environment of the twenty-first century. Properly handled, restructuring—particularly away from the traditional vertical model—can increase competitiveness and reorient the organizational culture and behaviors to enhance productivity and profits. Even with the attendant dangers, restructuring is a tempting path. As the authors of Diagnosing and Changing Organizational Culture (2006) note, “The failure rate of most planned organizational change initiatives is dramatic,” but “organizations that are not in the business of change and transition are generally viewed as recalcitrant.”
SEE ALSO Line-and-Staff Organizations; Organizational Chart; Organizational Culture; Organizational Development
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One of the most challenging tasks of a business may be organizing the people who perform its work. A business may begin with one person doing all the necessary tasks. As the business becomes successful and grows, however, there is generally more work, and more people are needed to perform various tasks. Through this division of work, individuals can become specialists at a specific job. Because there are several people who are often in different locations working toward a common objective, "there must be a plan showing how the work will be organized. The plan for the systematic arrangement of work is the organization structure. Organization structure is comprised of functions, relationships, responsibilities, authorities, and communications of individuals within each department" (Sexton, 1970, p. 23). The typical depiction of structure is the organizational chart. The formalized organizational chart has been around since 1854, when Daniel McCallum became general superintendent of the New York and Erie Railroad, which is one of the world's longest railroads. According to McCallum, since the railroad was one of the longest, the operating costs per mile should be less than those of shorter railroad lines. However, this was not the case. To remedy management inefficiencies, McCallum designed the first organizational chart in order to create a sense of structure. The organizational chart has been described as looking like a tree, with the roots representing the president and the board of directors, while the branches symbolize the various departments and the leaves depict the staff workers. The result of the organizational chart was a clear line of authority showing where subordinates were accountable to their immediate supervisors (Chandler, 1988, p. 156).
Traditional organizational structures focus on the functions, or departments, within an organization, closely following the organization's customs and bureaucratic procedures. These structures have clearly defined lines of authority for all levels of management. Two traditional structures are line and line-and-staff.
The line structure is defined by its clear chain of command, with final approval on decisions affecting the operations of the company still coming from the top down (Figure 1). Because the line structure is most often used in small organizations, such as small accounting offices and law firms, hair salons, and "mom-and-pop" stores, the president or CEO can easily provide information and direction to subordinates, thus allowing decisions to be made quickly (Boone and Kurtz, 2006, p. 259).
Line structures by nature are fairly informal and involve few departments, making the organizations highly decentralized. Employees are generally on a first-name basis with the president, who is often available throughout the day to answer questions and/or to respond to situations
as they arise. It is common to see the president or CEO working alongside the subordinates. Because the president is often responsible for wearing many "hats" and being responsible for many activities, she or he cannot be an expert in all areas (Figure 1).
While the line structure would not be appropriate for larger companies, the line-and-staff structure is applicable because it helps to identify a set of guidelines for the people directly involved in completing the organization's work. This type of structure combines the flow of information from the line structure with the staff departments that service, advise, and support them (Boone and Kurtz, 2006, p. 259).
Line departments are involved in making decisions regarding the operation of the organization, while staff areas provide specialized support. The line-and-staff organizational structure "is necessary to provide specialized, functional assistance to all managers, to ensure adequate checks and balances, and to maintain accountability for end results" (Allen, 1970, p. 63).
An example of a line department might be the production department because it is directly responsible for producing the product. A staff department, on the other hand, has employees who advise and assist, making sure the product gets advertised or that the customer service representative's computer is working (Boone and Kurtz, 2006, p. 259).
Based on the company's general organization, line-and-staff structures generally have a centralized chain of command. The line-and-staff managers have direct authority over their subordinates, but staff managers have no authority over line managers and their subordinates. Because there are more layers and presumably more guidelines to follow in this type of organization, the decision-making process is slower than in a line organization. The line-and-staff organizational structure is generally more formal in nature and has many departments (Figure 2).
A variation of the line-and-staff organizational structure is the matrix structure. In today's workplace, employees are hired into a functional department (a department that
performs a specific type of work, such as marketing, finance, accounting, and human resources) but may find themselves working on projects managed by members of another department. Organizations arranged according to project are referred to as matrix organizations. Matrix organizations combine both vertical authority relationships (where employees report to their functional manager) and horizontal, or diagonal, work relationships (where employees report to their project supervisor for the length of the project). "Workers are accountable to two supervisors—one functional manger in the department where the employee regularly works and one special project manager who uses the employee's services for a varying period of time" (Keeling and Kallaus, 1996, p. 43).
Since employees report to two separate managers, this type of organizational structure is difficult to manage—especially because of conflicting roles and shared authority. Employees' time is often split between departments and they can become easily frustrated if each manager requires extra efforts to complete projects on similar timelines.
Because the matrix structure is often used in organizations using the line-and-staff setup, it is also fairly centralized. However, the chain of command is different in that an employee can report to one or more managers, but one manager typically has more authority over the employee than the other manager(s). Within the project or team unit, decision making can occur faster than in a line-and-staff structure, but probably not as quickly as in a line structure. Typically, the matrix structure is more informal than line-and-staff structures but not as informal as line structures (Figure 3).
Organizations with a centralized structure have several layers of management that control the company by maintaining a high level of authority, which is the power to make decisions concerning business activities. With a centralized structure, line-and-staff employees have limited authority to carry something out without prior approval. This organizational structure tends to focus on top-down management, whereby executives at the top communicate by telling middle managers, who then tell first-level managers, who then tell the staff what to do and how to do it. Since this organizational structure tends to be fairly bureaucratic, employees have little freedom. Centralized organizations are known for decreased span of control—a limited number of employees report to a manager, who then reports to the next management level, and so on up the ladder to the CEO (Figure 4).
Because individual creativity can be stifled and management costs can be greater in a centralized organization, many organizations continue to downsize into a more decentralized structure. Decentralization seeks to eliminate the unnecessary levels of management and to place authority in the hands of first-line managers and staff—thus increasing the span of control, with more employees reporting to one manager. Because more employees are reporting to a single manager than before, the managers are forced to delegate more work and to hold the employees more accountable. Downsizing has also helped to change the flow of communication, so that top management hears staff concerns and complaints in a more direct manner and management has a more hands-on approach. The hands-on approach involves less bureaucracy, which means there is a faster response to situations that demand immediate attention. This structure also takes advantage of bottom-up communication, with staff issues being addressed in a timely manner.
The restructuring generally takes place at the mid-management level. Because some middle managers have lost their jobs, been laid off, or simply taken advantage of early retirement and severance packages, their positions have been phased out, thus helping to reduce unnecessary
costly salaries and increasing employee span of control. Many middle managers who stayed in their current "positions" found that their jobs have changed to being coaches, or team leaders, who allow their employees greater freedom in completing their work responsibilities (Csoka, 1995, p. 3).
The chain of command is the protocol used for communication within organizations. It provides a clear picture of who reports to whom. Quick decisions can be made in decentralized organizations because approval usually has to come only from the manager one level higher than the person making the decision. The chain of command involves line-and-staff employees, where the staff's job is completing the actual work and the line functions to oversee the staff (Figure 5).
Organizations can be divided into various departments, or units, with individuals who specialize in a given area, such as marketing, finance, sales, and so forth. Having each unit perform specialized jobs is known as departmentalization. Departmentalization is done according to five major categories (Figure 6): (1) product, which requires each department to be responsible for the product being manufactured; (2) geographic, which divides the organization based on the location of stores and offices; (3) customer, which separates departments by customer type, such as textbook companies that cater to both grade schools and community colleges; (4) functional, which breaks departments into specialty areas; and (5) process, which creates departments responsible for various steps in the production process (Boone and Kurtz, 2006).
see also Management: Authority and Responsibility ; Organizational Behavior and Development
Boone, Louis E., and Kurtz, David L. (2006). Contemporary Business 2006. Mason, OH: Thomson/South-Western.
Chandler, Alfred D., Jr. (1988, March/April). "Origins of the Organization Chart," Harvard Business Review, 88, 2, 156.
Csoka, Louis. (1995). Redefining the Middle Manager. HR Executive Review, 2(2), 3–5.
Keeling, B. Lewis, and Kallaus, Norman F. (1996). Administrative Office Management, 11th ed., Cincinnati, OH: South-Western Educational Publishing.
Litterer, Joseph A., ed. (1980). Organizations: Structure and Behavior. New York: Wiley.
Sexton, William P. (1970). Organization Structure. In William P. Sexton, ed., Organization Theories. Columbus, OH: Charles E. Merrill.
"Organizational Structure." Encyclopedia of Business and Finance, 2nd ed.. . Encyclopedia.com. (May 5, 2019). https://www.encyclopedia.com/finance/finance-and-accounting-magazines/organizational-structure
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An organizational structure defines the scope of acceptable behavior within an organization, its lines of authority and accountability, and to some extent the organization's relationship with its external environment. More specifically, it shows the pattern or arrangement of jobs and groups of jobs within an organization and yet it is more than an organizational chart. The organizational structure pertains to both reporting and operational relationships, provided they have some degree of permanence. The individual elements of an organizational structure typically include a variety of components that one may usefully see as building blocks: 1) departments or divisions; 2) management hierarchy; 3) rules, procedures, and goals; and 4) more temporary building blocks such as task forces or committees.
Ideally, organizational structures should be shaped and implemented for the primary purpose of facilitating the achievement of organizational goals in an efficient manner. Indeed, having a suitable organizational structure in place—one that recognizes and addresses the various human and business realities of the company in question—is a prerequisite for long-term success. Nonetheless, all too often organizational structures do not contribute positively to a company's performance. This is usually because the structure was allowed to grow somewhat organically and was not redesigned as the company grew so as to more efficiently guide the behavior of individuals and groups so that they would be maximally productive, efficient, flexible, and motivated. Small business owners seeking to establish a beneficial organizational structure need to recognize that the process may be complex since this task is often left until a start-up organization has already been established. By then, a de facto structure exists and changing it will need to be done carefully so as not to alienating or frustrating key players.
Even large corporations that attempt to restructure or reorganize and implement a new or changed organizational structure may discover that simply announcing a new structure does not immediately translate into actual change. Hierarchy is an important element of any organizational structure. The more levels of management are present in an organization, the more hierarchical it is. During the late 1990s and early 2000s it became fashionable to reduce the hierarchy in large corporations and the trend was dubbed flattening the corporate structure. But, as Eileen Shapiro, a management consultant and author told Patrick J. Kiger in his article "Hidden Hierarchies," things aren't always what they seem. "I've been inside a lot of companies that espouse flat organizational structures and self-management. But when you really start looking at how things actually work, you find that there is in fact a hierarchy—one that is not explicit." She explains that most firms, regardless of style, do actually have a hierarchy, whether explicit or not, and that trying to reflect the true, functional hierarchy in the organizational structure will help prevent the hidden hierarchy phenomenon. It also prevents the misunderstandings that can arise when the explicit organizational structure does not match the actual, functional structure.
KEYS TO ERECTING AN EFFECTIVE ORGANIZATIONAL STRUCTURE
All sorts of different organizational structures have been proven effective in contributing to business success. Some firms choose highly centralized, rigidly maintained structures, while others—perhaps even in the same industrial sector—develop decentralized, loose arrangements. Both of these organizational types can survive and even thrive. There is no one best way to design an organization or type of structure. Each depends upon the company involved, its needs and goals, and even the personalities of the individuals involved in the case of small businesses. The type of business in which an organization is involved is also a factor in designing an effective organizational structure. Organizations operate in different environments with different products, strategies, constraints, and opportunities, each of which may influence the design of an ideal organizational structure.
But despite the wide variety of organizational structures that can be found in the business world, the successful ones tend to share certain characteristics. Indeed, business experts cite a number of characteristics that separate effective organizational structures from ineffective designs. Recognition of these factors is especially important for entrepreneurs and established small business owners, since these individuals play such a pivotal role in determining the final layout of their enterprises.
As small business owners weigh their various options in this realm, they should make sure that the following factors are taken into consideration:
- Relative strengths and weaknesses of various organizational forms.
- Legal advantages and disadvantages of organizational structure options.
- Advantages and drawbacks of departmentalization options.
- Likely growth patterns of the company.
- Reporting relationships that are currently in place.
- Reporting and authority relationships that you hope will be implemented in the future.
- Optimum ratios of supervisors/managers to subordinates.
- Suitable level of autonomy/empowerment to be granted to employees at various levels of the organization (while still recognizing individual capacities for independent work).
- Structures that will produce greatest worker satisfaction.
- Structures that will produce optimum operational efficiency.
Once all these factors have been objectively examined and blended into an effective organizational structure, the small business owner will then be in a position to pursue his/her business goals with a far greater likelihood of success.
Day, George. "Aligning Organizational Structure to the Market." Business Strategy Review. Autumn 1999.
Kiger, Patrick J. "Hidden Hierarchies." Workforce Management. 27 February 2006.
Nickelson, Jack A., and Todd R. Zenger. "Being Efficiently Fickle: A dynamic theory of organizational choice." Organizational Science. September-October 2002.
"Thinking for a Living." The Economist. 21 January 2006.
Wagner-Tsukamoto, Sigmund. Human Nature and Organization Theory. Edward Elgar Publishing, 2003.
Hillstrom, Northern Lights
updated by Magee, ECDI
"Organizational Structure." Encyclopedia of Small Business. . Encyclopedia.com. (May 5, 2019). https://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/organizational-structure
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Organizations are composed of a variety of elements. Perhaps the fundamental component is organizational structure, the set of interrelationships (social bonds) between positions. Even organizations of globe-encircling proportions, such as multinational corporations, demonstrate "the consciously coordinated activities of two or more people" (Barnard 1938, p. 73). Similarly, it may be argued that relationships between and among sets of such organizations form the social structure of whole societies.
Within an organizational structure, groups or sets of social relationships can be differentiated by task specialization, known as the division of labor. People are assigned to specific positions within an organizational structure to increase the specificity of tasks and the reliability with which they are performed. Organizational structure is both (1) an outcome resulting from interactive processes between elements within the organization, as well as between the environment and the organization, and (2) a determinant of those interactive processes. Organizational structure calls forth or inhibits particular behaviors by organizational participants.
Interaction among parties to a relationship results in shared understandings that become part of an organization's culture. Focusing as it does on relationships constituting organizational structure, the social systems perspective for organizational analysis has been criticized as having a static cast. By contrast, organizational theorists contend that studying social processes among constituent parties is dynamic because it examines how social change occurs as participants grant or withhold their consent for collective actions. When the volitional and cognitive exigencies among constituents change, their behavior toward each is altered. Negotiation among organizational participants leads to the creation of new relationships, fluidity in existing relationships, and the potential for breaking off longstanding relationships. Processes influencing expectation and negotiation are complicated by the structural advantages enjoyed by dominant constituent parties. Whether change in agreed-upon relations is viewed as desirable often depends on whether a given constituent party perceives change to be disproportionately beneficial to itself when compared with the benefits to other specific constituent groups or to the overall organization. Moreover, more powerful constituents can, to their own benefit, cloud less powerful constituents' perceptions of what is actually in the latter's self-interest.
Much traditional theory and research on organizations, almost always implicitly (sometimes explicitly), assumes that decisions by upper participants benefit the entire collectivity. Most analyses do not differentiate benefit to the collectivity from benefit to upper-, middle-, or lower-level participants. Most researchers simply proceed on the implicit assumption that owners and managers are prime, if not sole, legitimate participants in and entitled beneficiaries of organizational structure. It is assumed, moreover, that lower-level employees in particular, and lower level participants generally, are incidental to the social construction of the organization, and are thus passive contributors to and beneficiaries of organizational structure. By contrast, modern sociological theory (as expressed throughout the present discussion of organizational structure and its correlates) increasingly differentiates among upper- , middle- , and lower-level participants as well as, separately, the organization as a whole. Thus, in this view, a much broader array of constituents contributes directly or indirectly to organizational survival and therefore merit an appropriate share of rewards. Researchers need explicitly to identify and differentiate all participants and constituents that contribute directly or indirectly to an organization. Allocation of resources to an organization's tasks, defined through the division of labor, critically affects the power balance between participants, thus raising important and politically disturbing questions. Organizational structure, composed of collectively endorsed and enacted resource allocation agreements, can be usefully understood from an "organizational justice" perspective.
Organizational justice research seeks to understand how resources are allocated in ways believed to be "fair" by various interactants. The perceived fairness of resource allocations by organizational participants is distributive justice; the perceived fairness of the process through which resource allocation decisions are made is procedural justice. Both distributive justice and procedural justice interact to influence organizational participants' perceptions of fairness. Distributive justice may follow underlying norms of allocation, including an assessment of both the quantity and the quality of participants' contribution to a given effort (thus, their earned equity in the organization), as well as the extent to which resources are evenly allocated among participants (thus, their right to equal treatment) and, moreover, how much participants need the resources they receive (thus, their right to basic means for survival) (Linkey and Alexander 1998). These norms underlying the allocation of resources may affect the satisfaction of organizational participants through the outcomes of allocation decisions. Procedural justice has two components: the structure and form of procedures through which resources are allocated, and the social and emotional relations between parties in an exchange relationship (interactive justice). As Brockner and Siegel (1995) point out, the difference between these two components may signal the difference between how much control participants have over the process of allocative decisions, and their intent toward others in making such decisions.
Researchers have proposed two different viewpoints to explain variations in organizational participants' satisfaction with procedural and distributive justice. The self-interest explanation is that individuals wish to maximize their resources and are more satisfied when their rewards are greater. The group-values explanation is that individuals evaluate themselves in the context of group membership; the perception of an individual as fair is colored by perceptions of the fairness of his or her group, and how resources are allocated to an individual indicates his or her worth relative to other members of the group. Both the self-interest and the group-values explanations have helped to explain organizational participants' satisfaction with the allocation of resources. These two approaches are reflected in the focus of allocation rules based on the attributes and contributions of recipients (Cook and Yamagishi 1983). Attributes are personal characteristics such as gender, age, and ethnicity that are used to determine social status. Contributions refer to valued inputs made by participants in an exchange relationship; among these valued inputs are performance and effort. Classification is not always clear-cut; for example, ability might be classified as an attribute in some circumstances but as a contribution otherwise.
While most of the organizational justice literature focuses on the contributions of organizational participants, a growing number of studies focus on their attributes. Evidence suggests that the degree to which organizational participants endorse norms for resource allocation to individuals is associated with their own placement within an organizational structure. Moreover, endorsement of these norms may also vary according to demographic characteristics such as age, gender, and income, as well as cultural factors such as political affiliation and religious affiliation (Jason S. Lee and Stolte 1994; Linkey and Alexander 1998). An important question for further research is whether individuals with given attributes alter their endorsement of allocative norms as their own placement within the organization's structure varies over the course of their own tenure in the organization. Further, satisfaction with resource allocation outcomes is associated with structural, demographic, and cultural factors (Huo et al. 1996; Irwin 1996); although the evidence for a consistent association between gender and satisfaction is mixed (e.g., Sweeney and McFarlin 1997; Lee and Fahr 1999). Given the level of ethnic and gender segregation within the workforce, particular tasks appear to be associated with certain attributes as workers are distributed into organizational positions. Additionally, institutional factors, such as state legislation, and cultural values may affect allocators' distribution norms. In some cases, distribution norms for external constituents related to a given organization through its impact on their culture, economy, or community may differ from distribution rules for those participating directly in an organization. These factors contribute to differential allocation of resources to participants within organizational structures, and their different perceptions of, and satisfaction with, allocation outcomes.
Blau and Scott's cui bono criterion (1962) explicitly raises the question of who benefits from particular policies and characteristics of organizational structure. Blau and Scott suggest a fourfold topology of organizations: (1) mutual benefit organizations, such as clubs, where presumably egalitarian members are prime beneficiaries; (2) business or industrial organizations, where owners are prime beneficiaries; (3) service organizations, such as hospitals, where clients are prime beneficiaries; (4) commonweal organizations, such as the State Department, in which the public-at-large is prime beneficiary. For each type of organization, researchers should systematically examine patterns of benefit by virtue of a constituency's location either (1) externally in an input-output exchange relationship to the organization or (2) internally as upper- , middle- , or lower-level participants in its organizational structure (Etzioni 1961). A fully developed distributive justice perspective would evaluate the benefit a constituency derives from the organization relative to its contribution to the organization's sustained existence (Alvarez 1979).
Not only does the allocation of resources impact organizational structure, it also affects assessments of organizational structure in terms of effectiveness and efficiency. Organizational effectiveness may be defined as the capacity of an organization to produce intended and unintended outcomes. An organization may unknowingly, unintendedly, or inadvertantly serve the interest of a given constituency. Such "latent" functional consequences are seldom explored and documented in advance by social scientists. More usually, latent functions are discovered when they become manifest because organizational activities are dramatically altered or the organization ceases to exist, with the consequence that former latent beneficiaries are severely affected. Indeed, previously unrecognized support from such latent beneficiaries may have been critical to organizational well-being (perhaps survival), and the disaffection of such beneficiaries might threaten future organizational survival. But the concept of "latent" functions has not yet produced a research literature.
Notwithstanding vexing conceptual problems raised by the issue of "latency," research on organizational effectiveness has traditionally overemphasized manifest purposive action, by reference to the organization's intended outcomes (or formal goals). It is obvious, but critical to note, that if the organization goes out of existence, it can no longer accomplish anything. Hence, perhaps the most important task (latent or manifest) for any organization is its continued survival. While some organizations are designed, and are prepared from the outset, to go out of existence upon completion of the task for which they were initially created, many, perhaps most, organizations are quick to acquire new purposes so as to maintain themselves in existence. Indeed, some organizations such as political parties and governments have been known to kill their own people in attempts to remain in existence. Thus, the "cost" per se of getting things done is, at least theoretically, of no consequence in assessing organizational effectiveness. Traditionally, assessing effectiveness requires the comparison of organizational activities to an optimal standard outlined in organizational goals. Since different organizational constituencies (or stakeholders) may have different and sometimes conflicting expectations, this traditional approach has serious limitations.
By contrast, the "cost" of getting things done is paramount in any assessment of organizational efficiency. "Costs" of accomplishing any given task can be of various kinds; and each type of cost may be assessed by various techniques, with varying degrees of efficacy. Unfortunately, social science has not reached any consensus on what types of costs and benefits are worth measuring. Thus, in its broadest sense, efficiency may be viewed as the assessment of an organization's inputs (either in kind or in the distribution of those inputs) relative to its output, in a more narrow view it is simply cost per unit of production. Traditionally, efficiency is reflected in economic analyses and cost-accounting techniques (e.g., Rossi and Freeman 1993). However, it may reflect other kinds of resources, such as opportunity costs; risk; and political, social, and social benefits. Like effectiveness, the attributes and positions of organizational stakeholders influence how efficiency is perceived and assessed.
This review is categorized into four functional requirements for social system survival, as posited by Parsons (1960): (1) adaptation to the environment, (2) goal attainment, (3) integration of its members into a "whole," and (4) creation of cultural understandings (often latent) among members by which the meaning of collective action can be judged. We do not suggest Parsons's AGIL scheme is the only or the definitive way to classify organizational structures or attendant activities. Rather, AGIL focuses on the totality of a particular organization (as a social system) and raises questions of how its organizational structures come into being, change, and persist; within each category we question "who benefits" from consensual, consciously coordinated activities.
ADAPTATION TO THE ENVIRONMENT
"Environment" refers to a broad array of elements that are "outside" organizational boundaries but are relevant to organizational functioning. Organizational boundaries are the set of agreed-upon relationships that constitute organizational structure. Dill defines the task, or technical, environment as all features of the environment "potentially relevant to goal setting and goal attainment" (1958, p. 410). Established beliefs and practices embedded within the organization may systematically affect the shape and operation of the focal organization's structure. Scott (1998) terms these influences the institutional environment of organizations; others refer to it as organizational culture. An organization may seek to control or reshape all or some elements in its environment as a means to lessen uncertainty about its capacity to endure. An organization might reshape its own organizational structures if it is unable to reshape the environment (e.g., Aldrich 1979). Dess and Beard (1984) suggest that Aldrich's topology of environmental characteristics (1979) may be classified into three categories: (1) munificence, or the environmental availability of resources needed by organizations; (2) complexity, or the similarity or dissimilarity of environmental entities and their distribution across the environment; and (3) dynamism, or the degree of change in the environment.
Organizations are embedded within larger societies. The societal culture (relatively integrated sets of values and value-based orientations) of a given society directly affects the kinds of organizational structures that can be sustained by organizations. Nevertheless, organizational structures and their internal organizational cultures might be a stronger determinative force than the outer societal culture. Hence, some organizations are often viewed as determinative importers of social change into some societies (e.g., technology transfers by multinational corporations). Organizational culture and the external societal culture inevitably affect one another; exploring specific nuances at the interface between these two cultural arenas is still a matter for future research. Blau (1994) notes that differential mobility among social groups may alter organizational structures, either increasing or constraining opportunities. Gains in social equity made by groups characterized by gender, ethnicity, age, or socioeconomic status may result in the alteration of organizational structures. The ability of workers to form coalitions both within and outside organizations may alter organizational hiring, promotion, and retention practices. Such restructuring may increase the mobility of groups in gaining more equitable organizational positions, or it may retain inequalities through the eventual resegregation of occupations (Cohen et al. 1998).
Neither effectiveness nor efficiency is an unalloyed universal good. As given constituencies gain stature and power, they are able to reform, reconstitute, or create relationships accordingly; but what makes one constituency more effective and/or more efficient may impact negatively on either the effectiveness or the efficiency of another. Hence, while not its sole determinant, the net balance of power between constituencies is an important variable in the formation and maintenance of organizational structure. When environmental conditions remain relatively constant, the stratification of organizational structure may also remain relatively constant as it is being reified, recreated, and reenacted, given that those already well placed are advantaged within each new round of structured interactions. However, when environmental conditions are visited by strong or rapid changes for example, in political culture, technology, or rapid changes (for example, in political culture, technology, or demographic characteristics), these may precipitate renegotiation and recalibration of social structures within the organization. Because modern organizations seldom resemble a zero-sum model, not all gains by one constituency constitute a loss for another. However, unless the organization continues to grow, prosper, and reward formerly well-rewarded constituencies, a sense of relative deprivation due to perceived loss of effectiveness and efficiency in obtaining organizational rewards may lead to intergroup conflict.
Thus, organizations are affected by the exchange of resources between organizations and various constituencies, including those providing resource inputs to an organization, the exchange of labor for wages, and those between organizations and consumers of outputs. Environmental pressures, including competition for resources, may influence organizations to change structure, including strategic alliances, mergers, joint ventures, downsizing, and divestitures. Organizations may choose to maintain or change relationships on the basis of competition, power to create stable market relations, and institutional attachments through interpersonal and interorganizational relationships (Baker et al. 1998). Such changes presumably allow organizations more flexibility in responding to turbulent and uncertain environments, and each changes the stance of an organization in relation to others that compete for related resources in a market. This is accomplished by increased organizational efficiency, in which decreased labor force size, or hierarchy, and increased organizational interdependence results in fewer costs in producing outputs. The impacts of such strategies have been consequential for workers' expectations of long-term connections to workplaces, and expectations about their careers. Workers increasingly expect duties to be assigned on the basis of experience and training rather than organizational structure (Powell 1996). Pugh and Hickson (1996) argue that as organizational environments become more turbulent and uncertain, organizations require a "redundancy of function" in which individuals are called on to have a wide variety of skills and fill multiple functions in a highly interdependent environment. Thus, workers develop flexible organizational "roles" rather than fulfilling a function based on a hierarchical position (Powell 1996). Older and younger workers may experience a sense of relative deprivation as a result of changes in organizational structure and as their own expectations of future employment opportunities decrease (Lerner 1996). Lerner concludes that procedural justice in organizational restructuring has not led to distributive justice in terms of employment opportunities and expectations.
The state (the system of governance in a society) is another global element with pervasive repercussions for organizational functioning. The state may regulate the organizations directly by instituting programs within them or indirectly by state regulation of what an organization may produce or how it may transact with other organizations such as suppliers or consumers. Organizations may attempt to influence governmental actions so that public policy does not constrain them or so that it will actively benefit them. Organizations frequently influence legislation directly, as by activities of lobbyists on retainer. Organizations often mount campaigns either to achieve or to prevent the enactment of specific legislation by directly influencing general public opinion and particular voters. Even if legislation is passed over their opposition, organizations can achieve their purposes by subsequently influencing the allocation of resources for its enforcement. Fligstein and Mara-Drita (1996) note that market relations between buyers, sellers, and the state are characterized by a power struggle in which each participant mobilizes resources to enact its own interests in maintaining (or altering) current relationships.
Communities are attentive to organizations located in their midst since changes in organizational structure can have considerable repercussions for the community at large. As Scott (1998) points out, not all organizations are strongly tied to the communities in which they are located. Locally based firms have a greater vested interest in community prosperity than do geographically dispersed firms, and they may act to assure continued community prosperity. Organizations may strongly affect the allocation of public goods and services as well as specifications in local policies, such as zoning and tax laws. Organizations may affect communities in which they are located through either implicit or explicit threats of "exit" as well as by directly impacting regulatory and economic conditions. The number, size, and type of organizations located in a community also have widespread consequences for individual local residents. South and Xu (1990) compared industries that dominate their local metropolitan economy with those that do not, finding that employees in dominant industries earn higher wages. Thus, organizations have important political, economic, and normative effects on individuals with or without organizational membership and on their community's organized power structures.
We now explore how organizations respond to and create their own environments, "Gatekeepers" are organizational participants at various levels who "selectively" permit information and people to traverse boundaries into and out of an organization. They "legitimate" particular environmental constituencies, with whom the organization then establishes institutional relations. Relations with constituencies not so "selected" become invisible, neutralized, or illegitimate. The breadth of the environmental domain that an organization claims in this manner has consequences for its stability. Narrow domains are associated with greater stability, while broad, inconsistently defined domains are associated with loss of function (Meyer 1975). At the same time, normative and regulatory forces outside organizations may exert pressures on gate-keepers to allow or disallow certain pieces of information or particular people.
"Loose coupling," or a seemingly weak relationship between parts of an organization (Pfeffer and Salancik 1978), is one of many ways in which organizations learn to deal with a broad environmental domain. This weak relationship allows change in one part of an organization to precipitate minimal or no change in other parts. Relationships between subunits or individuals in organizations, and relationships between the organization and other environmental entities, may be loosely coupled. Organizations may respond to potentially disruptive threats by very limited conformity in a specific sector, and yet this limited conformity projects an aura of complete organizational compliance. In reality, components of organizational structure affected by a given threat may be effectively uncoupled from many other components and processes, resulting merely in the appearance of compliance (DiMaggio and Powell 1983). Loose coupling can also lead to structural "inertia" in an organization's response to environmental changes, causing "lags" between environmental changes and adaptations to them on the part of various organizational structures. However, the degree to which loose coupling is useful as a strategy depends on the particular situation and linkages involved. Loose coupling in terms of outsourcing labor, autonomous work teams, organizational networking, and increasingly separated divisional organizational forms have all been adopted in the last decade as a response to increased market competition and technical complexity. Such modifications of organizational structure are most often justified by upper-level participants as attempts to increase either or both the organization's efficiency and responsiveness (effectiveness) to environmental challenges perceived to threaten organizational survival. What is left unsaid, however, is that a narrow economic conception of what constitutes efficiency or effectiveness by upper-level participants, such as executives and stockholders, may have devastating consequences for middle- and lower-level participants as well as for the surrounding community. Indeed, the very fact that they are essentially disenfranchised from organizational decision making may engender a confrontational relationship with upper-level participants that may render all parties inefficient and ineffective for the process of inventing alternative problem-solving solutions that contribute to the organization's holistic and long-term well-being.
Assessing the effectiveness of an organization's capacity to adapt may be less focused on outcomes than on the processes of organizational change. Organizational theorists have suggested that organizational effectiveness is reflected in how well an organization acquires and processes information and with what flexibility and adaptability (Weick 1977). Galbraith (1977) contends that organizations reduce environmental complexity by changing communication structures within organizations. Other researchers suggest that organizations are effective when their subunits are congruent with the specific environment with which they interact, and when organizations overall are congruent with their environments (Lawrence and Lorsch 1967). Such perspectives of organizational effectiveness may not be linked to the achievement of goals but, from a managerial perspective, may rest in the survival, or profitability of organizations. As Lerner (and maybe others) demonstrate, such goals may not be satisfactory to middle- and lower-level participants whose employment opportunities and expectations may be adversely affected by a particular organizational adaptation. Further, since organizational participation is affected by the demographic characteristics of participants, the specific demographic consequences (whether intended or unintended) of environmental adaptation must be examined.
Who benefits in the adaptation of organizations to the environment? Elites (fiduciaries, executives, and high-level managers) are only one kind of constituency vying for potential benefits derived from organizational structure. Middle- and lower-level organizational participants are often neglected in the research literature on organizational structure. Often, when research findings indicate that either an "organization" or a "community" benefits from a particular activity, what is really meant is that upper-level participants benefit. Certain populations (women and ethnic minorities, for example) participate differentially at upper, middle, and lower levels of organizational structure; thus, a focus on upper-level participants is insufficient to fully describe patterns of benefit.
"Goal" refers to a desirable future state of affairs. Official goals are the formal statements put forth by organizations to state their general purposes (Perrow 1961). Operative goals, on the other hand, refer to "what the organization is actually trying to do" (Perrow 1961, p. 855). The degree of congruency between official and operative goals is variable. It is important to distinguish organizational goals from the motives of individual organizational participants (Simon 1964). However, researchers need to clarify how particular goal activity differentially benefits specific internal or external constituencies. Goals limit and direct organizational decision making and suggest criteria by which organizational performance can be measured.
Over time, organizations establish multiple, often disparate, and sometimes conflicting goals. Kochan and colleagues (1976) argue that goal multiplicity and conflict are associated with both horizontal (number of tasks at the same level of structure) and vertical (number of levels between the "highest" and "lowest" units) differentiation of organizational structure. In the pursuit of multiple goals, coordination of effort is necessary, leading to vertical differentiation of organizational structure. Organizations change their goals over time, for both external and internal reasons. Thompson and McEwen (1958) contend that goals vary because interaction with elements external to the organization can be of two kinds: competitive or cooperative. The only competitive option in their discussion we call bounded competition, referring to the fact that the interaction takes place within the bounds of the normative structure (institutional environment) of the larger social system. By contrast, we conceive of raw or unbounded competition as taking place outside any normative order common to the contending parties and is not accounted for by Thompson and McEwen's discussion. In the extreme absence of common normative understandings, hostility between contending parties can rise to a level wherein one party believes itself justified in attempts to annihilate another. Accordingly, Thompson and McEwen define competition as rivalry between two or more organizations mediated by a third party. Organizations compete for resources viewed as desirable for organizational functioning. Thompson and McEwen discuss three cooperative styles of interaction between organizations and external elements, each underscored by a decreasing level of hostility: co-optation, bargaining, and coalition. Co-optation is the absorption of an external element into the organization, neutralizing its potential hostility by incorporating it within the organization's structure. Bargaining is direct interaction with environmental entities in which some kind of exchange takes place so that the organization can get what it desires. Coalition is an agreement, usually of specific duration for specific collective purposes, combining the efforts of two or more organizations, and restricting the right of each to set goals unilaterally. Notice that coalition requires very low levels of hostility between an organization and its partners; indeed, a potential outcome may be loss of separate identity and structural unification. These strategies can increase or decrease the size and complexity of organizational structure and the allocation of resources within it.
Organizational goals also change for internal reasons. Constituencies within the organization frequently form coalitions, initially for self-protection against real or imagined threats to the pursuit of their own interests. Each unable to impose its will on others, but fearing imposition, makes alliances with other constituencies perceived to be friendly. Some such alliances capture key positions of the organizational structure, thus giving greater access to the allocation of organizational resources. This dominance can be maintained over time by securing the cooperation of other elements and coalitions within the organization through the selective distribution of resources. How central a given goal is to an organization may depend on the composition of the dominant coalition and the relative balance of power within it.
This discussion has emphasized the complexity of goals and goal setting, given a variety of internal and external factors. The processes by which groups or members of organizations gain power, and the loose coupling between goals and motivations, have a large impact on goal setting. It is useful to discuss the processes of power in organizations in more depth. Many theorists have proposed definitions of power, but it was Emerson who proposed one of the most useful: Power resides in the dependency of one on the resources of another (1962). Resource control theorists believe that individuals or organizational subunits exercise power because they allocate resources needed by others to reduce uncertainty or because their resources are specialized or are central to the workflow of the organization (Lachman 1989). Researchers have paid much attention to structural conditions associated with power in organizations. Spaeth (1985) found that resource allocation is central to task performance since lower-level employees are assigned to produce given outputs and are provided with the necessary resources to do so. The higher the level of the worker, the more discretionary resources she or he will have to allocate. Recently, researchers have explored the relationship between technological innovation and shifts of power among organizational members. Burkhardt and Brass (1990) found that early adopters of a computerized information system in a federal agency increased their centrality and power in organizational networks. These shifts did not completely alter the power structure since those in power were not completely displaced by early technology adopters. Barley (1986) makes clear that technology provides organizational members an occasion for structuring." The same technological system may have different implications and may cause different social changes in different organizational structures. Thus, Barley disputes the claims by some researchers that technology has objective material consequences regardless of the social contexts within which it exists.
Scott (1998) writes that organizations attempt to build structures not only to accomplish a division of labor, but also to create a structure of authority. As organizations become more formalized—that is, as procedures and rules are explicitly formulated—power differentials are built into the system and institutionalized. The distributive advantage of upper participants is not obvious since hierarchy is presumably built on specific task competence and power is vested for specific task achievement. Those with institutionalized power need not mobilize to have their interests served, since they control the flow of resources and information. The institutionalization of power contradicts resource control theory, which asserts that those who control the contingencies for change in organizations gain power. Lachman (1989) emphasizes that when the relative power of subunits changes, the previous power structure significantly affects the new one. He found that the greatest predictor of subunit power after organizational change was its degree of power before the change, regardless of its control over organizational contingencies or changes.
The complexity of goals within organizations creates a number of difficulties in assessing effectiveness. The use of goals as virtually the sole criterion for effectiveness places excessive focus on the outcomes, rather than the processes, of organizational activities. While some goals may be universally held within an organization, these are usually held with varying degrees of intensity by various constituencies. Moreover, multiple, and sometimes conflicting, goals are held by various organizational constituencies; notably those at different hierarchical levels, but also those defined by a variety of other factors. Goals may be difficult to operationalize for organizations such as human service agencies, and "fuzzy goals" may be adaptive in avoiding conflict or in concealing operative goals (Weiss 1972). Often, the evaluation of organizational effectiveness is skewed toward one or another constituency's view of what constitute legitimate organizational goals or the priority assigned to given goals. Also, goal displacement may occur when compliance with indicators of good job performance (such as the number of calls taken per hour at a computer help desk) supplants the intended outcome of job performance (solving computer users' technical problems).
Accordingly, evaluation researchers have suggested a number of strategies for resolving some of the conflicts in determining and measuring goals. Stake (1975) suggests "responsive" evaluation that takes into account multiple and conflicting constituencies' goals, treating each as a separate and valid view of organizational functioning. One of the goals of responsive evaluation is to inform each group of the others' perspectives. Patton (1997) suggests a shift from goals to outcomes, focusing on expected changes, maintenance, or prevention that are the intended focus of organizational activity. Scriven (1975) suggests "goal-free" evaluation that focuses on only the actual, measurable outcomes of organizational activities compared to a profile of the demonstrated needs of participants. "Goal-free" evaluation does not include a formal elicitation of goals nor a review of formal organizational documents, but focuses instead on the needs of organizational participants, whether these are formally stated or not. The success that these alternative perspectives have in circumventing goals as the focus of effectiveness evaluation is variable, but they do constitute an acknowledgement of the difficulties in assessing organizational effectiveness solely through goal attainment.
Organizational efficiency, like effectiveness, is also tied to the attainment of organizational goals, but measures attainment against its costs. Cost-effectiveness analysis measures the monetary benefits of a program against the financial costs of implementing it. Cost-benefit analysis can estimate the broadly conceived benefits of a program versus its various costs, but usually also monetizes the benefits and compares them. Not only do these types of analyses face the same challenges described above in determining how the effectiveness of organizational activity is to be determined, they must choose a cost-accounting perspective that also reflects a particular "interest group" perspective. Freeman and Rossi (1993) describe three cost-accounting perspectives: (1) The individual level weighs costs, benefits, and effectiveness from the perspective of the unit targeted by an organization (people, groups, or organizations). (2) The program sponsor level takes the perspective of the sponsor in valuing benefits and accounting for costs, and examines the profitability of a given organizational activity. 3) The communal (or societal) perspective assesses both the direct and the indirect effects of organizational activity in a broad context and for a wide variety of participants. Both upper-level organizational participants and researchers have overemphasized the program-sponsor perspective, emphasizing short-term impacts and economic outcomes and short-changing factors that are integral to self-perceived well-being of often less powerful constituencies, such as the impact on their psychic, social, cultural, or political condition. Recent developments in "socioeconomics" seek to develop theoretical approaches that may bring these considerations under systematic analysis (Etzioni 1990, 1996, 1998; Granovetter 1985, 1992; Granovetter and Swedberg 1992). Monetizing such factors is difficult and controversial, but the costs and benefits of broader social and cultural factors both in monetary and other forms is included in efficiency studies using the communal perspective.
Economic analyses, however, frame their results in a monetary context for use by managers or policy makers, framing outcomes in ways that are less relevant to mid- and low-level workers, who do not control the allocation of resources. Additionally, it is difficult (and controversial) to monetize benefits, especially those involving complex social contexts, such as cultural and political changes. It may be difficult to combine multiple and/or conflicting goals in economic analyses, including the unintended consequences of organizational action. Finally, by definition, economic analysis takes an incremental approach to change, assuming that benefit is achieved if the benefits outweigh the costs. For some kinds of organizational activities, an incremental approach toward cost-effectiveness or cost-benefit analysis may not be appropriate if a partial change in outcomes is not desirable. For example, many programs designed to prevent drug use do not measure outcomes in terms of decreased drug use among participants, but in the extent to which total nonuse of drugs may be effectuated.
Setting and attainment of goals are complex processes affected by factors internal and external to organizations and by processes for power distribution. The cui bono criterion alerts the researcher not to take formal goals at face value but to identify how key actors and groups in coalitions differentially benefit from goal activity. In spite of its tendency to persist, organizational structure can be and is altered to reflect the power of new alliances among internal and external constituencies who benefit from new institutional arrangements. Organizations survive because powerful constituent alliances continue to derive benefit from them.
THE INTERNAL INTEGRATION OF ORGANIZATIONAL STRUCTURE
Organizations cohere in part because some elements of organizational structure are designated to coordinate other organizational elements into a collective "whole" in the pursuit of goals. This discussion of integration will examine (1) how some organizational variables affect composition of organizational structural; (2) structure's differential outcomes for stratified groups; and (3) who benefits from integration.
One factor important to integrating organizational members is technology, knowledge about how to get things done. Organizations often must increase coordination to achieve technically complicated tasks. Galbraith (1977) notes four mechanisms for increasing task coordination: (1) Rules standardize both acceptable actions and agreed-upon ends. (2) Schedules coordinate interdependent activities or multiple activities occurring at the same time. (3) Departmentalization routinizes the division of labor by grouping homogeneous tasks together. (4) Organizational hierarchy helps to coordinate tasks that are interrelated among departments. Organizational size can be an important factor affecting internal structure. Several measures have been used for size, including the physical plant, number of clients, or number of employees (Kimberly 1976). Most researchers have treated size as a determinant of organizational structure. It can be an indicator of demand for organizational services or products, providing constraints or opportunities for structural change.
These two variables are related to a number of structural outcomes, the most important of which are complexity or differentiation, formalization, and centralization. Complexity is the diversity of factors that must be simultaneously coordinated to get a task done. Horizontal differentiation is the specification of component elements of tasks performed at the same level of organizational structure. Vertical differentiation is the number of levels of importance, power, and control among units. Multiple and complex technologies are associated with increased structural differentiation (Dewar and Hage 1978). Increased size (number of participants) is necessary to achieve high degrees of structural differentiation, although a large organization may be minimally differentiated and simply coordinated. Nevertheless, larger organizations are generally more structurally differentiated and more complexly coordinated (cf. Blau and Schoenherr 1971).
Formalization is the extent to which rules for behaviors and relations in organizations are explicitly specified for participants directly or indirectly associated with particular tasks. This means that formalized positions have standardized powers and duties, regardless of the particular individual incumbent. Organizations with routine technology have a greater degree of formalization (Dornbusch and Scott 1975) at a more minute level of detail. Glisson (1978) contends that routinized technology may produce greater formalization. Formalization, however, is only moderately associated with organizational size (e.g., Blau and Schoenherr 1971).
Centralization refers to the extent to which decision making in an organization is concentrated or dispersed. Dornbusch and Scott (1975) point out that organizations may engage multiple technologies that vary in terms of clarity, predictability, and efficacy. Tasks high on these dimensions are more likely to be centralized, but tasks low on the dimensions are likely to be allocated to specialists, decentralizing organizational authority. Centralization through rules is associated with use of routine technology (Hage and Aiken 1967). There is an inverse relationship between size and centralization: Larger organizations tend to decentralize decision making.
Recent organizational restructuring in the United States has resulted in some organizations becoming "smaller" in size than they were three decades ago. The adoption of new technologies including computer-assisted production and justin-time inventory systems have resulted in a decrease in vertical hierarchy, and a flattened lateral hierarchy. At the same time, the complexity of the technology and the need for increased coordination has increased interdependence of organizational subunits or "teams," while centralization has decreased (Galbraith and Lawler 1993). Reengineering technologies has often resulted in changing the processes of work, rather than directly changing organizational structures, but has contributed to the increasingly interdependent relations among organizational subunits (Keidel 1994). Such reengineering has led to flexibility in team function, resulting in "semistructures" in which some aspects of performance are prescribed, but the processes through which teams operate are not (Brown and Eisenhardt 1995). Scott (1998) notes, however, that the resources needed to successfully alter structure to function in a more lateral, independent fashion are considerable, and many organizations do not have the resources to make this kind of structural transformation.
Consistently with generalized values in the host society, organizational structure has differential outcomes for people of diverse identities. Labor theorists offer various explanations for occupational segregation, the organizational practice of reserving specific kinds of jobs for people of given ethnicity or gender. Occupational segregation results in lower earnings in jobs traditionally held by relatively powerless groups-minority men and white and minority women. Kaufman (1986) found that black men were more likely than white men to be employed in highly routinized, less skilled jobs and were less likely to be in job ladders involving increasing levels of status dominance over other workers. Tienda and colleagues (1987) found that, although women's earnings increase as they move into jobs traditionally held by males, male incumbents experience a greater increase in earnings than their female counterparts. Some researchers contend that market forces have created an occupationally segregated labor force, while others believe that organizational practices are responsible. Bridges and Nelson (1989) argue that altbough market forces produce gender-related inequalities (as expected), these are exacerbated by intraorganizational decisions resulting in preservation of occupational segregation.
Although hierarchy appears to be determined rationally by high-level managers and by owners, labor theorists reveal that organizational structure has differential outcomes for people based on ethnicity and gender. Further, the structural inequalities between wages and perquisites for workers at various levels of the organization may be quite large and not necessary to maintain a task-oriented division of labor on which an organization's survival might depend. Marxists, work redesign theorists, and researchers exploring organizational "structuring" explicitly address how organizations benefit, or fail to benefit, worker categories. These perspectives challenge the presumption of rationality for organizational structures imbalanced in favor of a given constituency. Problems in assessing benefit are due to the assumption that managers or the environment determine what middle and lower participants do without exploring resistance to more generally beneficial institutional policies by upper participants. Researchers examining the impact of variables such as size on formalization frequently exclude human agents, and thereby reify organizational structure. Such research fails to give due consideration to how organizational structuring might account for these phenomena. To the extent that workers successfully and persistently subvert, modify, or resist organizational structuring of their activities, researchers cannot justify the assumption that structure is the sole result of owner, managerial, or environmental influences.
LATENT FACTORS IN STRATEGIC PLANNING
Values guide and give meaning to activities. A set of activities, however, may be variously interpreted from alternative value perspectives. Activities that are rational and meaningfully appropriate for an organizational task (in a bank, for example) may also be in substantial congruity with prescriptions and proscriptions of, say, an ostensibly unrelated religious organization serving the same client population. This hidden or latent positive affinity might make a bank clerk appear particularly productive as new customers are attracted to the bank and give favorable reactions for service received from the bank in spite of, rather than because of, role performance as bank clerk. The latent import could be negative, in which case the bank clerk might look particularly unproductive.
Although there is no assurance an organizational structure staffed with a demographically diverse population has a higher probability of survival, rational theorists believe its chances are increased. As an organization takes in participants with demographic characteristics different from those of previous participants, modalities of personal values at different participant levels will change. This creates a latent potential for future pressure to change goals and procedures. For effective long-term strategic planning, decision makers are well advised to consider implications of alternative demographic concentrations among actual or potential external constituencies and among each internal participant level. Cultivation of new markets to absorb organizational output may require recruitment from populations with new attributes as much as recruitment from new populations to reduce labor costs may require acceptance of new types of participant contributions. Such changes inherently precipitate structural change. An organization that sets narrow limits to organizational culture may as a latent consequence inadvertently limit its capacity to adapt to altered environmental conditions and thus decrease its capacity to survive.
Research examining the link between organizational culture and effectiveness has reflected managerial interest in improving organizational performance through the control and directed change of organizational culture. Research examining the link has been mixed, finding a direct relationship between the two (e.g., Petty et al. 1995), examining culture as a set of mediating variables in organizational performance (e.g., Saffold 1988), and finding no relationship between the two (e.g., Reynolds 1986). While most studies have examined factors internal to organizations in the construction of culture, some have examined the links between culture and organizational markets, networks, and environmental factors (e.g., Burt et al. 1994). One reason for the mixed findings in the association between organizational culture and effectiveness is a difficulty in defining and measuring culture. Culture has been variously defined as underlying shared values and beliefs among participants (Schein 1991); meanings of actions among individual participants (Golden 1992), and means of governing transactions among individual participants (Ouchi 1980). Culture has therefore been measured in terms of strength, meaning the congruence of managerial beliefs to managerial practices (Denison 1990); individual practices, affect, and cognitions (Silvester et al. 1999); and organizational types governing transactions among participants, which exhibit traits such as the degree of hierarchy or flexibility (Ouchi 1980). These differences in the definitions of culture and in its measurement account for some of the variability of findings in the organizational culture literature. Additionally, differences in organization types and criteria of effectiveness may also account for differential findings of the link between culture and organizational performance. A struggle between proponents of qualitative and quantitative methods has led to a bifurcated literature and a lack of multimethod studies examining the complexities of organizational culture (Martin and Frost 1996). Most studies on organizational culture and effectiveness focus on overall performance, profit, and productivity from the perspectives of the organizational elite, upper management, and administrators while purporting to describe a "whole" organization's culture and outcomes.
While organizational culture is both an important result and a determinant of organizational structure, it appears to have been given both narrow and exaggerated importance by writers whose focus is on profit-making organizations. In the mid-1980s researchers contended that centralized control of corporate culture by managers was correlated with organizational success (e.g., Deal and Kennedy 1982). Meyerson and Martin (1987) call this the integrationist perspective, but argue that organizational theory has encompassed at least two other perspectives, the differentiation perspective and the fragmentation perspective. The differentiation perspective acknowledges that there may be "nested" cultures and subcultures within organizations that may embrace different forms, ideologies, and rituals. The fragmentation perspective observes that clearly conflicting cultural understandings and practices in organizations may exist, and may shift as coalitions form around specific tasks and as organization members deal with the ambiguity of their tasks.
Martin (1992) notes that one or all of these cultural characteristics may be present within organizations, but that participants' positions throughout the organizational structure may affect how they perceive an organization's culture. Management may take an integrationist view of culture, seeing it as a way of controlling and coordinating organizational activity. Rank-and-file workers may be more likely to adopt a differentiation perspective instead, and those whose jobs are characterized by a high degree of ambiguity and environmental uncertainty may be more likely to adopt a fragmentation perspective. The issue here is how much of values essential to its own well-being each constituency will surrender in return for real or imagined benefits derived from continued organizational participation. Upper participants are only one constituency potentially benefiting from organizational culture. Other constituencies may use it as a vehicle to express resistance to, or interest in, a wide array of organizational and environmental conditions. If upper participants seek effectiveness in goal achievement and efficient productivity for increased profits, lower participants might seek security of employment and quality of working conditions. Participants may see the organization as a forum within which each subgroup expresses its own array of self-interests for potential incorporation into organizational culture in the context of collective, perhaps universal, concern for organizational survival. Depending on their relative power (location) within the organization's structure, constituents may be limited in the degree to which they can enact and establish understandings about the distribution of rewards (of various kinds including but not limited to economic rewards) relative to their own structural positions and to their self-perceived contributions to organizational survival.
If participants decide the distribution of rewards is unsatisfactory or inequitable relative to some other comparison group or individual, relative deprivation theorists argue that participants will then attempt systemic or individual remedies. Indeed, lower participants may choose to treat "official" cultural accounts with disbelief or to subvert them (Smircich 1983). The form that perceived unfairness takes influences the actions that people are likely to take; Skarlicki and Folger (1997) found that if participants perceive organizations as having low procedural justice and low distributive justice, they are more likely to take retributive action against an organization for perceived injustices than those who believe that only procedural or distributive justice is low. However, researchers have failed to demonstrate how unfavorable comparisons cause behavioral outcomes. Historically, groups of workers have understood existence of ethnicity and gender inequality in the work place, but not all groups have taken steps to remedy the problems. The organizational justice perspective may allow exploration of organizational structuring as a process in which agency exists on the parts of participants and constituents of organizations at both aggregate and individual levels in accord with their cultural orientation.
Current theory and research on organizational structure have been characterized by both managerial determinism and by a vague environmental determinism used to exonerate owners and managers from detrimental consequences of their structural designs upon middle and lower participants within the organization. Owners and higher-level managers often overemphasize short-term gains achieved by production and managerial techniques undermining relative empowerment of lower participants. On their behalf, organizational theorists and researchers contribute unwittingly to intensification of unnecessary control over workers, consumers, community residents, and other types of participants (Clegg 1981). Research guided by a organizational justice perspective may reduce an overemphasis on the competitive advantage of upper participants (disguised as advantage by the organization against external adversaries) and open new vistas on cooperative actions beneficial to all participants and related to the perceived value of their contributions to organizational survival. In the final analysis, perhaps the only justification for rewards received by a category of organizational participants is the contribution it makes to the essential task of organizational survival (Alvarez 1979).
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