Merritt's bakery case study

370 Part Four Organizational Processes

repeatability,” says Valve’s employee handbook. “But when you’re an entertainment

company that’s spent the last decade going out of its way to recruit the most

intelligent, innovative, talented people on Earth, telling them to sit at a desk and do

what they’re told obliterates 99 percent of their value.”1

Valve Corporation’s organizational structure is different from that of most companies, but this design seems to serve the game maker and entertainment firm’s strategic objectives. Organizational structure refers to the division of labor and the patterns of coordination, communication, workflow, and formal power that direct organizational activities. It for- mally dictates what activities receive the most attention, as well as financial, power, and in- formation resources. At Valve, for example, power and resources flow mainly to teams, which have almost complete autonomy over their work objectives and work processes.

Although the topic of organizational structure typically conjures up images of an organiza- tional chart, this diagram is only part of the puzzle. Organizational structure includes these reporting relationships, but it also relates to job design, information flow, work standards and rules, team dynamics, and power relationships. As such, the organization’s structure is an im- portant instrument in an executive’s toolkit for organizational change, because it establishes new communication patterns and aligns employee behavior with the corporate vision.2

This chapter begins by introducing the two fundamental processes in organizational struc- ture: division of labor and coordination. This is followed by a detailed investigation of the four main elements of organizational structure: span of control, centralization, formalization, and departmentalization. The latter part of this chapter examines the contingencies of organiza- tional design, including external environment, organizational size, technology, and strategy.

Division of Labor and Coordination All organizational structures include two fundamental requirements: the division of labor into distinct tasks and the coordination of that labor so that employees are able to accom- plish common goals.3 Organizations are groups of people who work interdependently to- ward some purpose. To efficiently accomplish their goals, these groups typically divide the work into manageable chunks, particularly when there are many different tasks to perform. They also introduce various coordinating mechanisms to ensure that everyone is working effectively toward the same objectives.

DIVISION OF LABOR Division of labor refers to the subdivision of work into separate jobs assigned to different people. Subdivided work leads to job specialization, because each job now includes a narrow subset of the tasks necessary to complete the product or service. Although Valve Corpora- tion’s leaders don’t do the organizing, employees self-organize into project teams, and members of each team agree to the tasks they should perform. Valve encourages its staff to become multiskilled, but most people gravitate toward one area of expertise or another. As companies get larger, this horizontal division of labor is usually accompanied by a vertical division of labor: Some people are assigned the task of supervising employees, others are re- sponsible for managing those supervisors, and so on. Valve has been able to avoid (or limit) this vertical division of labor by relying on employees to manage themselves and each other. But even Valve has team leaders who coordinate the work, as well as marketing and strategy leaders who guide and support employees’ decisions on these matters.

Why do companies divide the work into several jobs? As we described in Chapter 6, job specialization increases work efficiency.4 Job incumbents can master their tasks quickly because work cycles are shorter. Less time is wasted changing from one task to another. Training costs are reduced because employees require fewer physical and mental skills to

organizational structure The division of labor and patterns of coordination, communication, workflow, and formal power that direct organizational activities.

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Chapter Thirteen Designing Organizational Structures 371

accomplish the assigned work. Finally, job specialization makes it easier to match people with specific aptitudes or skills to the jobs for which they are best suited. Although one per- son working alone might be able to design a new online game, doing so would take much longer than having the work divided among several people with the required diversity of skills. Some employees are talented at thinking up innovative storylines, whereas others are better at preparing online drawings or working through financial costs.

COORDINATING WORK ACTIVITIES When people divide work among themselves, they require coordinating mechanisms to ensure that everyone works in concert. Coordination is so closely connected to the division of labor that the optimal level of specialization is limited by the feasibility of coordinating the work. In other words, an organization’s ability to divide work among people depends on how well those people can coordinate with each other. Otherwise, individual effort is wasted due to misalign- ment, duplication, and mistiming of tasks. Coordination also tends to become more expensive and difficult as the division of labor increases. Therefore, companies specialize jobs only to the point at which it isn’t too costly or challenging to coordinate the people in those jobs.5

Every organization—from the two-person corner convenience store to the largest corporate entity—uses one or more of the following coordinating mechanisms:6 informal communication, formal hierarchy, and standardization (see Exhibit 13.1). These forms of coordination align the work of staff within the same department as well as across work units. These coordinating mechanisms are also critical when several organizations work together, such as in joint ventures and humanitarian aid programs.7

Coordination Through Informal Communication All organizations rely on infor- mal communication as a coordinating mechanism. This process includes sharing information on mutual tasks and forming common mental models so that employees synchronize work activities using the same mental road map.8 Informal communication is vital in nonroutine

Visit connect.mcgrawhill.com for activities and test questions to help you learn about coordinating mechanisms and other organizational structure topics.

FORM OF COORDINATION DESCRIPTION SUBTYPES/STRATEGIES

EXHIBIT 13.1 Coordinating Mechanisms in Organizations

Sources: Based on information in J. Galbraith, Designing Complex Organizations (Reading, MA: Addison-Wesley, 1973), pp. 8–19; H. Mintzberg, The Structur- ing of Organizations (Englewood Cliffs, NJ: Prentice Hall, 1979), Ch. 1; D. A. Nadler and M. L. Tushman, Competing by Design: The Power of Organizational Architecture (New York: Oxford University Press, 1997), Ch. 6.

Sharing information on mutual tasks; forming common mental models to synchronize work activities

Assigning legitimate power to individuals, who then use this power to direct work processes and allocate resources

Creating routine patterns of behavior or output

• Direct communication • Liaison roles • Integrator roles • Temporary teams

• Direct supervision • Formal communication channels

• Standardized skills • Standardized processes • Standardized output

Informal communication

Formal hierarchy

Standardization

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372 Part Four Organizational Processes

and ambiguous situations, because employees need to exchange a large volume of information through face-to-face communication and other media-rich channels. Valve Corporation relies heavily on informal communication as a coordinating mechanism. Employees organize them- selves into teams and physically move close to each other to communicate directly, often on projects that typically enter uncharted territory.

Although coordination through informal communication is easiest in small firms, infor- mation technologies have further enabled this coordinating mechanism in large organiza- tions.9 Companies employing thousands of people also support informal communication by keeping each production site small. Magna International, the global auto parts manufac- turer, keeps its plants at a maximum size of around 200 employees. Magna’s leaders believe that employees have difficulty remembering others’ names in plants that are any larger, a situation that makes informal communication more difficult as a coordinating mechanism.10

Larger organizations also encourage coordination through informal communication by assigning liaison roles to employees, who are expected to communicate and share informa- tion with coworkers in other work units. When coordination is required among several work units, companies create integrator roles. These people are responsible for coordinating a work process by encouraging employees in each work unit to share information and informally coordinate work activities. Integrators do not have authority over the people involved in that process, so they must rely on persuasion and commitment. Brand managers for luxury per- fumes have integrator roles because they ensure that the work of fragrance developers, bottle designers, advertising creatives, production, and other groups are aligned with the brand’s image and meaning.11

Another way that larger organizations encourage coordination through informal commu- nication is by organizing employees from several departments into temporary teams. Tem- porary cross-functional teams give employees more authority and opportunity to coordinate through informal communication. This process is now common in vehicle design. As the design engineer begins work on product specifications, team members from manufacturing, engineering, marketing, purchasing, and other departments are able to provide immediate feedback, as well as begin their contribution to the process. Without the informal coordina- tion available through teams, the preliminary car design would pass from one department to the next—a much slower process.12

Coordination Through Formal Hierarchy Informal communication is the most flexible form of coordination, but it can become chaotic as the number of employees increases. Consequently, as organizations grow, they rely increasingly on a second coordinating mechanism: for- mal hierarchy.13 Hierarchy assigns legiti- mate power to individuals, who then use this power to direct work processes and allocate resources. In other words, work is coordinated through direct supervision— the chain of command.

A century ago, management scholars applauded the formal hierarchy as the best coordinating mechanism for large organizations. They argued that organiza- tions were most effective when managers exercised their authority and employees received orders from only one supervisor. The chain of command—in which

of 524 U.S. employees surveyed say they occasionally or frequently feel micromanaged by their boss.

of 500 U.S. employees surveyed say they work for a “micromanager.”

of 150 senior executives surveyed from the 1,000 largest American companies identify micromanaging as having the most negative impact on employee morale (third highest factor, after lack of communication and recognition).

of 11,045 U.S. employees surveyed identify micromanagement as the most significant barrier to their productivity.

31% of 97,000 employees surveyed in 30 countries describe their company’s leadership as oppressive or authoritative.

Coordination Through Micromanagement14

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Chapter Thirteen Designing Organizational Structures 373

information flows across work units only by going through supervisors and managers—was viewed as the backbone of organizational strength.

Although still important, formal hierarchy is much less popular today. One problem, which Valve’s cofounders have tried to avoid, is that hierarchical organizations are not as agile for coordination in complex and novel situations. Communicating through the chain of command is rarely as fast or accurate as direct communication between employ- ees. Another concern with formal hierarchy is that managers are able to closely supervise only a limited number of employees. As the business grows, the number of supervisors and layers of management must increase, resulting in a costly bureaucracy. Finally, today’s workforce demands more autonomy over work and more involvement in company deci- sions. Formal hierarchy coordination processes tend to conflict with employee autonomy and involvement.

Coordination Through Standardization Standardization, the third means of coordination, involves creating routine patterns of behavior or output. This coordinating mechanism takes three distinct forms:

• Standardized processes. The quality and consistency of a product or service can often be improved by standardizing work activities through job descriptions and procedures.15 For example, flow charts represent a standardized process coordinating mechanism. This coordinating mechanism works best when the task is routine (e.g., mass produc- tion) or simple (e.g., stocking shelves), but it is less effective in nonroutine and complex work such as product design (which Valve employees do).

• Standardized outputs. This form of standardization involves ensuring that individuals and work units have clearly defined goals and output measures (e.g., customer satis- faction, production efficiency). For instance, to coordinate the work of salespeople, companies assign sales targets rather than specific behaviors.

• Standardized skills. When work activities are too complex to standardize through processes or goals, companies often coordinate work effort by extensively training employees or hiring people who have learned precise role behaviors from educational programs. Valve Corporation relies on coordination through standardized skills. It carefully hires people for their skills in software engineering, animation, and related fields, so they can perform tasks without job descriptions or precise guidelines. Training is also a form of standardization through skills. Many companies have in-house training programs where employees learn how to perform tasks consistent with company expectations.

The division of labor and coordination of work represent the two fundamental ingredients of all organizations. But how work is divided, which coordinating mechanisms are empha- sized, who makes decisions, and other issues are related to the four elements of organiza- tional structure that we discuss over the next two sections of this chapter.

Elements of Organizational Structure Organizational structure has four elements that apply to every organization. This section introduces three of them: span of control, centralization, and formalization. The fourth element—departmentalization—is presented in the next section.

Which organizational structure do you prefer? Visit connect. mcgrawhill.com to identify your organizational structure and help you learn about this topic.

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374 Part Four Organizational Processes

SPAN OF CONTROL Chief executive officers are much busier today managing their direct reports than they were two or three decades ago. In the 1980s, an average of five people (typically vice-presidents) reported directly to the CEOs of Fortune 500 companies. By the end of the 1990s, this span of control increased an average of 6.5 direct reports. Today, CEOs of the largest U.S. firms have an average of 10 direct reports, double the number a few decades earlier. This increase reflects the fact that most Fortune 500 companies are far more complex today. They operate in many markets, have more variety of products, and employ people with a broader array of technical specialties. Each of these types of variation demand top-level attention, so there are more people reporting directly to the chief executive.16

Span of control (also called span of management) refers to the number of people directly reporting to the next level in the hierarchy. A narrow span of control exists when very few people report directly to a manager, whereas a wide span exists when a manager has many direct reports.17 A century ago, French engineer and management scholar Henri Fayol strongly recommended a relatively narrow span of control, typically no more than 20 em- ployees per supervisor and six supervisors per manager. Fayol championed formal hierarchy as the primary coordinating mechanism, so he believed that supervisors should closely mon- itor and coach employees. His views were similar to those of Napoleon, who declared that senior military leaders should have no more than five officers directly reporting to them. These prescriptions were based on the belief that managers simply could not monitor and control any more subordinates closely enough.18

Today, we know better. The best-performing manufacturing plants currently have an average of 38 production employees per supervisor (see Exhibit 13.2).19 What’s the secret here? Did Fayol, Napoleon, and others miscalculate the optimal span of control? The answer is that those sympathetic to hierarchical control believed that employees should perform the physical tasks, whereas supervisors and other management personnel should make the decisions and monitor employees to make sure they performed their tasks. In contrast, the best-performing manufacturing operations today rely on self-directed teams, so direct supervision (formal hierarchy) is supplemented with other coordinating

Figures represent the average number of direct reports per manager. “Max.” figures represent the maximum spans of control recommended by Napoleon Bonaparte, Henri Fayol, and Lindall Urwick. “Min.” figure represents the minimum span of control recommended by Tom Peters. “Goal” figures represent span of control targets that the U.S. government and the State of Iowa have tried to achieve. The State of Texas figure represents the span of control mandated by law. The Saratoga Institute figure is the average span of control among U.S. companies surveyed. The Best U.S. Plants figure is the average span of control in American manufacturing facilities identified by Industry Week magazine as the most effective. “Actual” figures are spans of control in the city of Seattle, State of Oregon, Multnomah County (including Portland, Oregon), State of Iowa, and Fedex Corporation in the years indicated.

Napoleon (Max. mgt.: 1815) Oregon (Actual: 2011)

Fayol (Max. mgt.: 1916) Urwick (Max. mgt.: 1937)

Seattle (Actual: 2005) Saratoga Institute (Survey: 2001) Multnomah County (Actual: 2009)

Texas State (Law: 2003) Iowa State (Actual: 2007)

Iowa State (Goal: 2007) U.S. Gov’t (Goal: 1999)

Fayol (Max. nonmgt.: 1916) Fedex (Actual: 2008)

Tom Peters (Min.: 1988) Best U.S. plants (Survey: 2000)

5 5.7

6 6

6.8 7.02

8.2 11 11

12 15

20 25 25

38

0 2010 30 40

EXHIBIT 13.2

Recommended, Actual, and Enforced Spans of Control20

span of control The number of people directly reporting to the next level in the hierarchy.

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Chapter Thirteen Designing Organizational Structures 375

mechanisms. Self-directed teams coordinate mainly through informal communication and various forms of standardization (i.e., training and processes), so formal hierarchy plays more of a supporting role.

Many firms that employ doctors, lawyers, and other professionals also have a wider span of control because these staff members coordinate their work mainly through standardized skills. For example, more than two dozen people report directly to Cindy Zollinger, co- founder and president of the Boston-based litigation-consulting firm Cornerstone Research. Zollinger explains that this large number of direct reports is possible because she leads pro- fessional staff who don’t require close supervision. “They largely run themselves,” Zollinger explains. “I help them in dealing with obstacles they face, or in making the most of oppor- tunities that they find.”21

A second factor influencing the best span of control is whether employees perform rou- tine tasks. A wider span of control is possible when employees perform routine jobs, because they require less direction or advice from supervisors. A narrow span of control is necessary when employees perform novel or complex tasks, because these employees tend to require more supervisory decisions and coaching. This principle is illustrated in a survey of property and casualty insurers. The average span of control in commercial-policy processing depart- ments is around 15 employees per supervisor, whereas the span of control is 6.1 in claims service and 5.5 in commercial underwriting. Staff members in the latter two departments perform more technical work, so they have more novel and complex tasks, which requires more supervisor involvement. Commercial-policy processing, on the other hand, is like pro- duction work. Tasks are routine and have few exceptions, so managers have less coordinating to do with each employee.22

A third influence on span of control is the degree of interdependence among employees within the department or team.23 Generally, a narrow span of control is necessary where employees perform highly interdependent work with others. More supervision is required for highly interdependent jobs because employees tend to experience more conflict with each other, which requires more of a manager’s time to resolve. Also, employees are less clear on their personal work performance in highly interdependent tasks, so supervisors spend more time providing coaching and feedback.

Tall versus Flat Structures Span of control is interconnected with organizational size (number of employees) and the number of layers in the organizational hierarchy. Consider two companies with the same number of employees. If Company A has a wider span of control (more direct reports per manager) than Company B, then Company A necessarily has fewer layers of management (i.e., a flatter structure). The reason for this relationship is that a com- pany with a wider span of control has more employees per supervisor, more supervisors for each middle manager, and so on. This larger number of direct reports, compared to a company with a narrower span of control, is possible only by removing layers of management.

The interconnection of span of control, organizational size (number of employees), and number of management layers has important implications for companies. Organizations employ more people as they grow, which means they must widen the span of control, build a taller hierarchy, or both. Most companies end up building taller structures, because they

rely on direct supervision to some extent as a coordinating mechanism, and there are limits to how many people each manager can coordinate.

Unfortunately, building a taller hierarchy (more layers of management) creates problems. One concern is that executives in tall structures tend to re- ceive lower-quality and less timely information. People tend to filter, distort, and simplify information before it is passed to higher levels in the hierarchy, because they are motivated to frame the information in a positive light or summarize it more efficiently. In contrast, information receives less manipula- tion in flat hierarchies and is often received much more quickly than in tall hierarchies. “Any new idea condemned to struggle upward through multiple levels of rigidly hierarchical, risk-averse management is an idea that won’t see

KenGen, Kenya’s leading electricity generation company, had more than 15 layers of hierarchy a few years ago. Today, the company’s 1,500 employees are organized in a hierarchy with only 6 layers: the chief executive, executive directors, senior managers, chief officers, front line management, and nonmanagement staff. “This flatter structure has reduced bureaucracy, and it has also improved teamwork,” explains KenGen executive Simon Ngure.24

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376 Part Four Organizational Processes

daylight . . . until it’s too late,” warned Chrysler Corp. CEO Sergio Marchionne when he restructured the company.25

A second problem is that taller structures have higher overhead costs. With more manag- ers per employee, tall hierarchies necessarily have more people administering the company, thereby reducing the percentage of staff who are actually making the product or providing the service. A third issue with tall hierarchies is that employees usually feel less empowered and engaged in their work. Hierarchies are power structures, so more levels of hierarchy tend to draw power away from people at the bottom of that hierarchy. The size of the hierarchy itself tends to focus power around managers rather than employees.26

These problems have prompted companies to remove one or more levels in the organiza- tional hierarchy.27 This “delayering” recently occurred at Sandvik, the Swedish manufacturer of tools and equipment for mining and other industries. “We had as much as 13 layers in the company between me as CEO and the most junior worker in the Company,” says Sandvik CEO Olof Faxander. “We’ve flattened that [so we] only have up to seven layers in the Company.”28 At the same time, critics warn that cutting back middle management may do more harm than good.

debating point SHOULD ORGANIZATIONS CUT BACK MIDDLE MANAGEMENT?

Business leaders face the ongoing challenge of preventing their organization from ballooning into a fat bureaucracy with too many layers of middle managers. Indeed, it has become a mantra for incoming CEOs to gallantly state they will “delayer” or “flatten” the corporate hierarchy, usually as part of a larger mandate to “empower” the workforce. As we describe in this chapter, there are several valid argu- ments for minimizing the corporate hierarchy, particularly by cutting back middle management. As companies employ more managers, they increase overhead costs and have a lower percentage of people actually generating revenue by making products or providing services. A taller hierarchy also undermines effective communication between frontline staff—who receive valuable knowledge about the external environment—and the top executive team. Middle managers have a tendency to distort, simplify, and filter information as it passes from them to higher authorities in the company. A third reason for cutting back middle management is that they absorb organizational power. As compa- nies add more layers, they remove more power that might have been assigned directly to frontline employees. In other words, tall hierarchies potentially undermine employee empowerment. These concerns seem logical, but slashing the hierarchy can have several unexpected consequences that outweigh any bene- fits. In fact, a growing chorus of management experts warn about several negative long-term consequences of cutting out too much middle management.29

Critics of delayering point out that all companies need manag- ers to translate corporate strategy into coherent daily operations.

“Middle managers are the link between your mission and execu- tion,” advises a senior hospital executive. “They turn our strategy into action and get everyone on the same page.”30 Furthermore, managers are needed to make quick decisions, coach employees, and help resolve conflicts. These valuable functions are under- served when the span of control becomes too wide. Delayering increases the number of direct reports per man- ager and thus significantly increases management workload and corresponding levels of stress. Managers partly reduce the work- load by learning to give subordinates more autonomy rather than micromanaging them. However, this role adjustment itself is stressful (same responsibility, but less authority or control). Com- panies often increase the span of control beyond the point at which many managers are capable of coaching or leading their direct reports. A third concern is that delayering results in fewer managerial jobs, so companies have less maneuverability to develop mana- gerial skills. Promotions are also riskier, because they involve a larger jump in responsibility in flatter, compared with taller, hierar- chies. Furthermore, having fewer promotion opportunities means that managers experience more career plateauing, which re- duces their motivation and loyalty. Chopping back managerial ca- reer structures also sends a signal that managers are no longer valued. “Delayering has had an adverse effect on morale, produc- tivity, and performance,” argues a senior government executive. “Disenfranchising middle management creates negative percep- tions and lower commitment to the organization with consequent reluctance to accept responsibility.”31

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Chapter Thirteen Designing Organizational Structures 377

CENTRALIZATION AND DECENTRALIZATION Centralization means that formal decision-making authority is held by a small group of people, typically those at the top of the organizational hierarchy. Most organizations begin with centralized structures, as the founder makes most of the decisions and tries to direct the business toward his or her vision. As organizations grow, however, they diversify, and their environments become more complex. Senior executives aren’t able to process all the deci- sions that significantly influence the business. Consequently, larger organizations typically decentralize; that is, they disperse decision authority and power throughout the organization.

The optimal level of centralization or decentralization depends on several contingencies that we will examine later in this chapter. However, different degrees of decentralization can occur simultaneously in different parts of an organization. For instance, the sales, market- ing, and operations units at Google are fairly centralized, whereas the engineering areas are much more decentralized so they can develop new products without top-down control. Likewise, 7-Eleven relies on both centralization and decentralization in different parts of the organization. It centralizes decisions about information technology and supplier purchasing to improve buying power, increase cost efficiencies, and minimize complexity across the or- ganization. Yet it decentralizes local inventory decisions to store managers, because they have the best information about their customers and can respond quickly to local market needs. “We could never predict a busload of football players on a Friday night, but the store man- ager can,” explains a 7-Eleven executive.32

FORMALIZATION Formalization is the degree to which organizations standard- ize behavior through rules, procedures, formal training, and related mechanisms.34 In other words, companies become more formalized as they increasingly rely on various forms of standardization to coordinate work. McDonald’s Restaurants and most other efficient fast-food chains typically have a high

Samsonite, the Swiss-based luggage company, recently abandoned its centralized organizational structure by delegating more power to country managers. The reason? “We’ve learned that all of our customers are more different than similar,” explains Samsonite chief financial officer Kyle Gendreau. Rather than follow global marketing and distribution practices dictated by head office, country managers are now “empowered” to apply practices that best serve their local markets. “Letting people be entrepreneurial on the ground drives growth,” says Gendreau. “It’s really paying off for us.”33

centralization The degree to which formal decision authority is held by a small group of people, typically those at the top of the organizational hierarchy.

formalization The degree to which organizations standardize behavior through rules, procedures, formal training, and related mechanisms.

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378 Part Four Organizational Processes

degree of formalization because they rely on the standardization of work processes as a coordi- nating mechanism. Employees have precisely defined roles, right down to how much mustard should be dispensed, how many pickles should be applied, and how long each hamburger should be cooked.

Older companies tend to become more formalized because work activities become rou- tinized, making them easier to document in standardized practices. Larger companies also tend to have more formalization because direct supervision and informal communication among employees do not operate as easily when large numbers of people are involved. External influences, such as government safety legislation and strict accounting rules, also encourage formalization.

Formalization may increase efficiency and compliance, but it can also create prob- lems.35 Rules and procedures reduce organizational flexibility, so employees follow pre- scribed behaviors even when the situation clearly calls for a customized response. High levels of formalization tend to undermine organizational learning and creativity. Some work rules become so convoluted that organizational efficiency would decline if they were actually followed as prescribed. Formalization is also a source of job dissatisfaction and work stress. Finally, rules and procedures have been known to take on a life of their own in some organizations. They become the focus of attention, rather than the organi- zation’s ultimate objectives of producing a product or service and serving dominant stakeholders.

MECHANISTIC VERSUS ORGANIC STRUCTURES We discussed span of control, centralization, and formalization together because they cluster around two broader organizational forms: mechanistic and organic structures (see Exhibit 13.3).36 A mechanistic structure is characterized by a narrow span of control and high degree of formalization and centralization. Mechanistic structures have many rules and procedures, limited decision making at lower levels, tall hierarchies of people in special- ized roles, and vertical rather than horizontal communication flows. Tasks are rigidly defined and are altered only when sanctioned by higher authorities.

Companies with an organic structure have the opposite characteristics. They operate with a wide span of control, decentralized decision making, and little formalization. Tasks are fluid, adjusting to new situations and organizational needs. Valve Corporation, which was described at the beginning of this chapter, has a highly organic structure. With at most two layers (some claim it has one layer, and therefore no hierarchy), Valve’s span of control is about as wide as a company can get. Decision making is decentralized down to teams and individuals. “Three people at the company can ship anything,” says Greg Coomer, one of

Valve’s earliest employees. He explains that any employee alone can launch a product without permission, but the company encourages at least three people because “the work gets better if you just check with a couple of people before you decide to push a button.”37 Valve also has mini- mal formalization. The company doesn’t have job descrip- tions and seems to have few lists of procedures for hiring, buying, or other activities.

Does your job require a mechanistic or organic structure? Visit connect. mcgrawhill.com to estimate whether the type of work you perform is better suited to one or the other of these organizational structures.

mechanistic structure An organizational structure with a narrow span of control and a high degree of formalization and centralization.

organic structure An organizational structure with a wide span of control, little formalization, and decentralized decision making.

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Chapter Thirteen Designing Organizational Structures 379

As a general rule, mechanistic structures operate better in stable environments because they rely on efficiency and routine behaviors. Organic structures work better in rapidly changing (i.e., dynamic) environments because they are more flexible and responsive to the changes. Organic structures are also more compatible with organizational learning and high-performance workplaces because they emphasize information sharing and an empow- ered workforce rather than hierarchy and status.38 However, the effectiveness of organic structures depends on how well employees have developed their roles and expertise.39 With- out these conditions, employees are unable to coordinate effectively, resulting in errors and gross inefficiencies.

Forms of Departmentalization Span of control, centralization, and formalization are important elements of organiza- tional structure, but most people think about organizational charts when the discussion of organizational structure arises. The organizational chart represents the fourth element in the structuring of organizations, called departmentalization. Departmentalization specifies how employees and their activities are grouped together. It is a fundamental strategy for coordinating organizational activities because it influences organizational behavior in the following ways:40

• Departmentalization establishes the chain of command—the system of common supervision among positions and units within the organization. It frames the mem- bership of formal work teams and typically determines which positions and units must share resources. Thus, departmentalization establishes interdependencies among employees and subunits.

• Departmentalization focuses people around common mental models or ways of thinking, such as serving clients, developing products, or supporting a particular skill set. This focus is typically anchored around the common budgets and measures of performance assigned to employees within each departmental unit.

• Departmentalization encourages specific people and work units to coordinate through informal communication. With common supervision and resources, members within each configuration typically work near each other, so they can use frequent and informal interaction to get the work done.

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Narrow span of control Wide span of control High centralization High decentralization High formalization Low formalization

MECHANISTIC STRUCTURE ORGANIC STRUCTUREEXHIBIT 13.3

Contrasting Mechanistic and Organic Organizational Structures

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380 Part Four Organizational Processes

There are almost as many organizational charts as there are businesses, but the six most common pure types of departmentalization are simple, functional, divisional, team-based, matrix, and network.

SIMPLE STRUCTURE Most companies begin with a simple structure.41 They employ only a few people and typi- cally offer only one distinct product or service. There is minimal hierarchy—usually just employees reporting to the owners. Employees perform broadly defined roles because there are insufficient economies of scale to assign them to specialized jobs. The simple structure is highly flexible and minimizes the walls that form between employees in other structures. However, the simple structure usually depends on the owner’s direct supervision to coordi- nate work activities, so it is very difficult to operate as the company grows and becomes more complex.