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Note on Organizational Structure 9-491-083 REV: MAY 23, 2016 ETHAN BERNSTEIN NITIN NOHRIA Note on Organizational Structure Organizations exist to enable people to effectively integrate their efforts and get things done. The structure of an organization is the pattern of organizational roles, relationships, and procedures that enables such integrated, collective action by its members. Organizational structure is human-created—it exists because it fulfills a set of coordination functions better than non-organizational structures (e.g., markets, crowdsourced communities, dyadic relationships, etc.). In particular, organizational structure serves four coordination functions to meet a specific set of organizational and individual needs: Table 1 Functions of Organizational Structure Function Organizational Need Individual Need Coordinated It enables members of the organization to draw on a It enables members of the organization to Capabilities wide variety of skills according to a division of labor develop specific skills and capabilities and to that defines a shared map of who is able to do what. learn, grow, and advance individualized careers. Coordinated It enables members of the organization to coordinate It enables members of the organization to bond Activities activities (individual actions) through integrating with a larger community, engage in mechanisms such as hierarchical supervision, formal interdependent work, and collectively produce rules, processes, and procedures. valuable output. Coordinated It enables members of the organization to distribute It enables members of the organization to Goals decision-making authority for priorities and goals, integrate individual interests into shared goals shaping the organization’s raison d’étre—its broad that are personally motivating and rewarding. purpose and mission. Coordinated It enables members to set and sustain organizational It enables members of the organization to Boundaries boundaries, defining what work they will do (and not identify with the organization’s business model do) and who they will hire (and not hire). and competitive positioning, and to decide if they wish to join (or not). Source: Casewriter. HBS Professor Nitin Nohria prepared the original version of this note, "Note on Organization Structure," HBS No. 491-083, which is being replaced by this version prepared by Professors Ethan Bernstein and Nitin Nohria with the assistance of Research Associate Kathy Qu. This note serves as the basis for class discussion. Copyright © 1991, 1992, 1995, 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. 491-083 Note on Organizational Structure Shaping an effective organizational structure is one of the central functions of the general manager. In traditional hierarchies, executives have the ability to change or redesign the overall structure of an organization, while other managers structure the activities in their sphere of responsibility. In less hierarchical organizations, structures emerge from participative, dynamic, ongoing processes. Either way, understanding how organizations are structured is vital to being an effective manager. This note is written with a view to provide the reader with a basic understanding of organizational structure and how to use it as a managerial lever. The first section outlines some of the key tools that must be taken into account in designing organizational structures. In the second section, some archetypal forms of organizational structure and their strengths and weaknesses are described, summarized by Exhibit 1. Finally, some emerging trends in how organizations are structured are discussed in the last section of this note, supplemented by a brief summary, in timeline format, of the evolution of theory on organizational structure in Exhibit 2. A selected bibliography is provided at the end for the reader who may wish to pursue this subject in greater depth. The Tools of Organizational Structure The structure of an organization is far more complex than drawing an organizational chart of lines and boxes. In thinking about underlying functions of organizational structure in Table 1, the following four considerations must be addressed: 1. The Division of Labor to Coordinate Capabilities Organizations do not do work, people do. Since no one person can do or know everything, how should responsibility for various capabilities be divided among the members of an organization? This includes deciding upon the extent of horizontal and vertical specialization, i.e., the breadth and depth of a job. An orchestra, for example, does not just hire musicians, but rather hires violinists, trumpeters, tuba players, violists, harpists, flutists, pianists, etc. Deciding upon the division of labor in an organization involves some key trade-offs. On the one hand, highly specialized jobs avoid duplication and focus attention, permitting the development of skills, capabilities, high standards, and clear accountabilities. On the other hand, extreme specialization increases coordination costs and leads to monotonous jobs. 2. Integration Mechanisms to Coordinate Activities A direct consequence of the division of labor is the need to integrate the independent activities and output of the members of the organization. Effective integration is as important as careful differentiation. There are various modes of vertical and horizontal integration within and among groups such as direct supervision, formal rules and procedures, plans and budgets, negotiation and adjustment, and other integrating devices such as liaison roles, meetings, committees, task forces, etc. Technology is also playing a key role in integration mechanisms, as a wave of new software solutions aim to use social technologies, electronic communication, and ubiquitous connectivity to enhance coordination of activities at work. Managers can choose integration mechanisms based on the degree to which integration issues are routine versus exceptional. Routine integration, such as across stations in an assembly line or in the monthly processing of paychecks, can be accomplished by direct supervision or standard operating procedures. Similarly, integration issues involving the use of limited resources may require mechanisms such as plans and budgets and mutual negotiation. The resolution of infrequent or unusual matters, on the other hand, may require other mechanisms like committees, task forces, etc. Integration needs can also foster 2 Note on Organizational Structure 491-083 the development of dynamic work teams or open collaboration, which can result in innovative problem solving and/or employee engagement. Though it is important to ensure smooth integration in any organization, it is important to remember that integration is costly. Meetings, for example, can be helpful, but many organizations suffer from meeting fatigue1 from excessive, poorly structured meetings that waste time. 3. The Distribution of Decision-making Authority to Coordinate Goals A third issue that must be addressed in any organization is who should make what decisions to set the organization’s direction. This means allocating decision rights such as the rights to initiate, approve, implement, and control various types of strategic or tactical decisions. The main axis along which these rights vary is the vertical dimension (the dimension spanning the different levels of the organization) leading to the well-known problem of determining the appropriate degree of centralization or decentralization of decision-making authority. Decision rights also have to be distributed along the horizontal dimension (the dimension spanning different roles at the same level of the organization) so that it is clear, for example, whether the marketing or engineering department has the right to decide on the specifications of new products. Ideally, decision rights should be given to those who have the best information to make the decision. Typically, these are people lower down or on the front lines in the organization. For example, a manufacturing manager probably knows the most about the production capacity of the plant and a field sales manager the most about customers. But it is far from that simple. A lack of firm-wide information, or self-interest that is at odds with the interests of the firm as a whole, can easily undermine the quality of front-line decisions. For example, it may not always be optimal to allow the manufacturing manager to make plant loading decisions or the sales manager to make pricing decisions—the manufacturing manager may wish to increase production because she is compensated for capacity utilization and the sales manager may wish to offer deep discounts because she has a sales quota to meet. Decision rights must, therefore, be allocated while keeping in mind the extent of goal congruence and the incentives of the various members of the organization. And that alignment must be achieved without making the assignment of decision rights so complex that no one knows who is responsible for what decisions. 4. The Setting and Sustaining of Organizational Boundaries Since not all capabilities, activities, and goals are organized within the boundaries of the firm, structuring an organization also involves deciding what to do inside and outside
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