Organizational Structure (Encyclopedia of Business and Finance)
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 peopleften in different locationsorking 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 Railroadne 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 organizationsuch as small accounting offices and law firms, hair salons, and "mom-and-pop" storeshe president or CEO can easily provide information and direction to subordinates, thus allowing decisions to be made quickly (Boone and Kurtz, 1993, 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, 1993, 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 assistaking sure the product gets advertised or that the customer service representative's computer is working (Boone and Kurtz, 1993, 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 supervisorsne 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 managespecially 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 time-lines.
Because the matrix structure is often used in organizations using the line-and-staff setup, its 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 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 staffthus 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 typeor example, 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, 1993).
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Chandler, Alfred D., Jr. (1988). "Origins of the Organization Chart," Harvard Business Review 88:2, (March/April):p. 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. (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 Management)
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 (see Figures 1a and 1b). 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).
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 following sections explain these patterns and provide the historical context from which some of them arose. The first section addresses organizational structure in the twentieth century. The second section provides additional details of traditional, vertically-arranged organizational structures. This is followed by descriptions of several alternate organizational structures including those arranged by product, function, and geographical or product markets. Next is a discussion of combination structures, or matrix organizations. The discussion concludes by addressing emerging and potential future organizational structures.
ORGANIZATIONAL STRUCTURE DURING THE TWENTIETH CENTURY
Understanding the historical context from which some of today's 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 inertiahe 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 was influenced by 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
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. Postwar 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 innovationoth of which were necessary as the century wore on and pressures to compete globally mounted.
TRADITIONAL ORGANIZATIONAL STRUCTURE
While the previous section explained the emergence of the traditional organizational structure, this section provides additional detail regarding how this affected the practice of management. The structure of every organization is unique in some respects, 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. First, the organization's work must be divided into specific jobs. This is referred to as the division of labor. Second, unless the organization is very small, the jobs must be grouped in some way, which is called departmentalization. Third, the number of people and jobs that are to be grouped together must be decided. This is related to the number of people that are to be managed by one person, or the span of controlhe number of employees reporting to a single manager. Fourth, 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
The traditional model of organizational structure 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. Figures 1a and 1b illustrate such an organization grouped by functional areas of operations, marketing and finance.
BASIS FOR DEPARTMENTALIZATION
As noted in the previous section, 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.
Every organization of a given type must perform certain jobs in order 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.
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.
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.
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 2 depicts an organization grouped by customers and markets.
MATRIX ORGANIZATIONAL STRUCTURE
Some organizations find that none of the afore-mentioned 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.
STRATEGIC BUSINESS UNITS
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 also because of 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,
EMERGING TRENDS IN ORGANIZATIONAL STRUCTURE
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 companiesven very large manufacturing firmsave 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 boundarlyless 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 with a "clean sheet of paper," 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. The president of Saturn, finally, reports to GM headquarters.
Industry consolidationreating huge global corporations through joint ventures, mergers, alliances, and other kinds of interorganizational cooperative effortsas 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 century. The first half of the twentieth century was dominated by the one-size-fits-all traditional structure. 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.
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Organizational Structure (Encyclopedia of Small Business)
An organizational structure is the pattern or arrangement of jobs and groups of jobs within an organization. This pattern pertains to both reporting and operational relationships, provided they have some degree of permanence. The individual elements of an organization structure typically include a variety of components that Portable MBA in Management contributors Phyllis and Leonard Schlesinger termed organizational "building blocks": 1) departments or divisions; 2) management hierarchy; 3) rules, procedures, and goals; and 4) 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 placene that recognizes and addresses the various human and business realities of the company in questions a prerequisite for longterm success. But as Gibson, Ivancevich, and Donnelly noted in Organizations: Behavior, Structure, Processes, "It is entirely reasonable to acknowledge that in many instances, organization structures do not contribute positively to organizational performance because managers are unable by training or intellect to design a structure that guides the behavior of individuals and groups to achieve high levels of production, efficiency, satisfaction, quality, flexibility, and development." Small business owners seeking to establish a beneficial organizational structure for their enterprise, then, need to recognize that the process is a complex one that requires considerable planning and research.
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 otherserhaps even in the same industry sectorevelop decentralized, loose arrangements. Both of these organizational types can survive and even thrive. "There is no one best way to design an organization," stated Phyllis and Leonard Schlesinger in The Portable MBA in Management. "Organizational research has shown that the more we know about particular types of organizations, the less we can generalize about the optimal design for an effective organization. Generally, organizational theorists believe that no one structure, set of systems, or method of staffing is appropriate for every organization. Organizations operate in different environments with different products, strategies, constraints, and opportunities."
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 organizational structure 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.
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