Foundation of Organization Design (MGMT673) Reading Material Organizational Structures Types of Structures There are many types of organizational structures. Each structure functions in different ways, demands different skills from employees, and is influenced by corporate size, strategy, culture, and the resources the organization has for managing the structure. Organizations have been known to change their structure to meet market demands, only to discover that they overlooked something major, which is now derailing their work. For example, the computer system an organization had in place could not support the demands of the new structure, or other stakeholders (such as suppliers, government regulators, or employees) refused to work with the new structure. In many cases, an organization has been forced to return to its old structure at an enormous cost of both time and money. Though structural change should not be feared, all critical stakeholders must be in on the early stages of planning. This allows the consultants and management to understand both the intended, as well as the potential unintended, consequences of the new design. The following are some basic organizational structures' strengths, weaknesses, and limitations. Functional Organization The functional organization is a widely used design and has existed since Roman times. Such an organization is generally broken into departments or divisions, such as manufacturing, sales, accounting, and human resources. The importance of the different structural units has emerged over time and can be determined by looking at the organization’s history. As functional organizations grew, they often added on new units or subunits. Like all organizational designs, the functional organization has strengths and weaknesses. The strength of the functional organization is that when the environments these organizations grow up in are stable, and the workforce is homogenous, these organizations work very well. There is a challenge in functional organization design. Through the years, as organizational environments became more turbulent, as the work force became increasingly diversified, and as technology became more demanding and complicated, it also became more costly to keep the functional organizations performing well. Divisional Organization The divisional organization is built around products, services, geography, or customers, rather than functions. It came into being about the same time as the growth of the large American corporations and the early development of the mass markets. Some of the strengths of divisional organizations are that they make accountability of managers easier, promote delegation, focus interest on the customer, and build departmental cohesion. Weaknesses of this structure are inefficiency and multiple demands on people, which increase stress and cause goal conflict. The latter is due to focusing on department objectives at the expense of the overall organization’s .

1. Foundation of Organization Design
(MGMT673)
Reading Material Organizational Structures
Types of Structures
There are many types of organizational structures. Each
structure functions in different ways, demands different skills
from employees, and is influenced by corporate size, strategy,
culture, and the resources the organization has for managing the
structure.
Organizations have been known to change their structure to
meet market demands, only to discover that they overlooked
something major, which is now derailing their work. For
example, the computer system an organization had in place
could not support the demands of the new structure, or other
stakeholders (such as suppliers, government regulators, or
employees) refused to work with the new structure. In many
cases, an organization has been forced to return to its old
structure at an enormous cost of both time and money. Though
structural change should not be feared, all critical stakeholders
must be in on the early stages of planning. This allows the
consultants and management to understand both the intended, as
well as the potential unintended, consequences of the new
design.
The following are some basic organizational structures'
strengths, weaknesses, and limitations.
Functional Organization
The functional organization is a widely used design and has
existed since Roman times. Such an organization is generally
broken into departments or divisions, such as manufacturing,
sales, accounting, and human resources. The importance of the

2. different structural units has emerged over time and can be
determined by looking at the organization’s history. As
functional organizations grew, they often added on new units or
subunits. Like all organizational designs, the functional
organization has strengths and weaknesses. The strength of the
functional organization is that when the environments these
organizations grow up in are stable, and the workforce is
homogenous, these organizations work very well.
There is a challenge in functional organization design. Through
the years, as organizational environments became more
turbulent, as the work force became increasingly diversified,
and as technology became more demanding and complicated, it
also became more costly to keep the functional organizations
performing well.
Divisional Organization
The divisional organization is built around products, services,
geography, or customers, rather than functions. It came into
being about the same time as the growth of the large American
corporations and the early development of the mass markets.
Some of the strengths of divisional organizations are that they
make accountability of managers easier, promote delegation,
focus interest on the customer, and build departmental cohesion.
Weaknesses of this structure are inefficiency and multiple
demands on people, which increase stress and cause goal
conflict. The latter is due to focusing on department objectives
at the expense of the overall organization’s needs and
objectives.
Matrix Organization
The matrix organization was developed as an attempt to take the
best from the functional and divisional structures, while
minimizing their weaknesses. It was first developed in the
aerospace industry where changing technological and customer

3. needs necessitated managing lateral demands. Its combination
of both lateral and vertical structures increases flexibility, and
it is more adaptable to change than either the functional or
divisional structure.
However, its dual chains of command, in which each employee
has at least two bosses, makes working relationships more
complex and increases interpersonal conflict within the
organization and also with clients. Matrix organizations are now
widely used in nearly all sectors but have not proven to be the
solution that everyone had hoped they would be. Working in
teams may increase complexity and other demands of decision-
making.
Process Organization
The process organization depends on multidisciplinary teams
organized around core processes. It emphasizes lateral over
vertical relationships with the need for fewer managers.
However, the team members often must develop traditional
management skills. Though the process organizations eliminate
many of the procedural and hierarchal boundaries by reducing
management costs, they do require a new mindset. They are
often resisted by middle management because it puts their jobs
into question. This type of organizational structure, however, is
growing rapidly in both manufacturing and service industries.
Customer-Centric Organization
The customer-centric organization focuses on satisfying
customer needs and demands. It is similar to the process
organization. The increasing power of the customer to demand
solutions to problems and the rise of globalization and e-
commerce is often given as the rationale for the development of
this type of organization. Advantages include providing “one
face” to the customer and having tailor-made solutions. A
disadvantage is that managing relationships between the front
and back offices and clarifying marketing’s role may become

4. nearly impossible.
Network Organization
The network organization gained its name from computer
networks. The basic idea is to link different organizations
together to provide a market or product. This type of structure
links very independent organizations together to produce and
deliver a product to customers. Design, manufacturing,
marketing, distribution, sales, and so forth, are all handled by
different organizations. The company’s task is to manage its
brand, while conveniently delivering a product that customers
want and where they can easily purchase it. Though it is an
ideal way to focus resources on customers and market needs,
managing relationships across multiple and divergent
organizations can be a major challenge.Preparing for Change
Simply designing the perfect organization is not enough, though
it can make for a good beginning. Management, along with help
from any outside consultants utilized, needs to develop a plan
for communicating the redesign. It must address why the new
design is necessary, what it is expected to accomplish, and how
it will affect employees and other stakeholders. Everything must
be communicated effectively if it is to result in high
performance that can be maintained.
Consider How Different Stakeholders Will React
It is highly likely that not all stakeholders will respond in the
same way, or that their responses will all be positive. Design
changes will not just impact management and employees, but
may force other stakeholders, such as suppliers and customers,
to change how they interact with the organization. It may even
force design changes upon them. Being aware of the new
design's impact on all stakeholders is vital for profitable
performance.
Have a Strategy for Communicating the Changes

5. Good organizational communication is critical for all
constituents. Bankers, suppliers, customers, clients, and the
governing board don’t always have to know every detail, but
they must receive clear and timely communications about the
stages of the process that will impact them. No one likes
surprises; when they can be avoided, they should be.
Consider Employee's and Other Stakeholders’ Needs
If the needs of the various stakeholders have been considered
during the design process, then this should not be a major
problem when rolling out the new design and communicating it
to the organization's various stakeholders. However, it is still
necessary to keep all vested parties informed that the
organization has considered their needs and is continually
monitoring the new design's impact on all stakeholders.
Consequences of Change
Structural change always has consequences and outcomes—
generally, both good and bad. The good results are welcomed,
and are often tied to the reasons for making the changes.
Oftentimes though, the changes that will challenge the
organization are not thoroughly thought out. Too often, both
management and consultants establish unrealistic expectations
for themselves and others.
Changes the Organization’s Culture
Structural change often impacts the current organizational
culture in unplanned and unexpected ways. Though some
assume culture is easy to change, that is simply not the case.
New cultures often demand a new language and new skills, and
these cannot be learned or transferred as quickly as one may
think.
Because of structural changes, a culture’s informal reward
system may suddenly no longer function. The customs that

6. formally allowed the business to function with a minimum
number of policies and procedures can be lost, because no one
thought to consider how critical functions would be
communicated after the change.
Leads to Confusion
Organizational restructuring often changes the ground rules that
people have become dependent on to do their jobs and to
function within the organization, with customers, and with other
important stakeholders. Who does what and who reports to
whom? Often such questions are not adequately addressed or, if
addressed, not communicated effectively throughout the
organization. Confusion can quickly lead to chaos and the
abortion of a completely appropriate design. The elimination of
confusion is essential if positive and productive results are to be
achieved.
Reduces Financial Performance
The added costs incurred because of new technologies,
additional training, managing complexity, and a host of other
hidden costs, can sometimes turn a profitable organization into
an unprofitable one. Obviously, this is not a desired
consequence. Consultants and management must attempt to
determine the cost of any particular organizational design.
Careful examination of such matters in the beginning can lead
to an effective and profitable redesign effort.
Planned Change
Not all change is planned. Changes are often forced on an
organization because of market adjustments, technological
innovations, and social and political movements, as well as
many other events occurring outside of the organization.
Nearly all organizational redesigns are initiated by management
and are examples of planned change. Management may hire an

7. outside firm to help with redesigning the organization, but that
is an example of management delegating its responsibilities to a
consultant who specializes in organizational design.
Many of the consequences of poor organizational design are
caused by a mismatch between the new design and what the
organization can actually accomplish. When using outside
consultants, the working relationship between management and
the consultants is essential—management must engage.
Successful redesign depends on mutual understanding of the
issues confronting the organization. Assessing the situation and
then deciding on a design that will help the organization
accomplish its objectives is a collaborative undertaking. Taking
on the redesign of an organization is so critical to an
organization’s success that it must be deliberate and well
thought through.
When managers and consultants are attentive and meticulous
and give constant attention to the redesign process, positive and
productive changes are achieved.
Deliberate Approach to Change
Organizational development, as a discipline and a practice,
concerns itself with planning change and helping manage it.
Organizational design is one of many strategies used by
organizational development consultants to manage planned
change.
Consider Organizational Contingencies
There is not one best way to design an organization. Those
accustomed to thinking that there is can easily get frustrated
with the design process. Many contingencies or forces, both
inside and outside of the organization, can lead to surprising
results. Because contingencies are critical to the design process,
organizational diagnosis is an essential and crucial step in
selecting and implementing an effective organizational design.

8. Often, it is because of a hurried or incomplete diagnosis that the
consultants and the management team select a dysfunctional or
inadequate design.
Assess the Organization and Its Environment
Organizational diagnosis is a procedure, or process, for
determining how an organization is currently performing. It
helps both the consultant and client determine where to focus
their efforts. Generally, organizational diagnosis is a continuous
process with deeper and deeper levels of data collection and
analysis. An organization may realize that it is not achieving its
objectives and goals or may discover things are not working as
it expected. Leadership looks for a reason and then takes action.
If the actions do not correct the issues, leadership may bring in
an external consultant or firm to help determine what is wrong
and to provide suggestions on how to manage the organization
or the problem area. Good consultants and business
organizations also build in an evaluation process to see how the
intervention is working. This often becomes the starting point
for another diagnosis. The process is circular, as it must be to
make a difference. Too often, things improve and management
goes back to its old way of doing things or just ignores what is
happening, and another crisis emerges.
A good organizational design may last for years. However,
because of growth, environmental change, or new technology,
the once-excellent design becomes dysfunctional, and the
organization must redesign. In the turbulent world in which we
currently live, redesign is increasing. In some organizations, it
is nearly continuous.
Open Systems Approach
Modern organizational development consultants use an open-
systems approach. That is, they see an organization as an open,
rather than a closed, self-contained system. In the real world,
there is no such thing as a closed system. An open-system view

9. takes into account the external environment as well as the
internal workings of the organization. It also uses internal and
external feedback to monitor the organization's processes,
markets, and response to feedback. Increasingly, the
environment influences organizations in numerous ways.
Why Restructure Organizations?
Why Restructure Organizations?
There is no one reason for restructuring an organization.
Changes in the organization's environment, technology, process,
and business strategy can all be factors. The simple fact that an
organization's competition, suppliers, or customers have made
structural changes in their own organizations has at one time or
another forced organizations to change their own designs. These
changes are often not planned, except by the most forward-
looking organizations that have proactive leadership.
Change in the Environment
Increasingly, leaders and managers are recognizing the
importance of seeing their organizations as open systems. A
major advantage to the utilization of open systems when
considering organizational restructuring, is the awareness of the
importance of the environment on both the current organization
and any future designs the management and consultants may
decide upon. Nearly everyone is aware of the impact of
globalization and e-commerce on organizations, but energy
sources, international debt, cultural and age diversity, and
natural and man-made disasters can all have an impact on
organizations as well, and need to be considered in the redesign
process.
Change in Technology or Process
Today’s world seems to be at the top when it comes to process
and technological change. The amount of technological change
today is unprecedented in human history, and the new
technologies and media continually modify both processes and

10. human relationships. Continuous adaptation is becoming the
norm and must increasingly be taken into consideration when
contemplating redesign. Given how long the functional
organization served organizational purposes and how many new
organizational structures have emerged in the last 100 years, it
is probably safe to say that new organizational structures will
keep emerging in the future. Anyone could create a yet
unthought-of organizational design, responding to ever-
changing technology.
Change of Strategy
Changing strategy to meet market demands, cut costs, or simply
to reposition an organization, often leads to considering
organizational redesign. Organizations have been known to
change their organizational strategy to differentiate their
product mix, change their market focus, change their client
base, or reduce cost, and then realize the new strategy would
necessitate a different type of organizational structure than their
current one. Sometimes an organization will be aware of the
organizational design issues before it changes its strategy, but
in many cases the redesign is the result of a strategic change
made without forethought of how the new strategy will impact
the organization
Changes Made by Customers, Suppliers, or Competition
Because modern organizations are open systems, changes in
customers’ wants, suppliers’ redesigned organizations, and
competition’s changing strategies often force structural changes
upon a client organization. These are not necessarily wanted
changes and often lead to resistance from top management as
well as employees. Encroaching unwanted outside demands
have forced organizations to redesign far more often than is
recognized. Because managers want to believe they are in
control, there is often a reluctance to recognize the obvious.
Awareness is crucial to successful redesign.