Unit 2: Human Resource Management
2.2 - Organizational Structure
Understanding How Businesses Organize Their People and Operations
1. What is Organizational Structure?
Organizational structure is the formal framework by which job tasks are divided, grouped, and coordinated within an organization. It defines the hierarchy of authority, communication channels, and reporting relationships.
Key purposes:
- Clarifies who reports to whom (chain of command)
- Defines roles and responsibilities
- Establishes communication channels
- Facilitates coordination and control
- Supports business strategy implementation
Key Concepts in Organizational Structure
1. Chain of Command
Definition: The unbroken line of authority that extends from the top of the organization to the lowest level, specifying who reports to whom.
- Establishes formal reporting relationships
- Defines communication flow
- Clarifies decision-making authority
2. Span of Control
Definition: The number of subordinates directly supervised by a manager.
- Narrow/Small span: Few subordinates per manager (e.g., 2-4 people)
- Wide/Large span: Many subordinates per manager (e.g., 10-20 people)
Factors affecting span of control:
- Complexity of tasks
- Experience of employees
- Geographic dispersion
- Manager's capabilities
- Technology available for communication
3. Hierarchy/Levels of Management
Definition: The number of layers of management from top to bottom in an organization.
- Top management: CEO, President, Board of Directors
- Middle management: Department heads, regional managers
- Lower management: Supervisors, team leaders
- Operational staff: Non-managerial employees
4. Delegation
Definition: The assignment of authority and responsibility from a superior to a subordinate to carry out specific activities.
- Manager assigns tasks to employees
- Employee gains authority to complete task
- Manager retains ultimate accountability
5. Centralization vs. Decentralization
Centralization: Decision-making concentrated at top management levels
- Head office makes most decisions
- Little autonomy for lower levels
Decentralization: Decision-making dispersed to lower levels
- Regional/departmental managers have authority
- Greater autonomy for operational units
2. Types of Organizational Structures
A. Hierarchical (Tall) Structure
Definition: Traditional structure with many layers of management, narrow span of control, and clear chain of command.
Characteristics:
- Many levels of hierarchy (pyramid shape)
- Narrow span of control
- Long chain of command
- Clear authority lines
- Centralized decision-making
- Formal communication channels
Many layers, narrow span of control
Advantages of Hierarchical Structure
- Clear authority: Everyone knows who is in charge
- Defined responsibilities: Clear job roles and expectations
- Career progression: Obvious promotion ladder
- Close supervision: Managers can closely monitor work
- Specialization: Employees focus on specific tasks
- Control: Tight management control over operations
Disadvantages of Hierarchical Structure
- Slow communication: Messages pass through many layers
- Expensive: Many managers increase salary costs
- Bureaucratic: Rigid, inflexible, slow decision-making
- Demotivating: Little autonomy for lower-level employees
- Distance from customers: Top management far from frontline
- Information distortion: Messages may be altered as they pass through levels
Examples of Hierarchical Organizations
- Military organizations
- Government agencies
- Traditional manufacturing companies
- Large banks
B. Flat (Horizontal) Structure
Definition: Structure with few levels of management, wide span of control, and short chain of command.
Characteristics:
- Few management levels
- Wide span of control
- Short chain of command
- Decentralized decision-making
- Greater delegation
- More autonomy for employees
Few layers, wide span of control
Advantages of Flat Structure
- Fast communication: Fewer layers to pass through
- Lower costs: Fewer managers reduces expenses
- Empowerment: Employees have more responsibility and autonomy
- Flexibility: Quick response to market changes
- Motivation: Greater involvement increases job satisfaction
- Better customer service: Decisions made closer to customers
Disadvantages of Flat Structure
- Manager overload: Wide span means managers stretched thin
- Limited supervision: Less close monitoring of employees
- Unclear career path: Fewer promotion opportunities
- Role confusion: May be unclear who has authority
- Requires skilled employees: Workers need to be self-directed
Examples of Flat Organizations
- Tech startups (Google, Facebook in early days)
- Small businesses
- Creative agencies
- Valve Corporation (video game company with minimal hierarchy)
C. Organizational Structure by Function
Definition: Departments organized according to business functions (marketing, finance, operations, HR, etc.).
Characteristics:
- Grouped by specialized function
- Vertical structure within each function
- Clear functional expertise
- Most common structure
Organized by business function
Advantages of Functional Structure
- Specialization: Expertise concentrated in each function
- Efficiency: Specialists work together, share knowledge
- Clear career path: Advancement within function
- Economies of scale: Resources shared within function
- Coordination: Easy within each function
Disadvantages of Functional Structure
- Slow decision-making: Requires coordination across functions
- Functional silos: Departments become isolated, don't communicate
- Limited perspective: Managers focus on function, not overall business
- Conflict: Departments may compete for resources
- Difficult accountability: Hard to assign blame for product failures
D. Organizational Structure by Product
Definition: Departments organized around different products or product lines, each with own functional teams.
Characteristics:
- Separate divisions for each product
- Each division has own marketing, operations, etc.
- Semi-autonomous units
- Common in large diversified companies
Each product has complete team
Advantages of Product Structure
- Focus: Each division concentrates on its product
- Accountability: Clear responsibility for product performance
- Customer-oriented: Can tailor to specific product markets
- Coordination: All functions work together for product
- Innovation: Encourages product-specific innovation
Disadvantages of Product Structure
- Duplication: Each division needs own support functions (costly)
- Competition: Internal competition for resources
- Economies of scale lost: Cannot share resources across products
- Inconsistency: Different standards across divisions
Examples
- Procter & Gamble (separate divisions for different consumer products)
- General Motors (Chevrolet, GMC, Cadillac divisions)
- Samsung (Electronics, Heavy Industries, Life Insurance divisions)
E. Organizational Structure by Region (Geographic)
Definition: Departments organized by geographic location or territory.
Characteristics:
- Separate divisions for different regions/countries
- Each region operates semi-independently
- Common in multinational companies
- Allows adaptation to local markets
Organized by location/region
Advantages of Geographic Structure
- Local responsiveness: Adapt to regional markets
- Cultural sensitivity: Understand local customs
- Faster service: Close to customers
- Motivation: Regional managers have autonomy
- Time zones: Operate in local time
Disadvantages of Geographic Structure
- Duplication: Each region has own functions
- Coordination challenges: Difficult to coordinate globally
- Inconsistency: Different standards across regions
- High costs: Maintaining separate regional operations
Examples
- Coca-Cola (regional divisions worldwide)
- HSBC (regional banking operations)
- McDonald's (regional divisions with local menu adaptations)
F. Matrix Structure
Definition: Hybrid structure combining two or more organizational structures (typically functional and product/project), where employees report to multiple managers.
Characteristics:
- Dual reporting relationships
- Combines strengths of different structures
- Project-based teams draw from functional departments
- Complex but flexible
| Marketing | Finance | Operations | HR | |
|---|---|---|---|---|
| Project A | Team Member | Team Member | Team Member | Team Member |
| Project B | Team Member | Team Member | Team Member | Team Member |
| Project C | Team Member | Team Member | Team Member | Team Member |
Employees report to both functional manager (vertical) and project manager (horizontal)
Advantages of Matrix Structure
- Flexibility: Resources allocated as needed to projects
- Efficient resource use: Specialists shared across projects
- Innovation: Cross-functional teams bring diverse perspectives
- Customer focus: Project teams dedicated to specific needs
- Skill development: Employees gain broad experience
- Quick response: Teams form rapidly for new opportunities
Disadvantages of Matrix Structure
- Conflict: Dual reporting causes confusion and power struggles
- Unclear authority: Who is really in charge?
- High stress: Employees face competing demands
- Slow decisions: Need consensus from multiple managers
- Complex: Difficult to manage and coordinate
- Costly: More managers required
Examples
- Consulting firms (BCG, McKinsey)
- Aerospace companies (Boeing, Lockheed Martin)
- Pharmaceutical companies (project teams for drug development)
- Large tech companies (Google, Microsoft for product development)
3. Organization Charts
What is an Organization Chart?
Organization chart (org chart) is a visual diagram showing the internal structure of an organization, including relationships, roles, and reporting lines.
Components shown:
- Job positions/titles
- Reporting relationships (who reports to whom)
- Hierarchy levels
- Departments/divisions
- Span of control
- Chain of command
How to Read an Organization Chart
Key elements:
- Boxes: Represent positions or departments
- Lines (vertical): Show reporting relationships (who reports to whom)
- Lines (horizontal): Show positions at same level
- Position on chart: Higher on chart = higher in hierarchy
- Connected boxes below: Direct subordinates
(Finance)
(Operations)
(Marketing)
Lines show reporting relationships, boxes at same level are peers
Benefits of Organization Charts
- Clarity: Shows structure at a glance
- Communication: Clear reporting lines
- Accountability: Everyone knows responsibilities
- Planning: Identify gaps or restructuring needs
- Onboarding: Help new employees understand organization
- Career paths: Show progression opportunities
Limitations of Organization Charts
- Informal relationships: Don't show unofficial communication patterns
- Static: Quickly outdated as organization changes
- Power dynamics: Don't show influence vs. formal authority
- Oversimplification: Complex organizations hard to represent
- Rigidity: May discourage flexible collaboration
4. Comparison of Structures
| Structure Type | Best For | Main Advantage | Main Disadvantage |
|---|---|---|---|
| Hierarchical/Tall | Large, traditional organizations | Clear authority, close supervision | Slow, bureaucratic |
| Flat/Horizontal | Small businesses, startups | Fast communication, empowerment | Manager overload, limited career path |
| Functional | Single product companies | Specialization, efficiency | Functional silos |
| Product-Based | Diversified product lines | Product focus, accountability | Duplication of resources |
| Geographic/Regional | Multinational companies | Local responsiveness | Duplication, coordination challenges |
| Matrix | Project-based organizations | Flexibility, resource efficiency | Dual reporting conflict, complexity |
5. Factors Influencing Choice of Structure
Organizations choose structures based on various factors:
- Size: Large organizations need more complex structures
- Strategy: Structure must support strategic objectives
- Technology: Routine tasks vs. complex creative work
- Environment: Stable vs. dynamic market conditions
- Products/services: Single vs. diversified offerings
- Geography: Local vs. international operations
- Culture: Formal vs. informal organizational culture
- Life cycle stage: Startup vs. mature company
✓ Unit 2.2 Summary: Organizational Structure
You should now understand that organizational structure defines how work is divided, coordinated, and controlled through chain of command, span of control, hierarchy levels, delegation, and centralization/decentralization. The main types include hierarchical (tall with many levels and narrow span), flat (few levels with wide span), functional (organized by business function), product-based (organized by product line), geographic (organized by region), and matrix (dual reporting combining functional and project structures). Each structure has distinct advantages and disadvantages—hierarchical provides control but is slow, flat enables speed but risks manager overload, functional builds expertise but creates silos, and matrix offers flexibility but causes conflict. Organization charts visually represent structure showing reporting relationships and hierarchy, helping clarify roles and accountability. The choice of structure depends on size, strategy, products, geography, and environment, with no single best structure—effectiveness depends on fit with organizational needs and context.