Ebook Management (6th edition): Part 2

4
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Organising

part 4

10 Organisational structure and design
11 Managers and communication
12 Human resource management

Organising is an important task of managers – one that is not always
understood or appreciated. However, when the organisation’s goals and
plans are in place, the organising function sets in motion the process of
seeing that those goals and plans are pursued. When managers organise,
they are defining what work needs to get done and creating a structure
that enables those work activities to be completed efficiently and
effectively.
In Part 4, we look at the management function of organising.
Chapter 10 introduces the concepts of organisational structure and
organisational design. Part of getting an organisation to function well is
to make sure communication is flowing up and down the organisational
structure, and managers play a crucial part in achieving this. This is what
we will look at in Chapter 11. Finally, the organising function involves
finding people to fill the jobs that have been created. In Chapter 12,
we will therefore discuss the human resource management activities
in which managers become involved.

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Chapter 10
Organisational structure and design

Learning outcomes
Once managers are done planning, then what? This is when managers need to
begin to ‘work the plan’. And the first step in doing that involves designing an
appropriate organisational structure. This chapter covers the decisions involved with
designing this structure. Focus on the following learning outcomes as you read and
study this chapter:
10.1 Explain why organising is important.
10.2 Describe six key elements in organisational design.
10.3 Contrast mechanistic and organic structures.
10.4 Identify the contingency factors that favour either the mechanistic model or
the organic model of organisational design.
10.5 Describe traditional organisational designs.

10.6 Discuss contemporary organisational designs.
10.7 Describe today’s organisational design challenges.

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358

W

hen Bernie Brookes took on the job of CEO of
Myer after the break-up of the Coles Myer Group
in mid-2006, he knew he had a big task ahead
of him to turn around the poorly performing
department store chain. The once successful
retail business had consistently underperformed
since the late 1990s in comparison to its closest
competitor David Jones, and it became Bernie
Brookes’ job to make the ‘My Store – My Myer’
catchphrase come alive again.1
The Myer business was founded by Sidney
Myer, who arrived in Melbourne in 1899 as
a penniless Russian immigrant and ended up
creating one of the largest retail businesses

in Australia. The Myer retail brand continued
to grow during the 20th century, becoming
well-recognised by Australian households. In
1983, Myer acquired Grace Bros Holdings Ltd,
a department store chain based in New South
Wales. In 1985, Myer merged with G.J. Coles
& Co. Ltd and became Coles Myer Ltd. In 2004,
Grace Bros stores were rebadged to Myer.
However, by that time the retail store chain was
in deep trouble.
In June 2006, Myer was acquired from Coles
Myer Ltd by a consortium comprising Newbridge
Capital, Texas Pacific Group (TPG), Blum Capital
and the Myer Family Company (the ‘consortium’)
in a $1.4 billion transaction. Eighty-three per cent
of Myer was owned by TPG and associates, 9 per
cent by management, and 8 per cent by the Myer
Family Company. According to Bernie Brookes,
the new ownership structure was advantageous
for Myer, for a couple of reasons. First, it gave
the new management team, as one of the three
key ownership groups within the business, a lot

of scope and authority to make major changes.
Second, because Myer was no longer a public
company, management did not need to spend a lot
of time and resources on external communication
to shareholders and financial analysts. Instead, it
could focus on its internal communication with
staff and on getting the job done in terms of

turning the organisation around.
The new management team under the
leadership of Bernie Brookes set out an ambitious
‘First 100 Days’ plan that was intended to be a
bold start to a 50-month turnaround program of
achieving the vision of becoming an ‘International
Class Retail Business providing Inspiration to
Everyone’.
One of the first things that had to be changed
was the culture, which needed to become more
customer-focused. To emphasise the change,
head office was literally renamed as the ‘Support
Centre’. This was a radical change from how
the ‘old’ Myer had operated. The ‘old’ Myer had
become famous for multiple management layers
and duplications. What management wanted
to achieve was to change the emphasis of the
business from being ‘head office-centric’, or
autocratic, to being much more ‘store-centric’,
or autonomous.
Brookes had anticipated a hard slog getting
staff and store managers on board with the
change program after years of difficulties at the
retailer, but he found them eager for change. They
found the ‘new Myer’ willing to listen to their
ideas. The objective of the new approach was to
empower local management to drive store sales,
improve customer loyalty and better support/
engage with the local communities. Budgets

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359

were established for each store to spend locally
on community sponsorships and in-store events.
Store managers were given a say about what
products they would stock, how they would
market them, how they would manage their
people, and so on. Cross-functional teams, called
‘Red Teams’, were set up that identified 101
customer service improvement projects across
the whole retail chain. According to Brookes, the
increased autonomy of store managers paid off in
improved morale of management and staff. Along
with greater autonomy, Brookes also offered
1200 managers and staff across the business
incentivised remuneration as part of a strategy
to change the culture at Myer.
The departure from the Coles Group also
meant that the ‘new’ Myer had to set up an
independent organisational platform with its own
human resources, IT and distribution functions.

By mid-2007, Myer had completed this transition
to its own recruiting and training, as well as
payroll and performance management, systems.
IT was largely outsourced to IBM. However, the
biggest restructure occurred in the distribution
function. Instead of having 34 small distribution
centres, a new supply chain management
system was put in place based on four large
Australian distribution centres – Perth, Brisbane,
Melbourne and Sydney – and four Asian hubs –
in Shenzhen (China), Shanghai, Hong Kong and
Singapore. This system, in combination with a
major restructuring of the buying section, was
seen as a key means to improve the buying
system, reduce costs, and create a clearer
chain of command and accountability. Basing
the distribution around four warehouses across
Australia meant that fashion goods would reach
Myer stores 14–21 days faster, in a better and
more store-ready condition, and at half the cost,
than under the previous arrangements.
By 2009, after three years and an investment
of more than $500 million in its supply chain,
technology, brands and stores, Myer was back in
a competitive position, generating healthy annual
earnings before interest and tax of $236 million.

Having successfully achieved what the private
equity owners had set out to do – to revitalise
the Myer chain – the company was refloated on

the Australian Securities Exchange in November
2009.
Having successfully managed the business
transformation process during the 50 months’
turnaround phase (from the beginning of June
2006 to the end of July 2010), Bernie Brookes
is now focusing on the next stage – the growth
phase – beyond July 2010. To this effect, Myer
has commenced an expansion program of having
80 stores by 2014 (from the original 60 when the
transformation started in 2006), which would be
more than double the proposed number of stores
operated by its smaller competitor, David Jones.
Myer’s future goal is also to boost turnover from
$3.3 billion in 2010 to $4 billion by 2015.

When Bernie
Brookes took on
the role of CEO of
Myer in 2006, he
found management
staff eager for
change. Their
greater autonomy
resulted in better
management
practice and
healthier staff
morale.

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360

part 4

organising

A

lthough Bernie Brookes’s organisational changes under a private equity group at
the ‘new’ Myer might not be right for others, this example illustrates how important
it is for managers to design an organisational structure that helps to accomplish
organisational goals and objectives. In this chapter, we will present information
about designing appropriate organisational structures. We will look at the various
elements of organisational structure and at contingency factors that influence the design. We will
look at some traditional and contemporary organisational designs. Finally, we will describe the
organisational design challenges facing managers – such as Bernie Brookes – today.

part

4

10.1 Learn in g out c ome

Explain why
organising is
important.

organising
Arranging and structuring
work to accomplish the
organisation’s goals.

Defining organisational structure and design
No other topic in management has undergone as much change in the past few years as that of
organising and organisational structure. Traditional approaches to organising work are being
questioned and re-evaluated as managers search out structural designs that will best support and
facilitate employees doing the organisation’s work – designs that can achieve efficiency, such as
in the case of Myer in our opening story, but that also have the flexibility that is necessary for
success in today’s dynamic environment.
The basic concepts of organisation design formulated by early management writers such
as Henri Fayol and Max Weber offered structural principles for managers to follow. (Those
principles are described in Chapter 1.) Over 80 years have passed since many of those principles
were originally proposed. Given that length of time and all the changes that have taken place,
you would think that those principles would be pretty worthless today. Surprisingly, they
are not. For the most part, they still provide valuable insights into designing effective and
efficient organisations. Of course, we have also gained a great deal of knowledge over the years
as to their limitations.
In Chapter 1 we defined organising as arranging and structuring work to accomplish
the organisation’s goals. It is a process through which managers design an organisation’s
structure. That process is important and serves many purposes (see Table 10.1). The challenge
for managers is to design an organisational structure that allows employees to do their work

effectively and efficiently.

Table 10.1╇ Purposes of organising
• Divides work to be done into specific jobs and departments.
• Assigns tasks and responsibilities associated with individual jobs.
• Coordinates diverse organisational tasks.
• Clusters jobs into units.
• Establishes relationships between individuals, groups and departments.
• Establishes formal lines of authority.
• Allocates and deploys organisational resources.
organisational
structure
The formal arrangement of
jobs within an organisation.

organisational design
Developing and changing
an organisation’s structure.

Just what is organisational structure? It is the formal arrangement of jobs within an
organisation. Just as humans have skeletons that define their shape, so organisations have
structures that define theirs. When managers develop or change an organisation’s structure they
are engaged in organisational design, a process that involves decisions about six key elements:
work specialisation, departmentalisation, chain of command, span of control, centralisation
and decentralisation, and formalisation.2 Let us take a closer look at each of these elements
of structure.

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Work specialisation
Remember the discussion of Adam Smith in Chapter 2, who first identified division of labour and
concluded that it contributed to increased employee productivity? Early in the 20th century,
Henry Ford applied this concept in an automobile assembly line where every Ford worker was
assigned a specific, repetitive task. One person would put on the right front wheel, someone else
would install the right front door, and another worker would put in the bench seat. By breaking
jobs up into small, standardised tasks that could be performed over and over again, Ford was
able to produce cars at the rate of one every ten seconds, using employees with relatively
limited skills.
Today, we use the term work specialisation to describe the degree to which tasks in an
organisation are divided into separate jobs. The essence of work specialisation is that an entire
job is not done by one individual but instead is broken down into steps, and each step is
completed by a different person. Individual employees ‘specialise’ in doing part of an activity,
rather than the entire activity, and that is why it is also known as division of labour.
Work specialisation makes efficient use of the diversity of skills that workers have. In most
organisations, some tasks require highly developed skills; others can be performed by employees
with lower skill levels. This concept explains why you rarely find a cardiac surgeon closing up a
patient after surgery. Instead, doctors doing their residencies in open-heart surgery and learning
the skill usually stitch and staple the patient after the surgeon has finished the surgery.
Early proponents of work specialisation believed that it could lead to great increases in
productivity. At the beginning of the 20th century, that generalisation was reasonable. Because
specialisation was not widely practised, its introduction almost always generated higher
productivity. But, it can also result in monotonous and repetitive jobs. At some point, the human
diseconomies from division of labour – boredom, fatigue, stress, low productivity, poor quality,

increased absenteeism and high turnover – exceed the economic advantages.3

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361

10.2 L ea r n in g o u t co m e

Describe six
key elements in
organisational design.

10
work specialisation

chapter

organisational structure and design

Dividing work activities into
separate job tasks.

Today’s view
Most managers today continue to see work specialisation as an important organising mechanism
because they recognise the economies it provides in certain types of jobs, but they also understand
the problems it creates when it is carried to extremes. McDonald’s, for example, uses high work
specialisation to make and sell its fast-food products efficiently. One person takes orders, others
cook and assemble the hamburgers, another works the fryer, another gets the drinks, another
bags orders, and so forth. Such single-minded focus on maximising efficiency has contributed
to increasing productivity. In fact, at many McDonald’s, you will see a clock that times how long

it takes employees to fill the order; look closer and you will probably see posted somewhere
an order fulfilment time goal. At some point, however, work specialisation no longer leads to
productivity. That is why other companies such as Ford Australia, Hallmark and Bendix Mintex
use minimal work specialisation and instead give employees a broad range of tasks to do.

Departmentalisation
Does your university or college have an office of student services? Does it have an educational
media department? If you are employed, does your organisation have a centralised marketing
department or regional sales divisions? After deciding what job tasks will be done by whom,
common job activities need to be grouped back together so that the work can be done in a
coordinated and integrated way. How jobs are grouped together is called departmentalisation.
Every organisation will have its own specific way of classifying and grouping work activities.
Figure 10.1 shows the five common forms of departmentalisation.
Functional departmentalisation groups jobs by functions performed. This approach can be
used in all types of organisations, although the functions change to reflect the organisation’s
objectives and work activities. Product departmentalisation groups jobs by product line.

departmentalisation
The basis by which jobs are
grouped together.

functional
departmentalisation
Grouping jobs by functions
performed.

product
departmentalisation
Grouping jobs by product
line.

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362

part 4

organising

Figure 10.1╇ The five common forms of departmentalisation
Functional departmentalisation

4

Plant Manager

part

Manager,
Engineering

Manager,
Accounting

Manager,
Manufacturing
–
–

+ Efficiencies from putting together similar specialities and
people with common skills, knowledge and orientations
+ Coordination within functional area
+ In-depth specialisation
Geographic departmentalisation

Sales Manager, Sales
Western Australia/NT

Manager,
Human Resources

Poor communication across functional areas
Limited view of organisational goals

Sales Manager
Sales Manager, Sales
Queensland

Sales Manager, Sales
NSW/ACT

+ Effective and efficient handling of specific regional issues
+ Serves needs of unique geographic markets

Product departmentalisation

–
–

Sales Manager, Sales
Victoria/Tasmania

Chief Executive
Officer
Car and Sport-Utility
Vehicle (SUV)
Division Manager

Manager,
Truck Manufacturing

Manager,
SUV Manufacturing Plant

+ Allows specialisation in particular products
and services
+ Managers can become experts in their industries
+ Closer to customers
Process departmentalisation

Sawing
Department
Manager

Sales Manager, Sales
South Australia

Duplication of functions
Can feel isolated from other organisational areas

Heavy Vehicle
Division Manager

Manager,
Bus Manufacturing

Manager,
Purchasing

–
–

Manager,
Car Manufacturing Plant

Duplication of function
Limited view of organisational goals

Plant
Superintendent
Planing
and Milling
Department
Manager

Lacquering
and Sanding
Department
Manager

Assembling
Department
Manager
–

+ More efficient flow of work activities
Customer departmentalisation

Finishing
Department
Manager

Inspection
and Shipping
Department
Manager

Can only be used with certain types of products

Director
of Sales
Manager,
Retail Accounts

Manager,
Wholesale Accounts

+ Customers’ needs and problems can
be met by specialists

–
–

Manager,
Government Accounts

Duplication of functions
Limited view of organisational goals

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In this approach, each main product area is placed under the authority of a manager who is
responsible for everything having to do with that product line. Geographic departmentalisation
groups jobs on the basis of territory or geography, perhaps the Asia-Pacific, European and
North American regions. Each of these regions is, in effect, a department organised around
geography. If an organisation’s customers are scattered over a large geographic area, this form
of departmentalisation can be valuable. Process departmentalisation groups jobs on the basis of

product or customer flow. In this approach, work activities follow a natural processing flow of
products or even of customers. For example, at a wood cabinet manufacturing plant in southern
New South Wales, production is organised around six departments: sawing, planing and milling,
assembling, lacquering and sanding, finishing, and inspection and shipping. Finally, customer
departmentalisation groups jobs on the basis of customers who have common needs or problems
that can best be met by having specialists for each group. For example, a large law office might
segment its staff on the basis of whether they serve corporate or individual clients.

Today’s view
Most large organisations continue to use combinations of most or all of these types of
departmentalisation. For example, Black & Decker organises its divisions along functional lines,
its manufacturing units around processes, its sales around geographic regions, and its sales
regions around customer groupings.
One popular departmentalisation trend is the increasing use of customer departmentalisa�
tion. Because getting and keeping customers is essential for success, this approach works well
because it emphasises monitoring and responding to changes in customers’ needs. Another
popular trend is the use of teams, especially as work tasks have become more complex and
diverse skills are needed to accomplish those tasks. One specific type of team that more
organisations are using is a cross-functional team, which is a work team composed of individuals
from various functional specialties. For instance, at Ford’s material planning and logistics
division, a cross-functional team with employees from the company’s finance, purchasing,
engineering and quality control areas, and with representatives from the company’s outside
logistics suppliers, has made several work improvement ideas.4 And if you remember from the
Myer example at the beginning of the chapter, Myer used cross-functional teams to identify
101 projects across the chain where teams are now working to try and improve customer service.
The use of cross-functional teams is discussed more fully in Chapter 14.

1. Explain why organising is important.
2. Identify the six key elements used in designing an organisation’s structure.

chapter 10

363

geographic
departmentalisation
Grouping jobs on the basis
of geographical region.

process
departmentalisation
Grouping jobs on the basis
of product or customer
flow.

customer
departmentalisation

10
chapter

organisational structure and design

Grouping jobs on the basis
of specific and unique
customers who have
common needs.

cross-functional teams
Work teams composed of

individuals from various
functional specialities.

review
questions

3. Discuss the traditional and contemporary views of work specialisation.
4. Describe each of the five forms of departmentalisation.

Chain of command
Suppose you were at work and had a problem with some issue that came up. What would you
do? Who would you go to, to help you resolve that issue? People need to know who their boss is.
That is what the chain of command is all about. The chain of command is the line of authority
that extends from the upper organisational levels to the lowest levels, which clarifies who reports
to whom. Managers need to consider the chain of command when organising work, because
it helps employees with questions such as ‘Who do I report to?’ or ‘Who do I go to if I have a
problem?’.
To understand the chain of command, you have to understand three other important
concepts: authority, responsibility and unity of command. Authority refers to the rights inherent

chain of command
The line of authority
extending from upper
organisational levels to the
lowest levels, which clarifies
who reports to whom.

authority
The rights inherent in a
managerial position to tell

people what to do and to
expect them to do it.

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364

part 4

responsibility

part

4

The obligation to perform
any assigned duties.

unity of command
The management principle
that each person should
report to only one manager.

organising

in a managerial position to tell people what to do and to expect them to do it.5 An organisation’s
managers, who are in the chain of command, are granted a certain degree of authority to do
their job of coordinating and overseeing the work of other people. As managers assign work to
employees, those employees assume an obligation to perform any assigned duties. This obligation
or expectation to perform is known as responsibility. Finally, the unity of command principle
(one of Fayol’s 14 principles of management) helps to preserve the concept of a continuous
line of authority. It states that a person should report to one manager only. Without unity of
command, conflicting demands and priorities from multiple bosses can create problems.

Today’s view
Although early management theorists (Fayol, Weber, Taylor and others) believed that chain of
command, authority, responsibility and unity of command were essential, times have changed.6
These concepts are considerably less relevant today because of information technology and
employee empowerment. For example, at the Michelin plant in Tours, France, managers have
replaced the top-down chain of command with ‘birdhouse’ meetings, in which employees meet
for five minutes at regular intervals throughout the day at a column on the shop floor and
study simple tables and charts to identify production bottlenecks. Instead of being bosses, shop
managers are enablers.7 Information technology has made it possible for employees to access
information in a matter of a few seconds that used to be available only to managers. It means
that employees can communicate with anyone else in the organisation without going through
the formal chain of command. Also, many employees, especially in organisations where work
revolves around projects, find themselves reporting to more than one boss, thus violating the
unity of command principle. However, such arrangements can and do work if communication,
conflict and other issues are managed well by all involved parties. Of course, many organisations
still find that they are most productive by enforcing the chain of command, but their numbers
are dwindling.

Span of control

Organisational level

How many employees can a manager efficiently and effectively manage? The traditional view was
that managers could not – and should not – directly supervise more than five or six subordinates.
span of control
This question of span of control is important because, to a large degree, it determines the
The number of employees
number of levels and managers an organisation has. Other things being equal, the wider or
a manager can efficiently
larger the span of control, the more efficient an organisation is. An example will show you why.
and effectively manage.
Assume that we have two large organisations, and each has approximately 4100 employees. As
Figure 10.2 shows, if one organisation has a uniform span of four and the other a span of eight,
the wider span will have two fewer levels
and approximately 800 fewer managers. If
Figure 10.2╇ Contrasting spans of control
the average manager made $80â•›000 a year,
the organisation with the wider span would
Members at each level
save over $64 million a year in management
(Highest)
Assuming span of 4
Assuming span of 8
salaries alone! Obviously, wider spans are
1
1
1
more efficient in terms of cost. However,
2

4
8
at some point, wider spans may reduce
3
16
64
effectiveness if employee performance
4
64
512
worsens because managers no longer have
5
256
4096
the time to lead effectively.
6
7

(Lowest)

1024
4096

Span of 4:
Employees
Managers (level 1–6)

Today’s view
= 4096
= 1365

Span of 8:
Employees
Managers (level 1–4)

= 4096
= 585

The contemporary view of span of control
recognises that there is no magic number.
Many factors influence the number of

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Empowerment in Asia

T

he concept of empowerment is starting to spread into Asia, with a few younger Asian
business leaders now espousing this style of management, too. An example is Ho
Kwong Ping, the executive chairman and CEO of the Banyan Tree Hotels and Resorts
Group, who wants to engage his staff and cultivate in them a set of core values
that he hopes over time will take root and mature into an instantly recognisable

Banyan Tree culture. Ho Kwong Ping was named ‘CEO of the Year’ at the Singapore Corporate Awards
2008. The former chairman of India’s Infosys, N.R. Narayana Murthy, and its present chief executive
and managing director, Nandan Nilekani, are also two widely admired top managers who espouse
empowerment of staff – a business practice not widely seen in India. However, as Asian companies
start to rely more on professional employees of all sorts, and as professional services become more
important in Asian economies, the less autocratic and more participative and even empowered style
of leadership will emerge.
How can managers empower employees? They can begin by using participative decision making,
in which employees provide input into decisions. Although getting employees to participate in making
decisions is not quite taking the full plunge into employee empowerment, it is at least a way to begin
tapping into the collective array of employees’ talents, skills, knowledge and abilities.
Another way to empower employees is through delegation – the process of assigning certain decisions
or specific job duties to employees. By delegating decisions and duties, the manager is turning over the
responsibility for carrying them out. When a manager is finally comfortable with the idea of employee
empowerment, fully empowering employees means redesigning their jobs so they have discretion over the
way they do their work. It is allowing employees to do their work effectively and efficiently by using their
creativity, imagination, knowledge and skills.
If a manager implements employee empowerment properly – that is, with complete and total commitment to the program and with appropriate employee training – results can be impressive for the
organisation and the empowered employees. The business can enjoy significant productivity gains,
quality improvements, more satisfied customers, increased employee motivation and improved morale.
Employees can enjoy the opportunities to do a great variety of work that is more interesting and challenging.
In addition, they are encouraged to take the initiative in identifying and solving problems and doing
their work.

chapter 10

365

Managing in the
ASIA-PACIFIC REGION

10
chapter

organisational structure and design

Sources: Banyan Tree Holdings Limited Annual Report 2007, <www.banyantree.com>, 17 May 2008; and
D. Quinn Mills, ‘Asian and American leadership styles: How are they unique?’, Harvard Business School:
Working Knowledge, <hbswk.hbs.edu/item/4869.html>, 27 June 2005.

employees that a manager can efficiently and effectively manage. These factors include the skills
and abilities of the manager and the employees, and the characteristics of the work being done.
For instance, managers who have well-trained and experienced employees can function quite
well with a wider span. Other contingency variables that will determine the appropriate span
include similarity of employee tasks, the complexity of those tasks, the physical proximity of
subordinates, the degree to which standardised procedures are in place, the sophistication of the
organisation’s information system, the strength of the organisation’s culture and the preferred
style of the manager.8
The trend in recent years has been towards larger spans of control. For example, HewlettPackard Australia has cut its management layers from 12 to an average of four, and IBM Australia
has gone from ten to four. In the IBM case, where the managers were previously responsible
for six employees, the average became 12.9 These wider spans of control are also consistent
with managers’ efforts to reduce costs, speed up decision making, increase flexibility, get closer

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to customers and empower employees. However, to ensure that performance does not suffer
because of these wider spans, organisations are investing heavily in employee training. Managers
recognise that they can handle a wider span when employees know their jobs well or can turn to
co-workers if they have questions.

part

4

review
questions

5. Discuss the traditional and contemporary views of chain of command.
6. Discuss the traditional and contemporary views of span of control.

Centralisation and decentralisation

centralisation
The degree to which
decision making is
concentrated at upper
levels of the organisation.

decentralisation
The degree to which lowerlevel employees provide
input or actually make
decisions.

In some organisations, top managers make all the decisions and the lower-level managers and
employees simply carry out their orders. At the other extreme are organisations in which decision
making is pushed down to the managers who are closest to the action. The former organisations
are described as highly centralised, and the latter as decentralised.
Centralisation describes the degree to which decision making is concentrated at upper
levels of the organisation. If top managers make the organisation’s key decisions with little or
no input from lower-level employees, then the organisation is centralised. In contrast, the more
that lower-level employees provide input or actually make decisions, the more decentralisation
there is. Keep in mind that the concept of centralisation–decentralisation is relative, not
absolute – that is, an organisation is never completely centralised or decentralised. While Myer,
as was discussed in the opening vignette to this chapter, has decentralised a lot of the decision
making to the store managers, some other decision making, particularly in relation to buying
and distribution, is still highly centralised at Myer. Few organisations could function effectively
if all decisions were made by a select group of top managers only; nor could they function
effectively if all decisions were delegated to employees at the lowest levels.
What determines whether an organisation will tend to be more centralised or decentralised?
Table 10.2 lists some of the factors that have been identified as influencing the amount of
centralisation or decentralisation an organisation uses.10

Today’s view
As organisations become more flexible and responsive, there has been a distinct trend towards
decentralising decision making. In large companies especially, lower-level managers are ‘closer
to the action’ and typically have more detailed knowledge about problems and how best to solve
them than do top managers. For instance, the large retailer Myer has now decentralised some

of the decision-making authority to store managers. Before the change, nearly all decisions were

Table 10.2╇ Factors that influence the amount of centralisation and decentralisation
More centralisation

More decentralisation

• Environment is stable.
•
• Lower-level managers are not as capable or experienced
•
at making decisions as upper-level managers.

• Lower-level managers do not want to have a say in decisions.
•
• Decisions are significant.
•
• Organisation is facing a crisis or the risk of company failure.
•
• Company is large.

• Effective implementation of company strategies depends
•
on managers retaining a say over what happens.
•


Environment is complex, uncertain.
Lower-level managers are capable and experienced at making
decisions.

Lower-level managers want a voice in decisions.
Decisions are relatively minor.
Corporate culture is open to allowing managers to have a say in
what happens.
Company is geographically dispersed.
Effective implementation of company strategies depends on
managers having involvement and the flexibility to make decisions.

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made at the ‘old’ Coles Myer head office and the store managers felt they had little say in how to
operate their store. However, under the new management at Myer, individual store managers and
managers of in-store divisions such as cosmetics, women’s wear, homewares and electrical have a
greater say about what products they stock and how they market them, which has allowed them
to differentiate their offerings based on each store’s local conditions.11 Another example can be
seen at Honeywell Pacific, which moved from a hierarchical management structure to one that is
much flatter and team-based. Before the change, nearly all decisions were made at headquarters,
but authority was pushed down to individual plant and brand managers. The results have been
increased revenues and a more intimate knowledge of the company’s main customers.12
Another term for increased decentralisation is employee empowerment, which is giving
employees more authority (power) to make decisions. We will address empowerment more
thoroughly in our discussion of leadership in Chapter 16.

Formalisation
Formalisation refers to how standardised an organisation’s jobs are and the extent to which
employee behaviour is guided by rules and procedures. In highly formalised organisations, there
are explicit job descriptions, lots of organisational rules and clearly defined procedures covering
work processes. Employees have little discretion over what is to be done, when it is to be done
and how it should be done. Employees can be expected to handle the same input in exactly the
same way, resulting in a consistent and uniform output. On the other hand, where formalisation
is low, job behaviours are relatively unstructured and employees have a great deal of freedom in
how they do their work.
The degree of formalisation can vary widely between organisations and even within
organisations. For instance, at a newspaper publishing company, journalists often have a great
deal of discretion in their job. They may be told what news topic to write about, but they have the
freedom to find their own stories, research them in the way they want and write them up, usually
within minimal guidelines. On the other hand, the compositors who lay out the newspaper pages
do not have that type of freedom. They have constraints – both time and space – that standardise
how they do their work.

chapter 10

367

10
chapter

organisational structure and design

employee
empowerment
Giving employees more
authority (power) to make

decisions.

formalisation
How standardised an
organisation’s jobs are,
and the extent to which
employee behaviour
is guided by rules and
procedures.

Today’s view
Although some formalisation is important and necessary for consistency and control, many of
today’s organisations seem to be less reliant on strict rules and standardisation to guide and
regulate employee behaviour. For instance, consider the following situation:
It is 2.37 pm and a customer at a branch of a large bank is trying to get an international
bank draft organised to send overseas the same day. Bank policy states that an international
bank draft must be organised before 2 pm for this service. The employee knows that rules
like this are supposed to be followed. At the same time, he wants to be accommodating to
the customer, and he knows that the draft could, in fact, be done that day. He decides to
accept the job and, in so doing, violates the policy. He just hopes that his manager does
not find out.13
Has this employee done something wrong? He did ‘break’ the rule. But by breaking the rule, he
actually brought in revenue and provided the customer with good service: so good, in fact, that
the customer may be satisfied enough to come back in the future.
Considering the fact that there are numerous situations like these where rules may be too
restrictive, many organisations have allowed employees some latitude, giving them sufficient
autonomy to make those decisions that they feel are best under the circumstances. It does not mean
that all organisational rules are thrown out the window, because there will be rules that are important
for employees to follow – and these rules should be explained so that employees understand why it
is important to adhere to them. But for other rules, employees may be given some leeway.14

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368

part 4

review
questions

part

4

10.3 Learn in g out c ome

Contrast mechanistic
and organic
structures.

mechanistic
organisation
An organisational design

that is rigid and tightly
controlled.

organising

7. Describe the factors that influence the amount of centralisation and decentralisation.
8. Explain how formalisation is used in organisational design.

Organisational design decisions
Organisations do not, and will not, have identical structures. A company with 30 employees is not
going to look like one with 30â•›000 employees. But even organisations of comparable size do not
necessarily have similar structures. What works for one organisation may not work for another.
How do managers decide what organisational design to use? That decision depends upon certain
contingency factors. This section looks at two generic models of organisational design and then
at the contingency factors that favour each.

Mechanistic and organic organisations
Table 10.3 describes two organisational forms.15 The mechanistic organisation is a rigid and
tightly controlled structure. It is characterised by high specialisation, rigid departmentalisation,
narrow spans of control, high formalisation, a limited information network (mostly downward
communication) and little participation in decision making by lower-level employees.

Glass ceiling
Managing
WORKFORCE
DIVERSITY AND
INCLUSION

P

retend that you have just finished your MBA degree. It has not been easy. Your graduate
classes were challenging, but you feel well prepared for and excited about getting your first
post-MBA job. If you are female, that first job for 60 per cent of you will be an entry-level
position. However, if you are male, only 46 per cent of you would start out in an entry-level
position. And only 2 per cent of women would step into the CEO or senior executive position,
compared with 6 per cent of men. Although entry into occupations such as accounting, business and law
happens at about the same rate for men and women, evidence is mounting that women’s and men’s career
paths begin to divide soon after their initial employment. What is going on here? After all these years of
‘equal opportunity’, why do we still see statistics like these?
The term glass ceiling, which was first used in a Wall Street Journal article in the 1980s, refers to
the invisible barrier that separates women and minorities from top management positions. The idea of a
‘ceiling’ means that there is something blocking upward movement, and the idea of ‘glass’ is that whatever
is blocking the way is not immediately apparent.
Research on the glass ceiling has looked at identifying the organisational practices and interpersonal
biases that have blocked women’s advancement. Findings from those studies have ranged from lack of
mentoring, sex stereotyping, views that associate masculine traits with leader effectiveness, and bosses’
perceptions of family–work conflict.
As others have said, it is time to shatter the glass ceiling for all employees. Every employee should
have the opportunity to work in a career in which they can use their skills and abilities, and to have a career
path that allows them to progress however far they want to go. Getting to that end, however, is not going
to be easy.
Sources: Catalyst, ‘Workforce metrics: Level of first position’, Workforce Management Online, <www.workforce.com>,
8 April 2010; J.M. Hoobler, S.J. Wayne and G. Lemmon, ‘Bosses’ perceptions of family-work conflict and women’s
promotability: Glass ceiling effects’, Academy of Management Journal, October 2009, pp. 939–57; and C. Hymowitz and
T.D. Schellhardt, ‘The glass ceiling’, The Wall Street Journal: A Special Report – The Corporate Woman, 24 March 1986,
pp. D1+.

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organisational structure and design

chapter 10

369

Table 10.3╇ Mechanistic versus organic organisation
Organic

• High specialisation

• Cross-functional teams

• Rigid departmentalisation

• Cross-hierarchical teams

• Clear chain of command

• Free flow of information

• Narrow spans of control

• Wide spans of control

• Centralisation

• Decentralisation

• High formalisation

• Low formalisation

In the mechanistic structure, work specialisation creates jobs that are simple, routine
and standardised. Extensive departmentalisation increases impersonality and the need for
multiple layers of management to coordinate these specialised departments. There is also
strict adherence to the unity of command principle. This ensures the existence of a formal
hierarchy of authority, in which each person is supervised by one superior. Narrow spans of
control, especially at increasingly higher levels of the organisation, have the effect of creating
tall organisational structures with many layers and levels. As the distance between the top and
the bottom of the organisation widens, top managers tend to impose rules and regulations to
control employee behaviour because they are so far removed from the lower-level activities that
they cannot directly supervise and ensure the use of standard practices. Instead, they substitute
high formalisation.
Mechanistic types of organisational structures tend to be efficiency machines and rely heavily
on rules, regulations, standardised tasks and similar controls. This organisational design tries to
minimise the impact of differing personalities, human judgment and ambiguity because these
are seen as inefficient and inconsistent. Although no pure form of the mechanistic organisation
exists in reality, almost all large corporations and government agencies tend to have many, or at
least some, of these mechanistic characteristics. The mechanistic structure is also very similar to
Weber’s bureaucracy concept, which was discussed in Chapter 2.
In direct contrast to the mechanistic form of organisation is the organic organisation,
which is as highly adaptive and flexible a structure as the mechanistic organisation is rigid
and stable. Rather than having standardised jobs and regulations, the organic organisation

is flexible, which allows it to change rapidly as needs require. Organic organisations may
have specialised jobs, but these jobs are not standardised. Employees are highly trained and
empowered to handle diverse job activities and problems, and these organisations frequently
use employee teams. Employees in organic-type organisations require minimal formal rules
and little direct supervision. Their high levels of skills and training, and the support provided
by other team members, make formalisation and tight managerial controls unnecessary. For
example, a much-needed organisational restructuring at GlaxoSmithKline, the London-based
pharmaceutical company, made it more of an organic structure. Before the restructuring,
research at Glaxo was hampered by a slow-moving bureaucracy. Decisions about which drugs
to fund were made by a committee of research and development executives far removed
from the research labs – a time-consuming process not at all appropriate for a company
dependent on new scientific breakthroughs. Now, lab scientists set the priorities and allocate
the resources. The change has ‘helped produce an entrepreneurial environment akin to a
smaller, biotechnology outfit’.16
When is a mechanistic organisational structure preferable, and when is an organic one more
appropriate? Let us look at the key contingency factors that influence the decision.

10
chapter

Mechanistic

organic organisation
An organisational design
that is highly adaptive and
flexible.

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370

part 4

10.4 Learn in g out c ome

part

4

Identify the
contingency factors
that favour either the
mechanistic model or
the organic model of
organisational design.

organising

Contingency factors
Jim Mullen, CEO of Biogen, says: ‘The campfire culture doesn’t work here anymore, with people
sitting around telling each other what’s going on. We need to be organised looking to the future.
The complexity of this company was, and is, rapidly increasing. We need to motivate people
to take risks, we need to look for innovation and creativity and we need to demand results.’17

As can be seen from this example, top managers of most organisations typically put a great deal
of thought into designing an appropriate structure. What that appropriate structure is depends
on four contingency variables: the organisation’s strategy, size, technology, and degree of
environmental uncertainty.

Strategy and structure
An organisation’s structure should help it achieve its goals. Because goals are an important part
of the organisation’s strategies, it is only logical that strategy and structure should be closely
linked. More specifically, if managers significantly change the organisation’s strategy, the
structure should change to support the new strategy – that is, structure should ‘follow’ strategy.
The initial research on the strategy–structure relationship was a study by Alfred Chandler
of several large US companies.18 Chandler traced the development of organisations such as
DuPont, General Motors, Standard Oil and Sears over a period of 50 years and concluded that
changes in corporate strategy led to changes in an organisation’s structure. He found that these
organisations usually began with a single product or line that required only a simple or loose
form of structure. Decisions were centralised in the hands of a single senior manager, and
specialisation, departmentalisation and formalisation were low. However, as these organisations
grew, their strategies became more ambitious and elaborate, and the structure changed to
support the chosen strategy.
Most current strategy–structure frameworks tend to focus on three dimensions: (1) innovation,
which reflects the organisation’s pursuit of meaningful and unique innovations; (2) cost
minimisation, which reflects the organisation’s pursuit of tightly controlled costs; and (3) imitation,
which reflects an organisation’s seeking to minimise risk and maximise profit opportunities by
copying the market leaders. What organisational design works best with each?19 Innovators need
the flexibility and free flow of information of the organic structure, whereas cost minimisers seek
the efficiency, stability and tight controls of the mechanistic structure. Imitators use structural
characteristics of both – the mechanistic structure to maintain tight controls and low costs, and the
organic structure to mimic the industry’s innovative directions.

Size and structure

There is considerable evidence that an organisation’s size significantly affects its structure.20
For instance, large organisations – those with 2000 or more employees – tend to have more
specialisation, departmentalisation, centralisation, and rules and regulations than small
organisations. However, the relationship is not linear. It seems that as an organisation grows
past a certain size, size has less influence on structure. Why? Essentially, once an organisation
has around 2000 employees it is already fairly mechanistic. Adding 500 employees to a firm with
2000 employees will not have much of an impact. On the other hand, adding 500 employees to
an organisation that has only 300 members is likely to make it more mechanistic.

review
questions

╇ 9.Contrast mechanistic and organic organisations.
10.Explain the relationship between strategy and structure.
11.Explain how organisational size affects organisational design.

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organisational structure and design

chapter 10

371

Technology and structure

10
chapter

Every organisation uses some form of technology to convert its inputs into outputs. To reach its
objectives, the organisation combines equipment, materials, knowledge and experienced individuals
into certain types and patterns of activities. For instance, workers at Whirlpool’s Manaus, Brazil,
facility build microwave ovens and air conditioners on a standardised assembly line. Employees
at Bond Imaging Laboratories in Richmond, Victoria, produce custom-made professional photo
and image processing jobs for individual customers. And employees at Bayer’s facility in Karachi,
Pakistan, make pharmaceutical products using a continuous-flow production line.
The initial interest in technology as a determinant of structure can be traced to the
work of a British scholar, Joan Woodward, who studied several small manufacturing firms in
southern England to determine the extent to which structural design elements were related
to organisational success.21 Woodward was unable to derive any consistent pattern from her
data until she segmented the firms into three categories based on the size of their production
runs. The three categories, representing three distinct technologies, had increasing levels of
complexity and sophistication. The first category, unit production, described the production
of items in units or small batches. The second category, mass production, described large-batch
or mass-production manufacturing such as refrigerators or cars. The third and most technically
complex group, process production, included continuous process producers such as oil and
chemical refiners. A summary of Woodward’s findings is shown in Table 10.4.
Since Woodward’s initial work, numerous studies have been conducted on the technology–
structure relationship. These studies generally demonstrate that organisations adapt their
structure to their technology.22 The processes or methods that transform an organisation’s
inputs into outputs differ by their degree of routineness or standardisation. In general, the more
routine the technology, the more mechanistic the structure can be. Organisations with more
non-routine technology are more likely to have organic structures.23

unit production
The production of items in
units or small batches.

mass production
The production of items in
large batches.

process production
The production of items in
continuous processes.

Environmental uncertainty and structure
In Chapter 3 we introduced the organisation’s environment and the amount of uncertainty in
that environment as constraints on managerial discretion. Why should an organisation’s structure
be affected by its environment? Because of environmental uncertainty! Some organisations face
relatively stable and simple environments; others face dynamic and complex environments.
Because uncertainty threatens an organisation’s effectiveness, managers will try to minimise
it. One way to reduce environmental uncertainty is through adjustments in the organisation’s
structure.24 The greater the uncertainty, the more an organisation needs the flexibility offered by
an organic design. For example, due to the uncertain nature of the oil industry, those companies
need to be flexible. Soon after being named CEO of Royal Dutch Shell plc, Jeroen van der Veer
streamlined the corporate structure to counteract some of the volatility in the oil industry. One
thing he did was to eliminate the company’s cumbersome, overly analytical process of making
deals with OPEC countries and other major oil producers.25 On the other hand, in stable, simple
environments, mechanistic designs tend to be the most effective.

Table 10.4╇ Woodward’s findings on technology, structure and effectiveness
Unit production

Mass production

Process production

Structural characteristics

•Â€Low vertical differentiation

•Â€Moderate vertical differentiation

•Â€High vertical differentiation



•Â€Low horizontal differentiation

•Â€High horizontal differentiation

•Â€Low horizontal differentiation



•Â€Low formalisation

•Â€High formalisation

•Â€Low formalisation

Most effective structure

•Â€Organic

•Â€Mechanistic

•Â€Organic

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Today’s view
The evidence on the environment–structure relationship helps to explain why so many
managers are restructuring their organisations to be lean, fast and flexible. Worldwide
economic uncertainties, global competition, accelerated product innovation by competitors
and increased demands from customers for higher quality and faster deliveries are examples of
dynamic environmental forces. Mechanistic organisations are not equipped to respond to rapid
environmental change and environmental uncertainty. As a result, we are seeing organisations
designed to be more organic.

part

4

review
questions
10.5 Learn in g out c ome

Describe traditional
organisational
designs.

12.Discuss Woodward’s findings on the relationship of technology and structure.
13.Explain how environmental uncertainty affects organisational design.

Common organisational designs
What organisational designs do BHP Billiton, Lion Nathan, Nestlé, Toshiba and eBay have? In
making organisational design decisions, managers have some common structural designs from
which to choose. This section looks first at some traditional organisational designs and then at
some more contemporary ones.

Traditional organisational designs
In designing a structure to support the efficient and effective accomplishment of organisational
goals, managers may choose to follow traditional organisational designs. These designs – simple
structure, functional structure and divisional structure – tend to be more mechanistic. Table 10.5
summarises the strengths and weaknesses of each of these designs.

Simple structure
simple structure

An organisational
design with low
departmentalisation,
wide spans of control,
centralised authority and
little formalisation.

Most organisations start as entrepreneurial ventures with a simple structure consisting of owners
and employees. A simple structure is an organisation design with low departmentalisation, wide
spans of control, authority centralised in one person and little formalisation.26 This structure is
most commonly used by small businesses in which the owner and manager are one and the same.
The strengths of the simple structure are obvious: it is fast, flexible and inexpensive to maintain,
and accountability is clear. However, it usually becomes increasingly inadequate as an organisation
grows because its low formalisation and high centralisation tend to result in information overload
at the top. As the organisation increases in size, decision making becomes slower and can eventually
come to a standstill as the single executive tries to continue making all the decisions. The simple
structure’s other weakness is that it is risky: everything depends on one person. If anything happens
to that person, the organisation’s information and decision-making centre is lost.
Most organisations do not remain simple structures, especially as they grow and add employees.
As the number of employees increases, the structure tends to become more specialised and
formalised. Rules and regulations are introduced, work becomes specialised, departments are
created, levels of management are added and the organisation becomes increasingly bureaucratic.
(You can review Weber’s concept of bureaucracy in Chapter 2.) At this point, a manager might
choose to organise around a functional structure or a divisional structure.

functional structure

Functional structure

An organisational design

that groups similar or
related occupational
specialties together.

A functional structure is an organisational design that groups similar or related occupational
specialities together. The strength of the functional structure lies in the cost-saving advantages
that accrue from specialisation. Putting similar specialities together results in economies
of scale, minimises duplication of people and equipment, and makes employees more

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Ed Whitacre, formerly CEO of AT&T, now CEO of General Motors

N

o one could have imagined it. After all these years, many thought it was too big to fail.
Yet, on 1 June 2009, General Motors Corporation (GM) filed for Chapter 11 bankruptcy
protection, the second-largest industrial bankruptcy in history. (WorldCom was the
largest.) GM, which had not made a profit since 2004, declared in its filing that it had
US$172 billion in debt and US$82 billion in assets. As any competent business student
could tell you, that ratio does not make a balance sheet balance, especially when the company’s equity is
worth little.
Fritz Henderson, who was named CEO of GM on 30 March 2009, was a numbers guy, but he knew

the company’s culture had to change. His vision of the new organisational culture revolved around four
guidelines: risk taking, accountability, speed and customer-product focus. The problem was that GM had
tried before to reinvent itself, with mixed success. ‘GM’s past is littered with the buzzwords of culture
change.… It has struggled to impose cultural change across the highly bureaucratic company in which
brands, departments, and regions operated like self-governing and competing states within a federation.’
But, GM’s executives said, this time would be different. After all, there was the bankruptcy and the selective
elimination of entrenched leadership. Were things really changing, though? Despite his well-intentioned
plans, Henderson was fired by the board on 1 December 2009. Some felt he was not radical enough to
change the company. His replacement was the person appointed by the Obama administration’s car czar
to oversee the automaker’s revival after bankruptcy, Ed Whitacre, the well-respected retired chairman and
CEO of AT&T.
The challenges Whitacre faces in changing GM’s ‘plodding’ culture are vast. A recent meeting of the
CEO and other top executives illustrates why. The meeting was called to approve plans for a new generation
of cars and trucks. Before the executives could go through all the pictures, charts and financial projections
they had prepared, Whitacre stopped them to ask why they were having the meeting in the first place.
‘You have all checked all this out pretty thoroughly. I imagine you are not going to approve something that
is bad or unprofitable, so why don’t you make the final decisions?’ He let the plans stand and suggested
that the group disband its regular Friday sessions. And it is not just the top executives who did this. In the
past, even minor decisions were mulled over by committee after committee. Whitacre is trying to change
that. Pushing authority and decision making down into GM’s multilayered organisation and slicing away at
the bureaucracy are big parts of the cultural changes Whitacre is attempting. Changing GM’s entrenched
corporate culture is not going to be easy, but it is necessary if GM is to become once again the automotive
icon it once was.

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Managers
WHO MADE A

DIFFERENCE

10
chapter

organisational structure and design

Sources: D. Welch, ‘Ed Whitacre’s battle to save GM from itself’, Bloomberg BusinessWeek, 3 May 2010, pp. 48–55;
S. Terlep, ‘GM’s plodding culture vexes its impatient CEO’, The Wall Street Journal, 7 April 2010, pp. B1+; J. Smerd,
‘Back to the drawing board – Can a new company culture save Motors?’, Workforce Management Online,
<www.workforce.com>, 19 October 2009; and N. King and S. Terlep, ‘GM collapses into government’s arms’,
The Wall Street Journal Online, <online.wsj.com>, 2 June 2009.

comfortable because they are with others who ‘talk the same language’. The biggest weakness
of the functional structure is that the organisation can lose sight of its best overall interests
in the pursuit of functional goals. No one function is totally responsible for end results, so
functional specialists become insulated and have little understanding of what people in other
functions are doing. Many medium-sized organisations tend to use a functional structure where
the organisation is organised around the functions of: operations, finance, human resources,
and product research and development. It is a functional departmentalisation applied to the
entire organisation.

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Table 10.5╇ Strengths and weaknesses of common traditional organisational designs
Simple structure

Strengths: Fast, flexible, inexpensive to maintain, clear accountability
Weaknesses: Not appropriate as organisation grows, and reliance on one person is risky

part

4

Functional structure

Strengths: Cost-saving advantages from specialisation (economies of scale, minimal duplication of people and equipment) and employees are
grouped with others who have similar tasks
Weaknesses: Pursuit of functional goals can cause managers to lose sight of what’s best for overall organisation, and functional specialists become
insulated and have little understanding of what other units are doing
Divisional structure

Strengths: Focuses on results – division managers are responsible for what happens to their products and services
Weaknesses: Duplication of activities and resources increases costs and reduces efficiency

Divisional structure
divisional structure

An organisational structure
made up of separate,
semi-autonomous units or
divisions.

review
question
10.6 Learn in g out c ome

Discuss contemporary
organisational
designs.

The divisional structure is an organisational structure made up of separate units or divisions.27
In this structural design, each unit or division has relatively limited autonomy, with a division
manager responsible for performance and who has strategic and operational decision-making
authority over his or her unit. In divisional structures, however, a central headquarters (or
parent corporation) typically acts as an external overseer to coordinate and control the various
divisions, and often it provides support services such as financial and legal support. Large
multi-product companies such as BHP Billiton and Boral are examples of organisations with
divisional structures. In Boral’s case the divisions include Australian Construction Materials
(ACM), Boral Cement, Boral Clay & Concrete Products, Boral Plasterboard, Boral Timber
and Boral USA. Each division specialises in its product field in the building and construction
materials industry.
The strength of the divisional structure is its focus on results. Division executives are responsible
for what happens to their products or services. The main disadvantage of this approach is the
duplication of activities and resources. Each division has its own functional departments – such
as marketing, research and development, and production – and this duplication of functions
increases the organisation’s costs and reduces efficiency.

14.Contrast the three traditional – simple, functional and divisional – organisational designs.

Contemporary organisational designs
Microsoft’s Windows 7 was the outcome of a three-year project marked by close collaboration
among the thousands of people working on various aspects of the product.28 This approach
was in sharp contrast to the development of Windows Vista, where the development team had
evolved into ‘a rigid set of silos – each responsible for specific technical features – that did not
share their plans widely’. With Vista, programming code created by each group might have
worked fine on its own, but it caused technical problems when integrated with code created by
other groups. Those design issues, as well as internal communications breakdowns, contributed
to numerous product delays and defects. CEO Steve Ballmer was adamant about not repeating
that mistake again. Thus, to ‘rebuild Windows, Microsoft razed walls’ – that is, organisational
structure walls that acted as barriers and impediments to efficient and effective work.

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organisational structure and design

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Like Steve Ballmer, managers in many contemporary organisations are finding that these

traditional hierarchical designs often are not appropriate for today’s increasingly dynamic and
complex environment. Instead, organisations need to be lean, flexible and innovative; that is, they
need to be more organic. So, managers are finding creative ways to structure and organise work
and to make their organisations more responsive to the needs of customers, employees and other
organisational constituents.29 The following sections will introduce some of the contemporary
concepts in organisational design. Table 10.6 summarises these contemporary designs.

chapter

10

Team structures
Larry Page and Sergey Brin, co-founders of Google, have created a corporate structure that
‘tackles most big projects in small, tightly focused teams’.30 In a team structure, the entire
organisation is made up of work groups or teams that perform the organisation’s work.31 In this
structure, employee empowerment is crucial because there is no line of managerial authority
from top to bottom. Rather, employee teams design and do work in the way they think is best.
However, the teams are also held responsible for all work performance results in their respective
areas. Let us look at some examples of how companies have used the team-based structure and
how they have gone about introducing it.
At Lion Nathan’s brewery in Khyber Pass, Auckland, New Zealand, the production side of the
brewing company is organised around a number of teams that report directly to management.
The teams, generally consisting of 12–14 individuals, take responsibility for their own production,
wastage, continuous improvement, quality assurance, training, and a range of safety measures. In
the past, many of these activities were assigned to various managers, which sometimes resulted
in buck passing and demarcation between different departments or between employees and
managers. Although each team has a team leader, the whole team has a say in selecting its leader
and gets involved in the recruitment of team members.32
The transition to organising around teams is usually a gradual one. For example, Toyo’s
(Australia) ink manufacturing plant at Kilsyth in Victoria is now organised around self-managing

teams. The reorganising process developed out of the company’s continuous improvement
approach and the need to get staff more involved in what the company was doing. During the

team structure
An organisational structure
in which the entire
organisation is made up of
work groups or teams.

Table 10.6╇ Contemporary organisational designs
Team structure

• What it is:
• Advantages:

• Disadvantages:


Boundaryless structure

 structure in which the entire organisation is
A
made up of work groups or teams.
Employees are more involved and empowered.
Reduced barriers among functional areas.
No clear chain of command.
Pressure on teams to perform.

Matrix–project structure

• What it is:

• Advantages:
• Disadvantages:

 atrix is a structure that assigns specialists
M
from different functional areas to work on
projects but who return to their areas when the
project is completed. Project is a structure in
which employees continuously work on projects.
As one project is completed employees move on
to the next project.
Fluid and flexible design that can respond to
environmental changes.
Faster decision making.
Complexity of assigning people to projects.
Task and personality conflicts.

• What it is:

• Advantages:

• Disadvantages:


 structure that is not defined by or limited
A
to artificial horizontal, vertical or external
boundaries; includes virtual, networked and

modular types of organisations.
Highly flexible and responsive.
Draws on talent wherever it is found.
Lack of control.
Communication difficulties.

Learning organisation structure

• What it is:
• Advantages:

• Disadvantages:

 structure that supports an organisation’s
A
capacity to adapt and change continuously.
Employees are continuously sharing and applying
knowledge.
Ability to learn can be a source of sustainable
competitive advantage.
Getting employees to share what they know can
be difficult.
Collaboration conflicts can arise.

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reorganising process, the company ran extensive training programs in team building and even
utilised TAFE lecturers to run in-house team-building programs.33
In large organisations the team structure complements what is typically a functional or
divisional structure. This allows the organisation to have the efficiency of a bureaucracy while
providing the flexibility that teams provide. To improve productivity at the operating level, for
instance, companies such as Amazon, Louis Vuitton, Motorola and Xerox make extensive use of
self-managed teams. At companies such as Boeing, Hewlett-Packard and Myer, cross-functional
teams are used to design new products or to coordinate major projects.

part

4

Matrix and project structures
matrix structure
An organisational structure
that assigns specialists
from different functional
departments to work on
one or more projects.

project structure
An organisational structure
in which employees
continuously work on
projects.

Other popular contemporary designs are the matrix and project structures. The matrix structure
assigns specialists from different functional departments to work on projects being led by a
project manager. Figure 10.3 shows an example of a matrix structure used in an aerospace firm.
Along the top are the familiar organisational functions of engineering, accounting, human
resources and so forth. The various projects the aerospace firm is currently working on are listed
on the left-hand side. Each project is directed by a manager who staffs his or her product team
with people from each of the functional departments. The addition of this vertical dimension
to the traditional horizontal functional departments, in effect, ‘weaves together’ elements
of functional and product departmentalisation – hence, the term matrix. How does a matrix
structure work in reality?
One unique aspect of the matrix design is that it creates a dual chain of command since
employees in the matrix have two managers: their functional department manager and their
product or project manager, who share authority. The project manager has authority over
the functional members who are part of that manager’s project team in areas relevant to the
project’s goals. However, any decisions about promotions, salary recommendations and annual
reviews typically remain the functional manager’s responsibility. The matrix design ‘violates’ the
unity of command principle, which says that each person should report to only one boss. Despite
that, it can, and does, work effectively if both managers communicate regularly, coordinate
work demands on employees and resolve conflicts together. One company that uses a matrix
organisational structure is Skanska, the leading ground-engineering business in the United
Kingdom. Employees from the company’s proposals, operations and commercial areas are
assigned to the various engineering projects taking place in different geographic locations.34
Although the matrix structure is an effective structural design choice for some organisations,
many organisations are using a more ‘advanced’ type of project structure, in which employees

continuously work on projects. Unlike the matrix structure, a project structure has no formal

Figure 10.3╇ A matrix organisation in an aerospace firm
Design
Engineering

Manufacturing

Contract
Administration

Purchasing

Accounting

Human
Resources (HR)

Alpha
Project

Design
Group

Manufacturing
Group

Contract
Group

Purchasing
Group

Accounting
Group

HR
Group

Beta
Project

Design
Group

Manufacturing
Group

Contract
Group

Purchasing
Group

Accounting
Group

HR
Group

Gamma
Project

Design
Group

Manufacturing
Group

Contract
Group

Purchasing
Group

Accounting
Group

HR
Group

Omega
Project

Design
Group

Manufacturing
Group

Contract
Group

Purchasing
Group

Accounting
Group

HR
Group

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departments that employees return to at the completion of a project. Instead, employees take
their specific skills, abilities and experiences to other work projects. In addition, all work in
project structures is performed by teams of employees. For instance, at Oticon Holding A/S,
a Danish hearing-aid manufacturer, there are no organisational departments or employee job
titles. All work activities are project-based, and these project teams form, disband and form
again as the work requires. Employees ‘join’ project teams because they bring needed skills
and abilities to that project. Once the project is completed, however, they move on to the
next one.35
Project structures tend to be very fluid and flexible organisational designs. There is no

departmentalisation or rigid organisational hierarchy to slow down decision making or
taking action. In this type of structure, managers serve as facilitators, mentors and coaches.
They ‘serve’ the project teams by eliminating or minimising organisational obstacles and by
ensuring that the teams have the resources they need to complete their work effectively and
efficiently.

The boundaryless organisation
Another approach to contemporary organisational design is the concept of a boundaryless
organisation, an organisation whose design is not defined by, or limited to, the horizontal,
vertical or external boundaries imposed by a predefined structure.36 The term was coined
by Jack Welch, former chairman of General Electric (GE), who wanted to eliminate vertical
and horizontal boundaries within GE and to break down external barriers between the
company and its customers and suppliers. This idea may sound odd, yet many of today’s
most successful organisations are finding that they can operate most effectively by remaining
flexible and unstructured – that the ideal structure for them is not having a rigid, predefined structure.37
What do we mean by ‘boundaries’? There are internal boundaries – the horizontal boundaries
imposed by work specialisation and departmentalisation, and vertical boundaries that separate
employees into organisational levels and hierarchies. Then, there are external boundaries – the
boundaries that separate the organisation from its customers, suppliers and other stakeholders. To
minimise or eliminate these boundaries, managers might use virtual
or network structural designs.
A virtual organisation is an organisation that consists of a small core
of full-time employees and that hires outside specialists temporarily
as needed to work on projects.38 Virtual organisations are becoming
quite popular, especially with smaller and mid-size companies and,
of course, with online businesses. The type of work virtual employees
do typically involves ‘researching, sales, marketing and social-media
development’ – tasks that can be done anywhere with a computer
and online access. An example is StrawberryFrog, a global advertising
agency with offices in Amsterdam, New York, São Paulo and Mumbai.

It does its work with a relatively small administrative staff, but has
a global network of freelancers who are hired to work as needed
on client projects. By relying on this web of freelancers around the globe, the company enjoys
a network of talent without all the unnecessary overhead and structural complexity.39 The
inspiration for this structural approach comes from the film industry. If you look at that industry,
people are essentially ‘free agents’ who move from project to project applying their skills –
directing, talent search, costuming, makeup, set design – as needed.
Another structural option for managers wanting to minimise or eliminate organisational
boundaries is the network organisation, which is an organisation that uses its own employees
to do some work activities and networks of outside suppliers to provide other needed product

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10

boundaryless
organisation
An organisation whose
design is not defined by, or
limited to, the horizontal,
vertical or external
boundaries imposed by a
predefined structure.

chapter

organisational structure and design

virtual organisation
An organisation that
consists of a small core of
full-time employees and
that hires outside specialists
temporarily as needed to
work on projects.

network organisation
An organisation that uses its
own employees to do some
work activities and networks
of outside suppliers to
provide other needed
product components or work
processes.

The structure of virtual
organisations is inspired
by the film industry.
People in the film
industry are essentially
‘free agents’ who move
from project to project,
often around the world,
applying their skills.

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4

To capture the essence
of innovation and pace,
StrawberryFrog has
smashed through the
conventional hierarchical
structure around
which most corporate
advertising agencies have
always been based.

components or work process.40 This organisational form also is sometimes called a modular
organisation, especially in manufacturing organisations.41 This structural approach allows
organisations to concentrate on what they do best and to contract out other activities to companies that can do those activities best. Many organisations use the network structure to
outsource manufacturing. Companies such as Ikea, Nike and Cisco Systems have found

that they can do hundreds of millions of dollars of business without owning manufacturing
facilities. At Boeing, the company’s head of development for the 787 Dreamliner manages
thousands of employees and some 100 suppliers at more than 100 sites in different countries,
including Australia.42 And Sweden’s Ericsson contracts its manufacturing, and even some of
its research and development, to more cost-effective contractors in New Delhi, Singapore and
other global locations.43

review
questions

10.7 Learn in g out c ome

Describe today’s
organisational design
challenges.

15.Explain team-based, matrix and project structures.
16.Describe the design of virtual and network organisations.

Today’s organisational design challenges
As managers look for organisational designs that will best support and facilitate employees
doing their work efficiently and effectively in today’s dynamic environment, there are certain
challenges with which they must contend. These include keeping employees connected,
organisational design issues in relation to sustainability, building a learning organisation and
managing global structural issues.

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Boundaryless organisations

T

he days when businesses generate their own product development ideas in-house and
develop, manufacture, market and deliver those products to customers may be numbered.
Today, many companies are trying open innovation, which is opening up the search for new
ideas beyond the organisation’s boundaries and allowing innovations to transfer easily inward
and outward. For instance, Procter & Gamble, Starbucks, Dell, Best Buy and Nike have all
created digital platforms that allow customers to help them create new products and messages. As you can
see, many of today’s successful companies are collaborating directly with customers in the product development
process. Others are partnering with suppliers, other outsiders and even competitors.
Companies worldwide are finding ways to connect to each other. Once bitter rivals, Nokia and Qualcomm
formed a cooperative agreement to develop next-generation mobile phones for North America. Nokia also
collaborated with Yahoo in a partnership where Yahoo’s software powers email and chat services on most
Nokia phones.
In today’s environment, organisations are looking for advantages wherever they can get them. One way they
can do this is with strategic partnerships, which are collaborative relationships between two or more organisations
in which they combine their resources and capabilities for some business purpose. Here are some reasons why
such partnerships make sense: flexibility and informality of arrangements promote efficiencies; provide access
to new markets and technologies; entail less paperwork when creating and disbanding projects; risks and
expenses are shared by multiple parties; independent brand identification is kept and can be exploited; working
with partners possessing multiple skills can create major synergies; rivals can often work together harmoniously;
partnerships can take on varied forms from simple to complex; dozens of participants can be accommodated
in partnership arrangements; and antitrust laws can protect R&D activities. Strategic partnerships are growing

in popularity. However, as with all the collaborative arrangements we have described – external and internal –
the challenge for managers is finding ways to exploit the benefits of such collaboration while incorporating the
collaborative efforts seamlessly into the organisation’s structural design.

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Managing
FROM A GLOBAL
PERSPECTIVE

10
chapter

organisational structure and design

Sources: D. Lavie, U. Stettner and M.L. Tushman, ‘Exploration and exploitation within and across organizations’, Academy of
Management Annals, June 2010, pp. 109–55; S. Morrison, ‘Yahoo chief defends her site, strategy’, The Wall Street Journal,
25 June 2010, p. B5; H. Mitsuhashi and H.R. Greve, ‘A matching theory of alliance formation and organizational success:
Complementarity and compatibility’, Academy of Management Journal, October 2009, pp. 975–95; J. Winsor, ‘Crowdsourcing:
What it means for innovation’, BusinessWeek Online, 15 June 2009; D. Durfee, ‘Try before you buy’, CFO, May 2006, pp. 48–54;
B. McEvily and A. Marcus, ‘Embedded ties and the acquisition of competitive capabilities’, Strategic Management Journal,
November 2005, pp. 1033–55; and R.D. Ireland, M.A. Hitt and D. Vaidyanath, ‘Alliance management as a source of competitive
advantage’, Journal of Management, Vol. 28, No. 3, 2002, pp. 413–46.

Keeping employees connected
Many organisational design concepts were developed during the 20th century, when work was
done at an employer’s place of business under a manager’s supervision, work tasks were fairly
predictable and constant, and most jobs were full time and continued indefinitely.44 But, that is

not the way it is today at many companies. For instance, thousands of Cisco Systems employees
sit at unassigned desks in team rooms interspersed with communal break areas. At some IBM
divisions, only a small percentage of employees – mostly top managers and their assistants – have
fixed desks or offices. All others are either mobile employees, or they share desks when they
need to be at work.45 As these examples show, a major structural design challenge for managers
is to offer flexibility, but also to keep widely dispersed and mobile employees connected to the
organisation. Mobile computing and communications technology have given organisations and
employees ways to stay connected and to be more productive. For instance, handheld devices
have email, calendars and contacts that can be used anywhere there is a wireless network.
And these devices can be used to log in to corporate databases and company intranets. Trend

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