Considerations for Organizational Design

Cite this article as:"Considerations for Organizational Design," in The Business Professor, updated April 6, 2020, last accessed June 6, 2020, https://thebusinessprofessor.com/lesson/considerations-for-organizational-design/.

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Considerations for Organizational Design?

There are numerous methods or manners for organizational design. The primary elements of Organizational Design include:

  • Hierarchy – Organizations vary in the number of levels that exist within its hierarchy. A traditional organization is considered “tall”. That is, there are numerous layers between the front-line employees and senior managers. “Flat” structures, on the other hand have very few layers of hierarchy between the front-line employee and the senior management. These structures require managers to supervise larger numbers of employees. This is known as a higher “span of control” for managers.
  • Span of Control – This concerns how many subordinates are below a single manager. In a hierarchical structure, one manager will generally have fewer subordinates as direct reports. In a flatter organizational structure, she will have more direct reports. This means that she has a higher span of control. The effect is that the manager has less opportunity to directly supervise the employee. As such, it requires higher levels of autonomy for each employee. This can be a positive and a negative. It allows for less predictability of employee action. Further, employees are more likely to experience role ambiguity (not fully understanding their role or job in the organization). Also, there is less opportunity for advancement in position in these organizations. There are various benefits to a wider span of control as well. Generally, it allows employees to be more creative in addressing problems. This leads to increased ingenuity and innovation. It has been shown to lead to greater employee satisfaction and self-actualization.
  • Work Specialization – This concerns the extent to which employee roles are defined. In a highly specialized organization, the job roles of individuals are highly specific in terms of function and knowledge. In a less specialized organization, the role of employees may be far more varied. That is, the employee may be required to work cross-functionally as opposed to remaining within their area of professed expertise.
  • Departmentalization – Departmentalization concerns how work efforts are grouped across the organization. The two most common approaches include functional Divisional Departments.
    • Functional Structures – This structure segments employees into groups based upon their functions in the organization. As such, employees with similar jobs or specialties will work in the same department. Common functional areas include administration, marketing, sales, accounting, and operations. The functional areas may also be further divided. The benefits of this type of separation are knowledge aggregation, team background, and cohesion. They tend to do better during stable times when the company has a limited number of value offerings. The downside is that it isolates similar groups of employees from other professional groups within the organization.
    • Divisional Structures – This structure divides employees based on related characteristics in the organization, such as operating division, product or service line, account or project, or geographic location. The benefit of this arrangement is that is brings together diverse types of employees – which can lead to creativity and innovation. The downside is that it may sacrifice efficiency allowed by work specialization in function structures. These structures tend to be more agile in difficult times.

Most organizations employ a mix of functional and division structures.

  • Chain of Authority – The chain of authority concerns to whom the employee will report. Will the reporting structure be hierarchical, team-based, etc. An important concept in this regard is establishing unity of command for purposes of authority and decision making.
  • Centralization and Decentralization – This concerns whether employees have decision-making authority or whether all decision making is reserved for managers. In highly centralized organizations, decisions are made at higher levels in the organization. Employees have very little authority to make decisions. In decentralized organizations, employees who are closer to the actual problem are empowered to make decisions. Allowing employees this level of authority is generally empowering. Centralized organizations do well when facing critical hardships. Having a single decision-maker can be beneficial for uniformity and finality. Decentralized organizations do well in rapidly changing market environments. Allowing employees to quickly respond to situations that are unique to them allows for speed, flexibility, and creativity.
  • Formalization – This determines the extent to which manager and subordinate activity is standardized. That is, a highly formalized organization will have explicit policies, procedures, and rules applicable to operations. The organization seeks to make employee behavior more routine and predictable. The result of such a rule-heavy organization is to reduce the autonomy of individual employees. The benefit is a reduction in ambiguity. The negative aspect is that is known to reduce ingenuity and innovativeness of the workforce.

The primary factors contributing to the decision of how to the design characteristics of an organization include:

  • Strategy – What is the organizational strategy? How is best promoted by the organizational structure?
  • Size – How large is the organization? Larger organizations tend to have more mechanistic (formalized) structures.
  • Technology – What technology is employed in the operational process. For example, the technology will vary based upon whether the company engages in Unit Production, Mass Production, or Process Production.
  • Environmental Uncertainty – How uncertain is the competitive or operational environment. As noted above, the various characteristics of the organization react differently to the level of environmental uncertainty.

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