All Articles Leadership What to know before you design organizational structure

What to know before you design organizational structure

4 min read


Leading early organizational theorists such as Max Weber, Frederick Winslow Taylor and Henri Fayol all argued, to some degree, that organizations can and should be structured in accordance with certain universal rules and principles. The result of all this was “bureaucracy” and “scientific management” that treated organizations as machines to be run in a mechanistic fashion relying on specialization of tasks, formal procedures and rules and centralized authority.

As time has gone by, however, the balance has shifted toward the so-called “contingency approach,” based on the belief that the most important factor in designing the organizational structure is the organization’s operating environment and, specifically, the sources of uncertainty within that environment.

If this is true, senior managers and those working with them on organizational design cannot rely on a single best structure for all situations and must instead search for a unique structure that allows them to best control their external environment and quickly and effectively respond to contingencies identified in advance. This process can be difficult and time-consuming, and it should begin with an understanding of the process of designing an organizational structure. The questions below can serve as a means of getting started:

What does the term “organizational structure” mean? Organizational structure is the way in which the members of an organization and their job responsibilities are arranged. The key components of an organizational structure include roles and responsibilities (task allocation), coordination processes and relationships between members and groups of members, hierarchical structure of power and authority (supervision), monitoring and control mechanisms, and channels for communications and information flows.

What are the building blocks of an organizational structure? The organizational structure typically consists of various business units (i.e., groups of organizational members supported by appropriate resources) formed around functions (e.g., research and development, manufacturing, sales and marketing, finance, human resources, etc.), products, markets or customers that are arranged in a hierarchical fashion. Eventually, many organizations evolve toward some combination of two or more of these types (i.e., a “matrix” structure) as their activities continue to grow and become more complex.

What are the most important influences on the design of the organizational structure? The most important determinant of organizational structure is the strategy of the organization. For example, if the strategy is based on identifying and satisfying the needs of a particular target group of customers, the human and other resources of the organization should be grouped in the way that is most effective for creating and delivering the outputs demanded by those customers.

Other factors that are thought to have a significant influence on organizational structure include the preferred styles of leaders and managers, the organizational climate and culture, the size and complexity of the organization, the skill capabilities of organizational members, the level of uncertainty in the external operating environment, the societal culture, the technology used in organizational activities, the geographic dispersion of the organization’s activities, the organization’s origin and history, the type of ownership and control, and the degree of interdependence on other organizations.

What dimensions are typically used for profiling and comparing organizational structures? Researchers generally rely on some or all of the following dimensions of organizational structure for their comparative work: specialization (i.e., division of labor); standardization (i.e., reliance of regularly used and legitimized organizational procedures); standardization of employment practices; formalization (i.e., used of formal rules and instruction to guide organizational members in carrying out their activities); centralization (i.e., location of decision-making authority); methods of coordination; and configuration.

What are the key questions and challenges for organizational designers? Organizational designers must wrestle with the appropriate degree of differentiation, both vertical and horizontal; the appropriate balance between differentiation and integration; the appropriate level of decentralization; and the appropriate balance between standardization and mutual adjustment.

What are the most important goals and objectives when establishing the organizational structure? The organizational structure should relate to what is being pursued by the organization and its overall environment, including competitors, suppliers, government agencies and the like; facilitate the use and effective exploitation of core competencies, including its people and technology; motivate the members; and promote the flow of information necessary for all members to perform their activities and tasks.

Alan S. Gutterman is the founder and principal of Gutterman Law & Business, a leading provider of timely and practical legal and business information for attorneys, other professionals and executives in the form of books, online content, newsletters, programs, training and consulting services. Gutterman has three decades of experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises and has held senior management positions with several technology-based businesses. He can be reached via e-mail.