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MGT504 - Organization Theory and Design - Lecture Handout 09

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Functional grouping and divisional grouping are the two most common approaches to structural design.


In a functional structure, activities are grouped by common function from the bottom to the top of the organization. All engineers are located in the engineering department, and the vice president of engineering is responsible for all engineering activities. The same is true in marketing, research and development, and manufacturing.
With a functional structure, all human knowledge and skills with respect to specific activities are consolidated, providing a valuable depth of knowledge for the organization. This structure is most effective when in-depth expertise is critical to meeting organizational goals, when the organization needs to be controlled and coordinated through the vertical hierarchy, and when efficiency is important. The structure can be quite effective is there is little need for horizontal coordination. Exhibit 3.7 summarizes the strengths and weaknesses of the functional structure. One strength of the functional structure is that is promotes economy of scale within function. Economy of scale means all employees are located in the same place and can share facilities. Producing all products in a single plant, for example, enables the plant to acquire the latest machinery. Constructing only one facility instead of separate facilities for each product line reduces duplication and waste. The functional structure also promotes in-depth skill development of employees. Employees are exposed to a range of functional activities within their own departments. The main weakness of the functional structure is a slow response to environmental changes that require coordination across departments. The vertical hierarchy becomes overloaded. Decisions pile up, and to managers do not respond fast enough. Other disadvantages of the functional structure are that innovation is slow because of poor coordination, and each employee has a restricted view of overall goals.

Strengths and Weaknesses of Functional Organization Structure

  1. Allows economies of scale within functional departments
  2. Enables in-depth knowledge and skill development
  3. Enables organization to accomplish functional goals
  4. Is best with only one or a few products


  1. Slow response time to environmental changes
  2. May cause decisions to pile on top, hierarchy overload
  3. Leads to poor horizontal coordination among departments
  4. Results in less innovation
  5. Involves restricted view of organizational goals

The functional structure is just right for Blue Bell Creameries. The organization has chosen to stay medium-sized and focus on making a single product quality ice cream. However, as Blue ell expands, it may have problems coordinating across departments, requiring stronger horizontal linkages mechanisms.

Functional Structure with Horizontal Linkages

Today, there is a shift toward flatter, more horizontal structures because of the challenges introduced earlier. Very few of today’s successful companies can maintain a strictly functional structure. Organizations compensate for the vertical functional hierarchy by installing horizontal linkages. Managers improve horizontal coordination by using information system, direct contact between department’s full time integrator or project manager’s task forces, or teams. Not – for- profit organizations are also recognizing the importance of horizontal linkages. One interesting use of horizontal linkages occurred at Karolinska Hospital in Stockholm, Sweden, which had 47 functional departments. Even after top executives cut that down to eleven, coordination was still woefully inadequate. The team set about reorganizing workflow at the hospital around patient care. Instead of bouncing a patient from department to department, Karolinska now envisions the illness to recovery period as a process with pits stops in admissions, X-ray, surgery, and so forth, the most interesting aspect of the approach is the new position of nurse coordinator, Nurse coordinators serve as full – time integrators, looking for situations where the baton is dropped in the handoff within or between departments. The improved horizontal coordination dramatically improved productivity and patient care at Karolinska. Karolinska is effectively using horizontal linkages to overcome some of the disadvantages of the functional structure.


The term divisional structure is used here as the generic term for what is some times called a product structure or strategic business units. With this structure, divisions can be organized according to individual product, services, product groups, major projects or programs, divisions, businesses, or profit centers. The distinctive feature of a divisional structure is that grouping is based on organizational outputs.

The different between a divisional structure and a functional structure is that functional structure can be redesigned into separate product groups, and each group contains the functional departments of R&D, manufacturing, accounting, and marketing. Coordination across functional departments within each product group is maximized. The divisional structures promote flexibility and change because each unit is smaller and can adapt to needs of its environment. Moreover, the divisional structures decentralize decision making, because the lines of authority converge at a lower level in the hierarchy. The functional structure, by contrast, forces decisions, all the way to the top before a problem affecting several functions can be resolved.

The divisional organization form of structure is excellent for achieving coordination across functional departments. It works well when organizations can no longer be adequately controlled through the traditional vertical hierarchy, and when goals are oriented toward adaptation and change. Giant, complex organizations such a Genera Electric, Nestle, and Johnson & Johnson are subdivided into a series of smaller, self – contained organizations for better control and coordination. In these large companies, the units are sometimes called divisions, business, or strategic business units. The structure at Johnson & Johnson includes 180 separate operating units, including McNeil Consumer Products, makers of Tylenol; Ortho Pharmaceuticals, which makes Retin-A and birth control pills; and J & J Consumer Product, the company that brings us Johnson’s Baby Shampoo and Bank – Aids, each division is a separately chartered, autonomous company operating under the guidance of Johnson & Johnson’s Corporate headquarters.

Strengths and Weaknesses of Divisional Organization Structure

  1. Suited to fast change in unstable environment
  2. Leads to client satisfaction because product responsibility and contact points are clear
  3. Involves high coordination across functions
  4. Best in large organizations with several products
  5. Decentralizes decision making


  1. Eliminates economies of scale in functional departments
  2. Leads to poor coordination across product lines
  3. Eliminates in depth competence and technical specialization
  4. Makes integration and standardization across product lines difficult

At Microsoft, co-founder and Chairman Bill Gates and CEO Steve Ballmer ripped apart the company’s structure to create eight new divisions and give managers unprecedented authority to run things as they see fit.

The divisional structure has several strengths that are of benefit to Microsoft. This structure is suited to fast change in an unstable environment and provides high product visibility. Since each product is a separate division, clients are able to contact the correct division and achieve satisfaction. Coordination across functions is excellent. Each product can adapt to requirements of individual customers or regions. The divisional structure typically works best in organizations that have multiple products or service and enough personnel to staff separate functional units. At corporations like Johnson & Johnson, PepsiCo, and now Microsoft, decision making is pushed down to the lowest levels. Each division is small enough to be quick on its feet, responding rapidly to changes in the market.

One disadvantage of using divisional structuring is that the organization losses economies of scale. Instead of fifty research engineers sharing a common facility in a functional structure, ten engineers may be assigned to each of five product divisions. The critical mass required for in depth research is lost, and physical facilities have to be duplicated for each product line. Another problem is that product lines become separate from each other, and coordination across product lines can be difficult. As one Johnson & Johnson executive said, “We have to keep reminding ourselves that we work for the same corporation.” There is some concern at Microsoft that the newly independent divisions might start offering products and services that conflict with one another.
Companies such as Hewlett-Packard and Xerox have a large number of divisions and have had had real problems with horizontal coordination. The software division may produce programs that are incompatible with business computers sold by other divisions. Customers are frustrated when a sales representative from one division is unaware of developments in other divisions. Task force and other linkage devices are needed to coordinate across divisions. A lack of technical specialization is also a problem in a divisional structure. Employees identify with the product line rather with a functional specialty. R&D Personal, for example, tends to do applied research to benefit the product line rather than basic research to benefit the entire organization. Microsoft is avoiding this problem by crating a separate division to do basic research.


Another basis for structural grouping is the organization’s users or customers. The most common structure in this category is geography. Each region of the country may have distinct tastes and needs. Each geographic unit includes all functions required to produce and market products in that region. For multinational corporations, self – contained units are crated for different countries and parts of the world.

Some years ago, apple Computer reorganized from a functional to a geographical structure to facilitate manufacture and delivery of Apple computers to customers around the world... McDonald’s divided its U.S operation into five geographical divisions, each with its own president and staff functions such as human resources and legal. The regional structure allows apple and McDonalds to focus on the needs of customers in a geographical area.

The strengths and weaknesses of a geographic divisional structure are similar to the divisional organization characteristics listed below the organization can adapt to specific needs of its own region, and employees identify with regional goals rather than with national goals. Horizontal coordination within a region is emphasized rather than linkages across regions or to the national office.


Sometimes, an organization’s structure needs to be multi focused in that both product and function or product and geography are emphasized at the same time. One way to achieve this is through the matrix structure. The matrix can be used when both technical expertise and product innovation and change are important for meeting organizational goals; the matrix structure often is the answer when organizations find that neither the functional, divisional, nor geographical structures combined with horizontal linkage mechanisms will work.

The matrix is a strong form of horizontal linkage. The unique characteristic of the matrix organization is that both product division and functional structures (horizontal and vertical) are implemented simultaneously, the product managers and functional managers have equal authority within the organization, and employees report to both of them. The matrix structure is similar to the use of full-time integrators or product managers described earlier.

Conditions for the Matrix

A dual hierarch may seem an unusual way to design an organization, but the matrix is the correct structure when the following conditions are met.

Condition 1: pressure exists to share scarce resources across product lines. The organization is typically medium sized and has moderate number o product lines. It feels pressure for the shared and flexible use of people and equipment across those products. For example, the organization is not large enough to assign engineers full – time to each product line, so engineers are assigned part – time to several product or projects.

Condition 2: Environmental pressure exists for two or more critical outputs, such as for in depth technical knowledge (functional structure) and frequent new products (divisional structure). This dual pressure means a balance of power is needed between the functional and product sides of the organizational, and a dual – authority structure is needed to maintain that balance.

Condition 3:. The environmental domain of the organization is both complex and uncertain. Frequent external changes and high interdependence between departments require a large amount of coordination and information processing in both vertical and horizontal directions.

Under these three conditions, the vertical and horizontal lines of authority must be given equal recognition. A dual – authority structure is thereby created so the balance of power between them is equal.

The matrix formalizes horizontal teams along with the traditional vertical hierarchy and tries to give equal balance to both. However, the matrix may shift one way or the other. However, the matrix may shift one way or the other. Many companies have found a balanced matrix hard to implement and maintain because one side of the authority structure often dominates. Recognizing this tendency, two variations of matrix structure have evolved – the functional matrix and the product matrix. In a functional matrix, the functional bosses have primary authority and the project or product managers simply coordinate product activities. In a product matrix, by contrast, the project or product managers have primary authority and functional managers simply assign technical personnel to projects and provide advisory expertise as needed. For many organizations, one of these approaches works better than the balanced matrix with dual lines of authority.

All kinds of organization have experimented with the matrix, including hospital, consulting firms, banks, insurance companies, government agencies; and many types of industrial firms. This structure has been used successfully by organizations such as IBM and Unilever, which fine – turned the matrix to suit their own particular goals and culture.

Strengths and Weaknesses

The matrix structure is best when environmental change is high and when goals reflect a dual requirement, such as for both product and functional goals. The dual – authority structure facilitates communication and coordination to cope with rapid environmental change and enables an equal balance between product and functional bosses. The matrix facilitates discussion and adaptation to unexpected problems. It tends to work best in organization of moderate size with a few product lines. The matrix is not needed for only a single product line, and too many product lines makes it difficult to coordinate both direction at once.

Strengths and Weakness of Matrix Organization Structure


  1. Achieves coordination necessary to meet dual demands from customers
  2. Flexible sharing of human resources across products
  3. Suited to complex decisions and frequent changes in unstable environment
  4. Provides opportunity for both functional and product skill development
  5. Best in medium sized organization with multiple products.


  1. Causes participant to experience dual authority. Which can be frustrating and confusing
  2. Means participants needs good interpersonal skills and extensive training
  3. is time consuming involves frequent meetings and conflict resolution sessions
  4. will not work unless participants understand it and adopt collegial rather than vertical type
  5. Require great effort to maintain power balance

The strength of the matrix is that it enables an organization to meet dual demands from customers in the environment. Resources (people, equipment) can be flexibly allocated across different products, and the organization can adapt to changing external requirements. This structure also provides an opportunity for employees to acquire either functional or general management skills, depending on their interests.

One disadvantage of the matrix is that some employees experience dual authority, which is frustrating and confusing. They need excellent interpersonal and conflict – resolution skills, which may require special training in human relations. The matrix also forces managers to spend a great deal of time in meetings. If managers do not adapt to the information and power sharing required by the matrix, the system will not work. Managers must collaborate with one another rather than rely on vertical authority in decision making. The successful implementation of one matrix structure occurred at a steel company in Pittsburgh.

This example illustrates the correct use of a matrix structure. The dual pressure to maintain economies of scale and to market four product lines give equal emphasis to the functional and product hierarchies. Through continuous meetings for coordination, worldwide steel achieved both economies of scale and flexibility.

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