Choosing an Organizational Structure

What you’ll learn to do: Identify the best structures for different types of organizations

Not all organizations are created equally. Organizations have different strategic needs, and to facilitate those needs they should have an organizational structure that supports business activities. We’ve already learned about different kinds of organizational structures, from the rigid bureaucratic type to the loose and free boundaryless organizational structure. What works for one organization won’t work for another, and in many cases, organizations will employ more than one structure to get the job done. How do organizations determine how to proceed where structure is concerned?

A sign post with two signs pointing in opposite directions. Each sign reads "Organizational Structure"

Learning Outcomes

  • Discuss organic versus mechanistic models for organizational structure
  • Identify the factors that determine an organizational structure
  • Organizational structure and its impact on success

Organic versus Mechanistic Models

We’ve spent some time now understanding the elements of an organizational structure, and the types of structures an organization might choose to use when organizing their work and employees. Some of those structures are very strict and hierarchal, like the bureaucratic model, and some of the structures, like boundaryless, are pretty loose and free-wheeling. They all have their advantages and disadvantages.

When managers combine the basic components and elements of an organizational structure together, the result has certain characteristics that are best understood by looking at it through the lens of organic and mechanistic organizations.

Organic Organizations

An organic structure. There are four segments that all communicate with one another. Each segment has 3 to 5 individuals who all communicate with one another.Organic organizations have a low degree of formality, specialization and standardization. Their decision making is decentralized and their activities are well-integrated. The organic model is usually flat, and it usually uses cross-hierarchical and cross-functional teams and possesses a comprehensive information network that features lateral and upward communication in addition to downward communication.

Organic organizations look a lot like boundaryless organizations. They allow for employees to cultivate more ideas and be more creative because the business is not as rigidly structured. Organic structures are used in dynamic, unstable environments where the business needs to quickly adapt to change, as the structure gives the organization the flexibility to deal with fast-paced environmental change and many different elements.

A good example of an organization that uses an organic structure might be a consulting firm. A consulting firm responds to customer issues as they come up, and those issues change with the business environment. Consulting firms want to respond to change quickly, so by choosing an organic structure they’re able to be nimble and address their customers’ needs.

Mechanistic Organizations

Mechanistic organizations have centralized decision making and formal, standardized control systems. Essentially, they are bureaucracies.

Mechanistic organizations work well in stable, simple environments. Managers integrate the activities of clearly defined departments through formal channels and in formal meetings. Often, they feature many hierarchical layers and a focus on reporting relationships.

A mechanistic organization. Individuals only communicate with their direct reports and direct supervisors.

General Motors

General Motors is a good example of an organization using the mechanistic model. Why do they use that? For one, they’re very large, and when that many people and functions are involved, order is needed. But they’re also in a stable, if not somewhat simple, environment. The car market fluctuates with the economy, yes, but the company builds cars and trucks. Across all their divisions, that function is basically the same.

DMV

Another example of a mechanistic model is the Department of Motor Vehicles. When you get your new driver’s license, you go from one department to another, taking a written test, taking an eye exam, taking an actual driving test, filling out the paperwork, and then finally, getting your driver’s license. The structure for this is very mechanistic—every person looking to get a driver’s license has to be treated exactly the same. It’s simple and stable.

Here’s a table comparing the basic characteristics of both models:

Organic Mechanistic
General tasks Specialized tasks
Loosely defined departments and hierarchy Well-defined departments with clear hierarchy
Decentralized decision making by many individuals Centralized decision making by a few people
Integration achieved by managers and employees interacting and exchanging information as needed Integration achieved by formal manager meetings
Flexibility and capability of rapid change Clear and efficient reporting relationships

Most companies find themselves falling somewhere in between the two extremes of organic and mechanistic. Each organization designs its structure to enable its mission, goals, and strategy. If the structure fits with other contextual elements, it has a better chance of being effective in supporting the organization.

Practice Question

Now that we fully understand the difference between organic and mechanistic structures, let’s use those to gain a better understanding of what kind of organizational structures work best for different organizations—and why.

Factors of an Organizational Structure

What elements influence the design of an organization’s structure? Some organizations choose to be mechanistic, others choose to be more organic. Why is that the case?

For the most part, it’s about strategy, organization size, technology and environment. Let’s take a look at each of these elements and how they influence the organization’s structure.

Strategy

A woman standing at the front of a room, gesturing at sticky notes on the wall.Every organization has one (or at least, every organization should). If an organization’s structure is a means by which that organization achieves its objectives, then strategy and structure should be closely linked.

An innovation strategy is one that emphasizes the introduction of major new products and services. A company like 3M or Apple could be characterized as organizations who would adopt innovative strategies. Ideally, an organic, loose organizational structure is more appropriate to support an innovative strategy.

An organization that is controlling costs and refrains from unnecessary innovation or marketing expenses is probably practicing a cost-minimization strategy. These companies sell a basic product and keep prices low. Wal-Mart employs this strategy. A mechanistic strategy allows for tight control, extensive work specialization, high formalization and centralization, and so it best fits this strategy.

An imitation strategy is one that seeks to move into new products or new markets after their viability has already been proven. They want to minimize risk and maximize profit, so they take successful ideas and copy them. A company like IBM might be considered one that uses an imitation strategy to its advantage. The best structural option here might be a mix between mechanistic and organic structure, which would allow tight control for current business and looser structures for new pursuits.

Organization Size

There is significant research supporting the idea that organizational structure is impacted by the size of the organization in question. Large organizations tend to have more work specialization, more vertical levels, rules, regulations, and so on. So they tend to be more mechanistic in nature.

Large organizations, those that have 2,000 or more employees, are likely to be more mechanistic, but as they increase in size, they do not become more mechanistic. If the organization increases to 2,500 people, the mechanistic-ness of the organization’s structure doesn’t necessarily increase. But if you were to add 500 employees to an organization that only had 300 to start, the percentage increase in size is likely to make that smaller organization more mechanistic.

Technology

In this instance, the word technology refers to how the organization transfers its inputs and outputs. Every organization has at least one technology for converting their resources into products or services. For example, the technology Ford Motor Company uses to produce cars is the assembly line.

There is not a strong association between technology and organizational structure, but studies have found that there is some correlation between the degrees of routine-ness of the technology the organization employs, and the structure that best supports it. By “degree of routine-ness” we mean that the technology tends either toward routine (automated and standardized) or non-routine (varied operations) activities.

Routine tasks are often supported by organization structures that are taller and more departmentalized. Organizations that relied on routine tasks often had more manuals and formalized documentation, and decisions were more centralized. Non-routine tasks required decentralization of decisions to support the uniqueness of the tasks.

Environment

General Motors, as we noted earlier, doesn’t face a lot of environmental change. The car market fluctuates a bit here and there, but they basically make cars and sell them. Other organizations feature all kinds of uncertainty. Organizational structures can assist in helping the business withstand the external issues of environment.

There are three different dimensions to environmental uncertainty: capacity, volatility and complexity.

Three dimensions of environmental uncertainty. On the x-axis is complexity, ranging from simple to complex. On the y-axis is volatility, ranging from stable to dynamic. On the z-axis is capacity, ranging from abundant to scarce.

Capacity refers to the degree in which an environment can support growth. Volatility refers to the level of unpredictable change. Complexity refers to the degree of heterogeneity and concentration among environmental elements.

The higher degree of complexity and volatility in an environment, and the more dynamic the capacity, it stands to reason that the more organic the organizational structure should be. If there is constant change and competition, an organization should be flexible to the changing needs that those dynamics bring with it. A technology or internet-based company would be a good example of one that faces complex, scarce, and dynamic environments.

A tobacco company, though, may be on the other end of that spectrum. Phillip Morris or Brown & Williamson face very few competitors, and their industry is incredibly standardized. The only change they’ve faced over the years is the decreasing use of their product. These organizations lean toward mechanization.

Practice Question

So, how do these elements affect an organizational structure, especially when an organization might lean toward one direction where strategy is concerned and in another direction where technology and environment are concerned?

3M’s Structure

3M is a company that would seem to have an innovative strategy. The company that invented Post-it Notes, masking tape and the first waterproof sandpaper could hardly be anything else. But they’re also a very large company. They have a variety of manufacturing technologies that are probably pretty routine, but their innovation would be far less so. Their environment? They actually feature a variety of departments, from health to office products to construction. Let’s say, by averaging those different interests out, that they fall in the middle of the complexity, volatility and capacity scale.

Several of these elements suggest that 3M should lean toward an organic structure, but they are actually a hybrid. At a whopping 91,000+ employees, 3M is almost forced to be mechanistic, and is in fact highly structured in the corporate area. They’re otherwise organized by department, and areas where innovation is required often feature a matrix structure, which lends itself to a more organic feel. They keep lines of communication open between the departments with innovative communication methods.

Organizational Structure and Success

Organizations grow and change all the time, and the organizational structure that worked for a company once upon a time doesn’t always work for a company as it grows. We’ve talked about how smaller companies in uncertain environments can have organic organizational structures and be very flexible about how they respond to customer needs. But as they grow larger, there’s a need for a more mechanistic approach. After all, a company can’t have 2,000 employees with decision making power, all doing business the way they think is right.

We’re going to take a look at a couple of organizations that went through some organizational structure changes, so we can see where the original organizational structure was going wrong and how changes to that structure once again set that organization up for success.

Google

Google is an excellent example of how a couple of guys in a garage changed the world. They started out with a single focus—to develop the world’s best internet search engine.

That was about the last time that Google had a single focus.

Google grew up fast, and in 20 years they’ve accumulated dozens of locations, over 90,000 “Googler” employees, and many, many different interests. Among their offerings are Google Docs, Google Translate, Google Maps, Waze, Android, YouTube, Blogger, Google Fiber, Google Home and self-driving vehicles. Just to name a few. Google’s single umbrella, with its relatively “flat” organizational structure, was growing monstrously diverse.

How does a single, relatively flat organizational structure support “monstrously diverse”? The short answer is, it doesn’t.

CEO and founder Larry Page created a holding company for all of Google’s projects and called it Alphabet. Then, each of those Google interests (26 in all, as you might have guessed) became its own company, with its own CEO. The CEO of each of those companies is now able to concentrate on the goals of that company without worrying about the mission of Google overall. It allowed greater autonomy to those smaller companies under the Alphabet umbrella.

Larry Page explained in a blog post: “Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related. Alphabet is about businesses prospering through strong leaders and independence.”

Page admitted the reorg was radical in the same post, saying, “in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.”

The reorganization of Alphabet as a holding company for the 26 Google subsidiaries has been going strong since 2015. Employees are able to concentrate on the mission of their own company and, with each company accountable for its own expenditures and income, Page expected that they’d find innovating more meaningful.

This is an example of how a very large company, forced into mechanistic structure by its sheer size and scope, made an organizational move to allow its smaller divisions to innovate and adopt more organic structures if that better fit their needs. Alphabet’s 2018 revenue was $136.82 billion last year, and that’s a good indication that it’s working.

Microsoft

Microsoft had established themselves as the world’s go-to in personal computer operating systems and Office suites. But suddenly the behemoth technology company was struggling. Departments that had been established to innovate were now in competition with one another, creating a toxic environment that threatened the company’s future success.

While Google was the dominant online provider and Apple was the ruler of the world of mobile products, Microsoft was struggling to invent, and then losing interest in their own products when they did. Zune is a great example. Does anyone remember what a Zune is? Me neither.

In 2014, a new CEO, Satya Nadella, started his tenure with a major restructuring of the company. His first order of business was to do away with the damaging internal competition that posed so much of a threat, but he also wanted to reinvent productivity and business processes, build an intelligent cloud platform and create more personal computing. With a restructure plan and this three-pronged mission in hand, he went to work.

Nadella waited two years before he merged Microsoft Research Group with the Bing, Cortana, and Information Platform group teams to create a new artificial intelligence and research group, whose goal it is to innovate artificial intelligence across Microsoft’s product lines.

Restructuring this organization was a success in that it refocused Microsoft’s people. The company was suffering from low employee engagement, and manipulating the organizational structure to eliminate harmful competition and create new team focus was a huge win. Nadella helped Microsoft’s employees find a new sense of meaning in their work.

In both of these instances, CEOs reviewed current operations and decided it was time for a new organizational structure that would better impact the company’s success. Whether it’s a change in functional strategy, as was the case for Google, or in people strategy, in the case of Microsoft, both CEOs chose to redo the structure to support the new strategy. The new structures then set the companies up for future success.

What should every good organizational structure do for a company? The list includes, but is not limited to, the following:

  • Aids effective communication
  • Aids in performance evaluation
  • Increases efficiency
  • Unburdens employees from excess or redundant work
  • Provides faster and better decision making
  • Provides clear reporting and working relationships

A company should always be reviewing its strategy, size, technology and environment to decide if the organization’s structure still supports the business. If it’s in need of a change, then change should occur. We’ll talk about how to manage these kinds of changes in the next module.

Practice Question