Organizational Structures and Their History

What you’ll learn to do: Describe the various organizational structures and their history

When the US economy went from the general store on the corner to the boom of manufacturing and the industrial revolution, there was a need to look at businesses differently. Suddenly, there were not two or three employees in a business, there were hundreds. There was not just one group of tasks to complete, there were dozens.

Just as we looked to our team members to decide how to motivate them and make them more productive, we began to study organizational structure to determine how that had an influence. Organizational structure brings together Taylor’s ideas of work specialization, Fayol’s ideas of chain of command, and Weber’s bureaucracy to add to the productivity and efficiency of business.

Learning Outcomes

  • Discuss the elements of organizational structure
  • Discuss common organizational structures and their historical origins
  • Identify modern organizational design options

What is Organizational Structure?

An empty organizational chart with multiple levels.A worker reports to a manager. A manager reports to a director, a director reports to a vice president, and a vice president reports to a C-level senior leader, like a chief executive officer or a chief administrative officer. If you’ve ever worked in a corporate setting, you’re likely to recognize this as the basic set of layers of an organization’s structure.

Organizational structure defines how job tasks are formally divided, grouped, and coordinated. The structure of an organization usually features six different elements:

  • Work specialization
  • Departmentalization
  • Chain of command
  • Span of control
  • Centralization and decentralization
  • Formalization

Practice Question

Now that we understand just what organizational structure is, let’s take a look at each one of its elements, so we can better understand how organizations choose to structure themselves to maximize productivity.

Work Specialization

Earlier, we studied Frederick Winslow Taylor, who researched time and motion and determined the most efficient ways for workers to do their tasks. Taylor’s “one right way” was the birth of work specialization. When Henry Ford conceived the assembly line, he tossed aside “one best way” and viewed work specialization with an eye toward continued improvement. Work specialization describes the degree to which activities in the organization are divided, and then subdivided, into separate jobs.

If you put one worker on the task of building an automobile, he might still be building it a month or two later. But if you have one worker that’s focused on installing right front tires, and another who is focused on left front fenders, then those tasks become standardized. Employees learn to do them quickly with practice.

By the 1940s, most manufacturers were practicing work specialization, or “division of labor” as it’s sometimes called. Work specialization was ideal from a task point of view—easy tasks could be done by unskilled labor, and those tasks that required more skill could be separated out and addressed by employees that possessed those skills. Those skilled employees weren’t wasting their time on tasks they didn’t have to be doing.

Work specialization was also ideal from a productivity point of view. Installation of brake pads requires different tools than the installation of a tire, and when workers were assigned to one of those tasks instead of both, tools didn’t need to be taken out and put away. Employees could cheaply be trained to do one specific task, and many employees, each trained to do their specific task, could assemble highly complex machinery quicker and easier than one highly trained employee that possessed all the skills to complete the assembly.

Manufacturers continued to tinker with and fine-tune worker specialization to increase productivity until the 1960s, when it became clear that a good thing could be taken too far. Boredom, stress, low productivity, increased absenteeism and turnover offset higher productivity. Manufacturers responded by enlarging worker specialization, including more tasks within a position to increase engagement.

Departmentalization

Once jobs are divided up through work specialization, those jobs need to be combined together to coordinate common tasks. Departmentalization is the basis by which jobs are grouped together. Jobs can be grouped in the following ways.

  • Function. This is among the most popular way to group activities. Corporations might have a supply chain function, a finance function, a human resources function. All the worker specializations for those areas are grouped together, and people with common skills work in common units.
  • Product. A large manufacturing company might group its common tasks together by product. A paper products manufacturer might have a department for office paper, and other department for bathroom tissues, and yet another for cartons. The major advantage of organizing common tasks this way is to increase employee accountability for the success of those products.
  • Geography. If an organization’s customers are scattered over a geographic region, an organization might choose to group common tasks geographically. A company that has a South, Midwest, and Eastern sales function is organizing around territory, or geography.
  • Process. A manufacturing plant might choose to organize common tasks around process. A tubing plant might organize departments around casting, pressing, finishing, packaging, etc. Each department specializes in one particular part of the manufacturing process. The same kind of departmentalization is true of the Department of Motor Vehicles, where you proceed from one area to another to renew your license plates or your driver’s license.
  • Customer. A business might choose to combine tasks around the type of customer it serves. For instance, a service like Dropbox.com has free file sharing and cloud storage for its individual users, but there is also a department of Dropbox that services business clients.

Large corporations can use any or all of these types of departmentalization to organize themselves. They might have a manufacturing area that organizes itself around process, but then a sales department that is organized geographically and a corporate support center that’s organized functionally.

Chain of Command

An illustration of a person standing holding a chain together.The chain of command is the unbroken line of authority that extends from the top of the organization (e.g., the CEO or the President) to the lowest echelon and clarifies who reports to whom. At the beginning we talked about managers reporting to directors, who reported to vice presidents who reported to C-level leaders. Such is the chain of command.

Two additional concepts go along with the idea of chain of command. The first, authority, describes the rights inherent in a managerial position to give orders and to expect the orders to be obeyed. The second, unity of command, describes the concept that a subordinate should only have one superior to whom he or she is directly responsible. If unity of command doesn’t exist, there’s a likelihood that a subordinate will be responding to commands from different people and experiencing a dilemma of competing priorities, which isn’t productive.

We learned about Henri Fayol and his theories around management, particularly chain of command and unity of command. These principles used to be a cornerstone of organizational structure, but advancements in technology and the trend toward empowering employees makes this less relevant today, but the chain of command element is not going to disappear any time soon.

Span of Control

Span of control deals with the number of subordinates a manager can effectively direct. The wider an organization can make its managers’ spans of control the more efficient it will be. Wider spans of control save money.

Two pyramids showing different organizational structures. In pyramid one, there are 7 levels. Level 1 has 4096 individuals, level 2 has 1024 individuals, level 3 has 256 individuals, level 4 has 64 individuals, level 5 has 16 individuals, level 6 has 4 individuals, and level 7 has 1 individual. This organization has a total of 1365 managers. In pyramid two, there are 5 levels. Level 1 has 4096 individuals, level 2 has 516 individuals, level 3 has 64 individuals, level 4 has 8 individuals, and level 5 has one individual. This organization has a total of 585 managers.

Consider the span of control of the company represented in the drawing above in blue. The blue company has 5,461 employees and six levels of managers to manage them (all but the bottom layer of 4,096). Let’s say those managers make $50,000 apiece. The total payroll for 1,365 managers making $50,000 apiece is $68,250,000.

If we look at the green company, we still have a bottom layer of 4,096, but less managers overall managing them. If the green company’s 585 managers each make $50,000, the green company’s total payroll for those managers is $29,250,000. That’s a huge savings.

Small spans of control are not only expensive, but they tend to complicate communication up and down the organization. The more layers, the more the message has to travel from manager to manager. Narrower spans of control also encourage overly tight supervision and less employee creativity and empowerment. In recent years, the trend has been toward wider spans of control.

Centralization and Decentralization

Centralization refers to the degree to which decision making is concentrated at a single point in the organization.

In a decentralized organization, employees are empowered to make decisions, so action can be taken quickly to solve problems, and employee input is considered. The more lower-level employees have the power to make decisions, the more decentralized an organization is.

In a centralized organization, upper management makes all decisions and lower management is there to carry those decisions out.

Formalization

Formalization refers to the degree to which jobs within the organization are standardized. An employee in a highly formalized job has little input as to how that job is done, when it’s done or how it should be done.

A worker on the assembly line is probably in a highly formalized job, where he doesn’t have much say in how he does his job. An accounts payable associate also doesn’t have a lot of say in how those many invoices are processed, but her job is probably a little less formalized than the assembly line worker. A sales associate, out calling on customers, may have very little formalization in his job.

Practice Question

Now that we understand the six elements that figure into organizational structure, let’s take a look at some common configurations of organizational structure and in what instances they are used.

History of Common Structures

Fayol introduced chain of command, separation of jobs, power, and authority; Weber introduced the bureaucratic approach, and Taylor introduced job specialization. They championed the idea of structure within an organization to support efficiency and effective operations, but they never actually prescribed what an organizational structure should look like. In fact, organizational structure was a matter of choice and could differ from organization to organization. The only criterion for any proposed structure was that it be effective.

It wasn’t until the 1930s that organizational structures started becoming a bit more standard. As human relations theory took hold, researchers pondered an organizational structure that would allow for the needs, knowledge and opinions of employees to be better recognized.

An organization’s structure contains the six elements we described, and is laid out in such a way that employees are able to, be productive, make a profit, and accomplish the organization’s mission. Let’s take a look at some of the older, simpler organizational structures that companies have adopted. They’re still very much in use today.

The Simple Structure

The simple structure is aptly named because, well, there’s just not much to it. Simple structures have

  • A low degree of departmentalization
  • Wide spans of control
  • Centralized authority
  • Little formalization

The typical simple organization structure is flat:

A simple organizational structure with a manager and four individuals who directly report to them.

This type of organizational structure is inexpensive to maintain and accountability is very clear. However, it’s difficult to maintain this kind of structure in any but a small organization. When this kind of organization structure increases in size, decision making slows down and the manager becomes overly burdened as the go-to decision maker for 50-100 people. It’s also risky – everything depends on one person, and should that person become ill or die, it puts the business in jeopardy.

The simple structure is often referred to as “pre-bureaucratic,” in that it lacks a standardization of tasks.

Bureaucratic Structure

Bureaucratic organizational structures take a chapter out of researcher Max Weber’s book, with clearly defined roles and responsibilities, hierarchical structure and respect for merit. This organizational structure is characterized by

  • Highly routine operating tasks achieved through specialization
  • Very formalized rules and regulations
  • Functional departmentalization
  • Centralized authority
  • Narrow spans of control
  • Decision making that follows the chain of command

Bureaucratic organizational structures are pyramid-like, with a CEO atop the chain of command in the corporate structure and a clear chain of command underneath. A bureaucratic organizational structure might look like this:

A bureaucratic organizational structure. At the top is a board of directors, to whom the CEO reports. The CPO and the Executive Vice President report to the CEO. The CPO has direct reports in health, beauty, and food. Each of these three departments are segmented into research and development, manufacturing, finance, marketing, and customer service. The Executive Vice President has a direct report in Admin & Finance. This department is segmented into Human Resources, procurement, finance, communications, training/safety, and legal.

Bureaucratic organizational structures are ideal for organizations that require standardization (think banks, government offices). They’re ideal for organizations looking for the ability to perform standard tasks highly efficiently. Organizations with bureaucratic structures can get by with less talented people at lower levels, because decision making almost always falls to senior leaders.

The downfalls of bureaucratic structures are that they create silos – functional areas that often don’t talk to each other.

If the bureaucratic organizational structure looks familiar, it’s because it’s still tremendously popular with organizations today. Even as trends are changing toward teams and other types of structures that help businesses compete, organizations still hold onto the hierarchical structure of the bureaucratic structure as the norm.

The Matrix Structure

An organizational structure with the CEO at top, four CEOs of SBUs below, and five geographic locations also under the CEO along the side

Matrix structure with geographic and product (SBU) structure.

A matrix structure creates dual lines of authority and combines functional and product departmentalization.

Ad agencies, hospitals, universities and management consulting firms use the matrix organizational structure. It’s easy to see why – by creating a dual reporting situation, a manager who’s working with a company on advertising would be able to manage a team that included a representative from each of the needed areas to get a campaign running—a graphic designer, a space planner and so on.

This structure allows for the efficient allocation of specialists. Information is more easily exchanged, as the contact between the different departments is increased.

The major disadvantage is the ability to get all these people moving at the same time, with clear priorities, to deliver a solution that’s on time and on budget. It can also create power struggles, because it tosses aside the idea of unity of command.

The matrix structure is among those that are considered “post-bureaucratic,” in that it does contrast in some ways with Weber’s ideals. That said, the matrix structure doesn’t really depart from Weber’s in that hierarchy and authority still exist here.

Practice Question

Organizational structures continue to evolve to meet the globalization and economic demands of today’s business world. Let’s take a look at some more modern types of structures.

Modern Organizational Design

“Post-bureaucratic” organizational structures continue to be developed to enhance how organizations do business and remain competitive. Let’s talk about some of these new options, designed to help organizations do business in today’s world.

The Team Structure

In an organizational structure based on teams, the structure breaks down department barriers and decentralizes decision making to the level of the team. Team structures usually require employees to be generalists as well as specialists.

A team structure can define a whole company. Whole Foods Market boasts a team-based organizational structure, with the teams shaped around their departments within the store—there was a produce team, a meat team, and so on. Based on the shape of the organizational chart in Figure 1, you can understand why Whole Foods refers to its mission statement as the “Declaration of Interdependence.” Indeed, each of the teams is dependent on and answers to the other members of their own team and the other teams.

A loose organizational structure with the management team in the center. Team A, B, and C all communicate with one another and the management. Team A is the core team, and has part-time and consultant employees.

Figure 1. Team-Based Organizational Chart

More often than not, when larger organizations decide to use teams, they do so as a part of a bureaucratic structure rather than a straight team structure. Moving from a bureaucratic to a team structure requires a great deal of change, so larger organizations will assemble teams and add a quasi-team structure into their bureaucratic org chart.

Virtual Organization

A virtual organization is a small, core organization that outsources major business functions. Think of it as “renting” departments rather than owning them.

Back in the early days of Hollywood, movies were made by big studios with large bureaucratic organizational structures and a laundry list of celebrities. Now, when you sit down to watch a movie, you see several different production companies’ logos on the screen before the movie even starts. It might begin with “Paramount.” And then you see “Bad Robot.” And maybe two other companies. Each one of those companies has played a role in making the film. During the credits, you see animation companies and sound editing companies. Paramount may be acting as the central “organization.” The businesses to which Paramount sends work would make up the balance of the virtual organization.

The home office has flex-time employees. There are also domestic satellite offices, international satellite offices, independent contractors, telecommuters, and outside vendors.

Figure 2. Virtual Organizational Chart

The chart in Figure 2 illustrates a typical virtual organization, which includes employees that practice flex-time in a home office, ones that are in satellite offices domestically and internationally, and then a group of independent contractors, telecommuters and vendors.

Paul Newman’s food product company, Newman’s Own, runs on a virtual organizational structure. Newman’s Own employs only 18 people, and outsources almost everything—manufacturing, procurement, shipping and the like.

Large organizations dabbling in the virtual organizational structure usually do so to outsource manufacturing. Thousands of well-known organizations are virtual in one way or another. General Motors, Nike, and Cisco are just a few of them. The flexibility a virtual organization provides is hard for organizations to resist, as it allows them to contract out any function they feel another organization can do more cheaply than them.

The virtual organization is definitely on the other side of the spectrum from bureaucratic organizational structure. The bureaucratic organizational structure seeks control in multiple levels and, if there is a downfall to the virtual organizational structure, it is that there is far less control over the different parts of the business.

Boundaryless Organizational Structure

American business executive and former CEO of General Electric, Jack Welch, coined the term “boundaryless organization” when he described his ideal General Electric. He wanted to eliminate vertical and horizontal boundaries within GE and break down barriers between the company and its customers and suppliers.

When an organization removes the vertical boundaries, the hierarchy flattens. Status and rank are minimized. Functional departments create horizontal boundaries, and those boundaries can stifle interactions between departments. Functional departments can be replaced with cross-functional teams, and activities can be organized around process.

General Electric used tools like 360 performance appraisals, where peers, subordinates and managers could evaluate an employee’s performance. They put together cross-hierarchical teams and employed participative decision making processes.

The boundaryless organizational structure, when fully operational, breaks down barriers to external partners (suppliers, customers, etc.) and barriers created by geography. Telecommuting blurs organizational boundaries as well. In fact, this structure relies heavily on technology to achieve, and so sometimes it’s called the T-form structure.

Holacracy

This video explains the concept of holacracy as a method of decentralized management and organizational governance in which decision making and authority are distributed amongst self-organizing teams.

Brian Robertson of Ternary Software in Exton, Pennsylvania, developed the system of Holacracy by experimenting with more democratic forms of organizational structure. It’s a flat organization system, meaning there are few or no levels of middle management between staff and executives. The objective behind a flat organizational system is that employees are more involved in the decision making process rather than being directly and closely supervised by many layers of management.

The essential elements of Holacracy include:

  • Roles instead of job descriptions. An individual can hold multiple roles within this construct. Roles are defined by each circle—or team—via a collective governance process.
  • Circle structure. Each circle is a team. Circles are organized hierarchically and each circle is assigned a clear purpose and accountabilities by its broader circle. But the employees within that circle need to determine how to best achieve its goals. Each circle has a “lead link” and “rep link,” and those people sit in the meetings of both their circle and the broader circle to ensure alignment with the organization’s mission and strategy.
  • Governance process. Circles use a defined process to create and regularly update its own roles and policies.
  • Operational process. Circles align around operational needs and requires that each member of the circle fulfill duties. Members have a lot of autonomy and authority and can decide on their own how to best achieve these goals.

Zappos is famously using the Holacracy model in their work, and they chose to use that model so they could provide excellent customer service. Their theory was that they were able to put customer service decisions into the hands of the employees and eliminate burden on upper management.

It should be noted that the term “Holacracy” is a registered trademark of HolacracyOne, LLC.

Practice Question

Which modern organizational structure best positions an organization for success? Well, like we mentioned, organizations—especially large ones—are committed to a bureaucratic org chart, and any additional changes in this direction are sometimes incorporated into the bureaucratic structure.