The topic is hackneyed, and yet, every company periodically has to solve problems in the field of organizational design – these can be issues of improving the organizational structure of the company as a whole, or local tasks of optimizing the interaction scheme for a separate area, issues of growth/development, or issues of interactions between the management company and dependent companies. This issue is multifaceted and quite interesting. Structuring an organization as modeling social relations in a separate business community is also a nerve-wracking issue. Not all managers have the time or desire to read Mintzberg and others, but responsibility must be distributed in any case.

According to the classics, the task of designing a graphic diagram of the organization is in third place in the sequence of steps for developing the organizational structure of the company, the approach is graphically presented in Fig. 1. First, the goals, since without an answer to the question: why do we need all this? what do we want? – structuring the organization will be more like mental gymnastics than a useful event. The goals are primary, business processes are secondary, since the structure of the organization’s processes supports the structure of its goals, and only in the third step, having defined the goals and processes, we fix the formal connections in the organizational structure so that the organizational structure of the company supports the necessary business processes to achieve the set goals. And all our decisions at each step (goals, processes, structure) are fixed in the planning and reporting and  regulatory and methodological documents of the Company (regulations). But this is the classics …

Fig. 1. Classical approach to the formation of organizational interaction schemes

 

 

 

 

 

 

 

 

In practice, organizational design issues are often decided based on personal ambitions, which is understandable. A very interesting analysis of the most common mistakes in practice is given in the article in the McKinsey Bulletin  “The False Path to Efficiency”, Issue 1(3) 2003. “Some <top managers> tend to make global decisions quickly, others, on the contrary, calculate all the consequences of planned changes down to the smallest detail, others consult with each employee, and others do not consider it necessary to inform anyone except top managers about their plans.”

Structuring an organization is a field for creativity for the owner of a business system, reflecting his picture of the world.

I will give a real example of an artificially created conflict in the organizational structure of a holding management company; the example is graphically presented in Fig. 2.

An example from life, there was an opportunity to observe the interaction in dynamics in all its “beauty” for several years… Why was it necessary? The answer is in the political plane, it is difficult to find any business logic in this “creativity” of organizational design, the analysis of the interaction practice shows obvious losses of time on approvals and low efficiency of planning processes and control over the implementation of plans – belated defense of the business plan of a dependent company (March-April of the planning year).

With some additional effort, it became clear that another function of the BSC advisor (in addition to the methodological one) is the function of a “supervisor” (in the language of concepts), which is expressed in additional control, including over the director of strategic development, in the interests of the top person.

If we develop the pathological idea reflected in the diagram in Fig. 2, we will get vivid examples of other possible options (Fig. 3) – how to further increase the number of Advisors to the President, strengthen internal cross-control, turn business into court games according to the Eastern Byzantine model of government or reign…)

 

It would be interesting to collect examples of graphic organizational charts from practice “with a twist”, from our daily corporate life, which thinking and caring people have to deal with, to depersonalize the examples and publish them for the exchange of experience… )) There will be a good knowledge base, or a cabinet of curiosities “how not to do it”… I am ready to continue publishing on this topic if readers send me their examples )) wellcome!

A negative example on the topic of organizational structure was considered above. I recommend considering a number of positive examples on organizational structure for developers in the book by V.I. Kochkin “Efficient Development” .

The issues of interactions between the management company and the holding’s dependent companies are well systematized, analyzed and described in one good, old McKinsey methodology, in the publication in the McKinsey Bulletin  “The Role of the Corporate Center”, No. 1(3) 2003. I recommend…

The history of business community development in different countries has accumulated basic options for solutions on how to structure an organization to solve what problems. Further in the article there will be material on the topic of “repetition of the past”, since sometimes top officials like to consider several options with an analysis of the pros and cons of each of them, then this material can also be useful…

Below are the main types  of organizational structures, with examples, analysis of pros and cons, scope of application and a brief description of the history of their origin:

1. Linear functional structure
2. Divisional structure
3. Project structure
4. Matrix structure
5. Network structure

1. Linear-functional structure

Definition and example:

Linear-functional organizational structures consist of linear divisions that perform the main production activities, and functional divisions that implement management functions on the scale of the entire organization (planning, finance, accounting, marketing, personnel, etc.).

In the linear-functional management structure, the principle of one-man management operates, the essence of which is that subordinates carry out the orders of only one manager. The superior management body does not have the right to give orders to any executors, bypassing their immediate superior.

 

 

 

 

 

Figure 4.  Linear-functional management structure.

Pros:

1. clear delineation of responsibility and competence, personalized responsibility for the result;
2. high competence of specialists responsible for specific functions;
3. speed of reaction in response to direct orders.

Cons:

1. lengthy decision-making procedure;
2. problems of interfunctional coordination – complex horizontal communications between employees of different divisions of the company;
3. a heavy workload for the manager; since the lack of authority of functional and line managers encourages raising decision-making to the level of a higher manager, thereby overloading him with current problems;
4. narrow specialization of employees, which narrows their horizons of vision of the company’s activities;
5. a large number of management levels between the top management and the employee;
6. not very flexible and adaptable to new market situations.

Application area:

Single-product, highly specialized industrial and service enterprises.

History of the issue:

It was used in enterprises from the end of the 19th – beginning of the 20th century (School of Scientific Management).

2. Divisional structure

Definition and example:

Divisional structures are structures based on the allocation of large autonomous production and economic units (divisions) that have operational and production independence and are responsible for generating profits.

The structuring of a company into divisions is carried out according to one of three principles:

1. Product – taking into account the characteristics of manufactured products or provided services
2. Industry/market segment of the consumer, type of client
3. Regional, depending on the areas served.

In this regard, three types of divisional structures are distinguished:

1. divisional-productive structures;
2. customer-oriented organizational structures;
3. divisional-regional structures.

 

 

 

 

Figure 5.  International product management structure.

Pros:

1. the ability to devote as much attention to a specific product, consumer, or geographic region as a small specialized company, as a result of which it is possible to respond more quickly to changes occurring in the external environment and adapt to changing conditions;
2. orientation towards achieving the final results of the company’s activities (production of specific types of products, satisfaction of the needs of a specific consumer, saturation of a specific regional market with goods);
3. reducing the management complexity faced by senior managers;
4. separation of operational management from strategic management, as a result of which the company’s top management concentrates on strategic planning and management;
5. transferring responsibility for profit to the divisional level, decentralizing the adoption of operational management decisions; such a structure helps bring management closer to market problems;
6. improved communications (compared to a linear-functional structure);
7. development of breadth of thinking, flexibility of perception and enterprise among department (division) managers.

Cons:

1. increasing the hierarchy, forming intermediate levels of management to coordinate the work of departments, groups, etc.;
2. opposition of divisional goals to the overall development goals of the company, mismatch of interests between the “top” and “bottom” in a multi-level hierarchy;
3. the possibility of interdivisional conflicts, in particular in the event of a shortage of centrally distributed key resources;
4. poor coordination of divisional activities, staff services are disunited, horizontal connections are weakened;
5. inefficient use of resources, the inability to use them fully due to the allocation of resources to a specific unit;
6. an increase in the costs of maintaining the management apparatus due to the duplication of the same functions in divisions and a corresponding increase in the number of personnel;
7. difficulty in exercising control from top to bottom;
8. multi-level hierarchy and within the divisions themselves, the effect in them of all the shortcomings of linear-functional structures;
9. possible limitation of the professional development of divisional specialists, since their teams are not as large as in the case of using linear-functional structures at the company level.

Application area:

The use of divisional management structures is most effective under the following conditions:

1. in large companies, when expanding production and business operations;
2. in companies with a wide range of manufactured products;
3. in companies with highly diversified production;
4. in companies where production is weakly affected by fluctuations in market conditions and depends little on technological innovations;
5. in the case of intensive penetration of companies into foreign markets, i.e. in companies operating on a broad international scale, simultaneously in several markets in countries with different socio-economic systems and legislation.

The most developed type of divisional management structure is the organizational structure based on strategic business units (SBUs). Strategic business units are responsible for choosing the scope of activities, developing competitive products and sales strategies. Once the product range has been developed, responsibility for implementing the program falls on the units of current commercial activities, i.e., on the divisions.

History of the issue:

Divisional structures emerged as a reaction to the shortcomings of linear-functional structures. The need for their reorganization was caused by a sharp increase in the size of companies, the complication of technological processes, and the diversification and internationalization of their activities. In the conditions of a dynamically changing external environment, it was impossible to manage dissimilar or geographically remote divisions of a company from a single center.

Divisional management structures first appeared in the late 1920s at General Motors, and they became most widespread in the 1960s and 1970s. According to some estimates, 80% of all diversified and specialized companies in the US had switched from linear-functional structures to divisional ones by the mid-1980s, including 95% of the top 500. In Japan, 45% of all companies use this type of structure.

The pioneer in the creation and use of organizational management structures built on the basis of the allocation of strategic business units was General Electric. In the second half of the 70s, this company had about 200 departments and 43 strategic business units.

3. Project structure

Definition and example:

Project structures are structures for managing complex types of activities (projects) that require continuous coordination of qualified employees from various functional and line departments under strict constraints on deadlines, quality of work, and costs of material, financial, and labor resources.

The project manager is vested with project authority (full authority and control rights within a specific project). The manager is responsible for all activities from the beginning to the complete completion of the project or any part of it. His functions include defining the concept and goals of the project, forming the project team, distributing tasks between specialists, planning and organizing the execution of work, and coordinating the actions of performers. All team members and all resources allocated for this purpose are completely subordinate to him. The project manager’s project authority includes responsibility for project planning, scheduling and progress of work, spending allocated resources, including material incentives for employees. After the completion of work on the project, the structure disintegrates, and the personnel transfers to a new project structure or returns to their permanent position (in the case of contract work, they are dismissed).

In international practice, a special institute (PMI, Project Management Institute, http://www.pmi.org/ ) has developed project management standards, PMBoK (Project Management Body of Knowledge), which allow a specialist to be certified for compliance with project management standards.

 

 

Figure 6.  Example of a project management structure

Pros:

1. integration of various types of company activities in order to obtain high-quality results for a specific project;
2. an integrated approach to project implementation and problem solving;
3. concentration of all efforts on solving one problem, on completing one specific project;
4. greater flexibility of project structures, flexible use of the organization’s personnel, specialized knowledge and competence of employees;
5. strengthening the personal responsibility of a specific manager both for the project as a whole and for its elements.

Cons:

1. in the presence of several organizational projects or programs, project structures lead to fragmentation of resources and significantly complicate the maintenance and development of the production and scientific-technical potential of the company as a single whole;
2. difficulties for employees to understand their place in the company due to working on separate projects that are not sustainable entities;
3. difficulties with the prospective use of specialists in this company;
4. partial duplication of functions in similar projects.

Application area:

1. When creating a new business;
2. When creating a new innovative product, conducting R&D;
3. With a targeted change in the company’s management system, including management subsystems, for example, the production management system, – modernization of equipment, development and mastering of new types of products and technological processes,
4. Construction of facilities, etc.

History of the issue:

In the late 1950s, the project planning and management method was first used in the United States to implement the research and development program for the Polaris rocket. The method was based on the idea of ​​defining, assessing probable deadlines, and monitoring the “critical path” of the entire work package. The method yielded very good results: the number of failures in work due to inconsistency in the resources used was reduced, the overall duration of the entire work package was shortened, and the overall cost of the program was reduced. After the Polaris program was completed, this method was widely used in management practice and led to the emergence of the project management discipline.

4. Matrix structure

Definition and example:

The matrix structure reflects two management directions in the organizational structure of the company: 1) vertical direction – management of functional and linear structural divisions of the company, 2) horizontal – management of individual projects, programs, products, for the implementation of which the resources of the functional, linear divisions of the company are attracted.

In a matrix structure, an employee reports to two managers at the same time, who have equal rights. A system of dual subordination arises, based on a combination of two principles – functional and project (product).

Project managers in matrix structures, as in the project management structure, have project authority. Moreover, this authority can vary significantly: from comprehensive linear authority over all project details to almost purely consultative authority. The choice of a specific option is determined by the rights delegated to him by the company’s top management. Project managers in a matrix structure are responsible for the overall integration of all activities and resources related to a given project. As a rule, project managers retain the right to determine the priority and timing of a particular task, while the heads of structural divisions can only select a specific executor and the solution methodology.

 

 

 

Figure 7.  Example of a matrix management structure

Pros:

1. integration of various types of company activities within the framework of implemented projects and programs;
2. obtaining high-quality results for a large number of projects, programs, products;
3. significant activation of the activities of managers and employees of the management apparatus as a result of the formation of project (program) teams that actively interact with functional units, strengthening the relationship between them;
4. involvement of managers at all levels and specialists in the sphere of active creative work on the implementation of organizational projects and, above all, on the accelerated technical improvement of production;
5. reducing the workload of senior management by delegating decision-making authority to the middle level while maintaining unity of coordination and control over key decisions at the highest level;
6. strengthening the personal responsibility of a specific manager both for the project (program) as a whole and for its elements;
7. achieving greater flexibility and coordination of work than in linear-functional and divisional organizational management structures, i.e. better and faster response of the matrix structure to changes in the external environment; flexible and effective use of the organization’s personnel, specialized knowledge and competence of employees;
8. overcoming intra-organizational barriers without interfering with the development of functional specialization.

Cons:

1. the complexity of the matrix structure for practical implementation; its implementation requires long-term training of employees and an appropriate organizational culture;
2. the structure is complex, cumbersome and expensive not only to implement but also to operate;
3. due to the dual subordination system, the principle of one-man management is undermined, which often leads to conflicts; within the framework of this structure, ambiguity arises between the role of the performer and his managers, which creates tension in the relations between the members of the company’s workforce;
4. within the matrix structure, there is a tendency towards anarchy; under the conditions of its operation, rights and responsibilities are not clearly distributed between its elements;
5. This structure is characterized by a struggle for power, since within its framework the powers of authority are not clearly defined;
6. this structure is characterized by excessive overhead costs due to the fact that more funds are required to support a larger number of managers, and sometimes also to resolve conflict situations;
7. ambiguity and loss of accountability hinder the achievement of high-quality results;
8. when using a matrix structure, difficulties arise with the prospective use of specialists in a given company;
9. there is partial duplication of functions;
10. management decisions are not made in a timely manner; as a rule, group decision-making is typical;
11. conformism in group decision making is noted;
12. the traditional system of relationships between departments is disrupted;
13. in the conditions of a matrix structure, full control over management levels is difficult and practically absent;
14. The structure is considered to be completely ineffective during periods of crisis.

Application area:

The matrix structure is used in the space industry, in the electronics industry, in high-tech areas.

History of the issue:

Originally developed in the space industry and applied in the electronics and high-tech industries, the matrix structure emerged as a response to the need to implement rapid technological change while making the most efficient use of a highly skilled workforce.

5. Network structure

Definition and example:

The network structure unites resource suppliers and producers of products/services on a contractual basis (SLA, service level agreement) in the interests of implementing a specific project, where a small parent organization acts as a broker (intermediary). After the project is completed, the project participants separate to become elements of a new value network within the framework of the next entrepreneurial project. Coordination of companies united in the network is carried out by market mechanisms (outsourcing, tender mechanism, outstaffing) instead of command and administrative methods.

The logic of a network or internal market involves the creation of a market economy within a company, where divisions sell and buy goods/services from each other at open market prices.

Network structures are even more clearly oriented towards a specific task than project and matrix structures, and responsibility and risks are divided as much as possible. In a network structure, there is no or almost no management apparatus, there are situational functional nodes that perform different roles at different times – the roles of a resource center, an information, coordination or distribution center.

 

 

 

 

 

 

 

Figure 8.  Example of a network management structure

Pros:

1. high adaptability of companies to changing market conditions, quick response to changes in the market situation;
2. concentration of the company’s activities on priority areas of specialization, on unique processes;
3. significant reduction of costs, their rational structure and increase in income;
4. low level of employment, elimination of duplication of skilled labor;
5. attracting the best partners to joint activities within the network, eliminating the use of second-rate performers;
6. voluntary relationships between counterparties aimed at achieving specific, precisely measured results.

Cons:

1. when forming network models, preference is given to specialization and concentration on key competencies, while modern trends in company development, on the contrary, indicate the need to focus on multi-faceted general qualifications;
2. in network structures, there is an excessive dependence of results on personnel, and the risks associated with staff turnover increase;
3. there is virtually no material or social support for network participants due to the rejection of classical long-term contractual forms and conventional labor relations;
4. There is a risk of over-complication, arising in particular from the heterogeneity of the company’s participants, uncertainty regarding its membership, the openness of networks, the dynamics of self-organization, and uncertainty in planning for network members.

Application area:

1. Computer production, software, electronic industry.
2. Internet businesses (trade, services).

History of the issue:

The network structure is the newest form of company organization, based on modern communications capabilities, the development of the Internet, software and the electronic industry.

Sources:

Books, magazines, newspapers, personal experience and the experience of colleagues, and also, in particular:

1. Vladimirova I. G., magazine “Management in Russia and Abroad”, No. 5 / 1998
2. Open Internet sources ( http://ru.wikipedia.org/ , etc.)

Recommended resources for more detailed information on organizational design:

1. G. Mintzberg “Structure in the Fist”
2. V.I. Kochkin “Efficient Development” ( http://ef-development.ru/ )