How do managers put their plans into action? Once goals have been finalized and plans have been made, the next step in the management process is to put those plans into action. Organizing is the process of structuring the capital, personnel, raw materials, and other resources to carry out a company’s plans in a way that best matches the nature of the work. Part of organizing is to establish an organization structure. What structure an organization chooses depends on a variety of factors, such as the number of employees it has, the speed at which decisions need to be made, how vulnerable the business is to rapid changes, and the collaborative nature of the work.

How do companies document the structure of an organization? Smaller companies tend to use simpler organizational structures compared to large companies. Regardless, to accomplish many tasks at the same time, organizations have some division of labor and allocate work into smaller units. An organizational chart, like that shown in Figure 7.9, shows how groups of employees fit into the larger organizational structure. The organizational chart is a visual representation of several ideas that reflect the structure of the company. The span of control of a specific position is the number of employees being supervised by a specific person. Departmentalization consists of the decisions made to structure the company into smaller groups. Sometimes this is done by function or by product and sometimes by geography or even the type of customers served.

Figure 7.9

Organizational Chart

How is power distributed in an organization? There are two common approaches:

• Vertical organization (or a tall organization). The power belongs to a few, and most people are in positions in which they report to a supervisor.

• Horizontal organization (or a flat organization). Power is distributed, with many people organized in teams or groups.

In a vertical organization, decision making is centralized, and the power to make decisions lies with a smaller number of people. The firm’s organization chart tends to have many layers and long vertical columns showing who reports to whom. The vertical organization has been the primary structure of businesses since the industrial revolution.

In a horizontal organization, the traditional managerial pyramid is flattened, and there are fewer layers of management. Decision making is decentralized and spread out across many more people than in it is in a vertical structure. A horizontally structured organization still has some of the pyramidal aspects, including a CEO and perhaps another layer of middle managers, but most of the remaining employees work in teams or groups. The organization chart for a firm such as this is flat and wide because there are many people with authority. Figure 7.10 illustrates the basic differences between vertically structured organizations and horizontally structured organizations.

Figure 7.10

Vertically and Horizontally Structured Organizations

What are the pros and cons of vertical organization? In a vertical organization, a company is organized by specific functions, such as marketing, finance, purchasing, IT, and human resources. Levels of expertise within the functions are developed, and managers have direct authority and reporting responsibility for their area. Integrating the functions and divisions is not always easy because communication and decisions have to travel up and down long chain-of-command lines. This makes it difficult for a company to respond quickly to changes in a market. Nonetheless, the structure has its benefits because there is ultimately one person in charge and a clear point of authority for decision making. However, in the early 1990s, vertical organization structures were criticized as being overspecialized, fragmented, and inflexible. Some businesses, such as Ford Motor Company and Barclay’s Bank, found that they were more successful when they organized differently and formed management groups around areas of specific production.10

What are the pros and cons of horizontal organization? The benefit of a horizontal organization is that each team has more responsibility for the outcome of its work. There is less of a sense of competition for power and more of a push toward collaborative work. Each employee is empowered to have more responsibility and decision-making authority. Because there are fewer layers of managers, if needed, approvals from them can be sought and received much faster.

Horizontal structures have been deemed the model for the knowledge age. Because employees today have better access to information in their firms, whereas previously only their bosses did, many people argue horizontal structures are more effective. They are suitable for industries that require rapid responses to quick changes.

Does a company’s organization structure ever change? Yes. Sometimes companies grow so large that their product lines, geographic regions, or manufacturing processes can become difficult to manage. So, the firms restructure from a vertical organization to a horizontal one. In these situations, managers often try to reorganize by function. For example, they might structure the organization into divisions of employees who work on just one product line. Or they might divide a company into teams to specialize in one geographic region or work through one manufacturing process. In essence, these divisions work like separate mini-companies. Each division has its own set of functional expertise, so separate managers are in charge of financing for that division, marketing for that division, and so on. In today’s business environment, there are fewer and fewer organizations structured vertically by function.

One company that made the shift from being a vertical organization to a horizontal one is Xerox. It was once had a traditional vertical structure, organized by function, such as R&D, manufacturing, and sales. To more closely connect with its customers, the company realigned itself in the early 1990s around individual business markets, such as small businesses, office document systems, and engineering systems. Each individual group had its own set of financial reports, and factories were focused on individual product lines. Today, the company continues to maintain a flat organizational structure organized by product category as well as by region to take into account the company’s global presence.

What is line and staff organization? Most companies begin with a simple organization where one position has direct control of all the departments under it. This is called line organization. A product manager may be responsible for the design and production of that item. These styles of management relationships are easy to document in a single, clean organization chart. As companies grow, they sometimes shift to an organization that creates staff departments. A staff legal department may interact with a specific product line when support is needed for addressing regulatory issues. The legal department does not have authority over all of the product design and production issues but works with the product department on specific topics. This more complex set of managerial relationships is called line and staff organization.

What is a matrix organization? In vertical organizations, employees are grouped together based on their functions—all accountants are in one department, all engineers in another, and so on. A matrix organization is a type of structure in which people are pooled into groups by skills and then assigned to projects as needed. So, an engineer would report to an engineering supervisor but, after being assigned to a project, report to a project manager as well. The matrix organization is useful when the business is project-based because it promotes resource sharing. The shared authority and responsibility can mean better coordination between managers and lead to better project results. However, having two bosses can create conflicts, so the matrix style is useful only in specific settings.

What is an inverted organization? A vertical hierarchy can be mated with another structure that is quite different, the inverted organization. In this structure, managers must answer, or be accountable, to their employees. The goal of an inverted organization is to enable, encourage, and empower employees to do what they do best. Empowered employees can make decisions on the ground without the delay of forwarding requests upward through layers of management. Most firms end up implementing inverted structures along with the traditional vertical structure. So, although employees still have supervisors and supervisors answer to managers, managers are equally accountable to their employees. The rationale for this approach is that the core business of the company is to create value. The value creators in the company are the frontline employees. So, managers contribute to the company’s success by empowering these people and putting them first.11

One company that has grown with this philosophy is HCL Technologies, a provider of IT services that has ranked as India’s best employer. Founded by Vineet Nayar, HCL adopted an inverted organization in 2005. Afterward, the company began growing by more than 20 percent annually, even amid the global recession.12 HCL’s Nayar believes that for a business to satisfy its customers, its employees must feel valued and must trust their managers. Managers must be held accountable to their employees and vice versa.

Nayar wrote a book documenting the experience, titled Employees First, Customers Second. The result of taking care of employees was that customers were more satisfied and received better services and products. Many other companies, such as Southwest Airlines, have employed elements of the inverted organization.

What organizational structure works across multiple companies? Today, a new business structure has emerged: the network organization. A network organization is a collection of independent, mostly single-function firms that together produce a product or a service instead of one company being responsible for all functions. Boeing uses a network organization to build its 787s. In the past, the company’s airplanes were built mostly by Boeing employees. With the 787, Boeing relies on the expertise of hundreds of manufacturers worldwide to independently manufacture the components of the plane. They then ship the individual subassemblies to Boeing’s main plant, where they are assembled into a single 787.

Other companies that use a network organization include Nike, which owns only one manufacturing plant, and Reebok, which designs and markets but does not produce any of its products. Operating with a network structure requires that companies have the following characteristics:

• Be highly flexible and innovative

• Be able to respond quickly to threats and opportunities

Companies that successfully operate in a network structure find that they can save time and can reduce costs and risks.