Organizational structure refers to the division of labour as well as the patterns of coordination, communication, workflow and formal power that direct organizational activities.

Organizational structures include two requirements, the division of labour into distinct tasks (1) and the coordination of labour (2). Division of labour refers to the subdivision of work into separate jobs assigned to different people. Job specialization increases work efficiency. An organization’s ability to divide work among people depends on how well those people can coordinate with each other. There are three coordination mechanisms:

1. Informal communication
   This is sharing information on mutual tasks as well as forming common mental models to synchronize work activities. It is useful in ambiguous situations. It makes use of direct communication, liaison roles, integrator roles and temporary teams.
2. Formal hierarchy
   This is assigning legitimate power to individuals who ten use this power to direct work processes and allocate resources. It makes use of direct supervision and formal communication channels. A formal hierarchy is not efficient in novel or ambiguous situations.
3. Standardization
   This is creating routine patterns of behaviour or output. It makes use of standardized skills, processes and output.

People with liaison roles are expected to communicate and share information with co-workers in other work units. People with integrator roles are responsible for coordinating a work process by encouraging employees in each work unit to share information and informally coordinate work activities.

Organizational structure has four elements: span of control, centralization, formalization and departmentalization.

The span of control refers to the number of people directly reporting to the next level above in the hierarchy. The best span of control is decided by the degree of autonomy for staff members (1), whether employees perform routine tasks (2) and the degree of interdependence among employees within the department or team (3). A highly interdependent job requires a narrow span of control because there is more conflict. The span of control is interconnected with organizational size and the number of layers in the organizational hierarchy. A wide span of control is only achievable by removing layers of management.

Centralization means that formal decision-making authority is held by a small group of people, typically those at the top of the organizational hierarchy. Larger organizations often decentralize, they disperse decision making authority and power throughout the organization.

Formalization is the degree to which organizations standardize behaviour through rules, procedures, formal training and related mechanisms. Formalization can increase efficiency and compliance, but it can reduce organizational flexibility, organizational learning and creativity. Formalization is also a source of job dissatisfaction and work stress.

A mechanistic structure is an organizational structure with a narrow span of control and a high degree of formalization and centralization. An organic structure is an organizational structure with a wide span of control, little formalization and decentralized decision making. Mechanistic structures operate better in stable environments because they rely on efficiency and routine behaviours and organic structures work better in dynamic environments because they are more flexible and responsive to changes.

Departmentalization specifies how employees and their activities are grouped together. It establishes the chain of command, focusses people around common mental models and it encourages specific people and work units to coordinate through informal communication. There are different types of departmentalization:

1. Simple structure
   There are minimal products or services and a minimal hierarchy.
2. Functional structure
   Employees are organized around specific knowledge or other resources.
3. Divisional structure
   Employees are organized around geographic areas, outputs or clients.
4. Team-based structure
   Employees are organized in self-directed teams that complete an entire piece of work.
5. Matrix structure
   This overlays two structures in order to leverage the benefits of both.
6. Network structure
   This is an alliance of several organizations for the purpose of creating a product or serving a client.

Direct supervision is easier in a functional structure. Grouping employees around skills focusses their attention on those skills and not necessarily on the company’s products, services or client needs. Compared to other structures, the functional structure usually produces more dysfunctional conflict and poorer coordination in serving clients or developing products. The geographic divisional structure organizes employees around distinct regions. The product/service divisional structure organizes employees around distinct outputs and the client divisional structure organizes employees around specific customer groups. The right divisional structure depends on the primary source of environmental diversity or uncertainty. The team-based structure is more flexible in turbulent environments and it tends to reduce costs because there is less hierarchy. The ambiguity of teams and increased conflict can lead to increased stress. In a pure matrix structure, two bosses have equal power. There is a product-geographic matrix structure and a functional structure overlays with a project structure. The matrix structure increases conflict among managers with equal power. Another problem of the matrix structure is ambiguous accountability. The network structure typically consists of several satellite organizations bee-hived around a hub or core firm.

There are four contingencies of organizational design:

1. External environment
   The best structure for an organization depends on the external environment. The organizational design is influenced by four environmental characteristics. An environment can be dynamic or stable (1), complex or simple (2), diverse or integrated (3) and hostile or munificent (4).
2. Organizational size
   Larger organizations have different structures than smaller organizations because more employees lead to more job specialization which leads to a greater need for coordination.
3. Technology
   Technology refers to the mechanisms or processes an organization relies on to make its products or services. Variability (1) and analysability (2) are determinants for the organizational structure.
4. Organizational strategy
   This refers to the way the organization positions itself in its environment in relation to its stakeholders, given the organization’s resources, capabilities and mission. The structure follows the strategy.

The more complex the environment, the more decentralized the organization should become. An integrated environment only has one client, product and geographic area. The more diversified the environment, the more need for a divisional structure.