The four basic forms of organizational structure are functional, multidivisional, matrix, and network.
A functional structure organizes its activities according to the specific functions that a company performs.
Common units include finance, sales and marketing, production, and R&D. From a practical standpoint, any of the
functions in a firm's value chain can be organized as a unit in a functional structure. Functional structures tend to
work best in smaller firms and those with few products or services. Functional organization helps managers of
smaller firms improve efficiency and quality by fostering professionalism in the performance of specialized tasks.
However, as firms grow and become more complex (perhaps by venturing into multiple lines), a functional form
can become downright dysfunctional. Often, problems arise if each functional unit begins to focus too narrowly on
its own goals and operations, thus losing sight not only of other functional activities but of customer needs and
corporate objectives.This phenomenon has given rise to the termfunctional silos. The functional organizational
model may also exacerbate problems in multiproduct, multimarket firms. Expansion, whether into product or
geographic markets, can become problematic if the strategy that's appropriate in one market doesn't work very well
in another. The types of products, for example, that enjoy dominant domestic share may not meet the needs of
foreign consumers. Similarly, a firm involved in two different product markets may find that the same competitive
methods don't work equally well in both or that different markets call for different sales channels. When a
functional structure is used in contexts characterized by varying market demands and sales characteristics,
functionally structured organizations may be sluggish in responding to changing customer demands and in
accessing potential new customers.
One solution to the problems of managing activities in multiple markets is the multidivisional structure. Divisions
can be organized around geographic markets, products, or groups of related businesses, with division heads being
responsible for the strategy of a coherent group of businesses or markets. Such strategic specialization means that
strategic decisions are more likely to be appropriate and timely. It also enables firms to design compensation
systems that reward performance at the business-unit, versus functional, level. Each division maintains a finance
function, a marketing function, and so on. Multidivisional structure makes it possible to implement
division-specific incentives and performance -accountability standards, and because each division has ready access
to key resources, multidivisional structure also fosters speedier reactions to opportunities and challenges.
Multidivisional structure is also effective in coordinating diverse economic activities. Headquarters, for example,
plans, coordinates, and evaluates all operating divisions, allocating the personnel, facilities, funds, and other
resources needed to execute divisional strategies. Divisional managers, meanwhile, are in charge of most of the
functions revolving around major product lines and, as such, are typically responsible for divisional financial
performance. Of course, multidivisional structure is not without drawbacks. It can, for instance, foster undesirable
competition between divisions. In addition, when each division is functionally self-contained, there may be costly
duplications of staff functions that could be handled more efficiently under some other form of organization.
Finally, coordination across divisions can be difficult if cooperation is in the best interests of one division but not
those of another.
The matrix structure is a hybrid between the functional and multidivisional structures. A matrix structure is
designed to take advantage of the benefits of both basic forms namely, functional specialization and divisional
autonomy. However, any structure that sets up so many dual loci of authority is going to have problems with
conflicts over authority and accountability. Moreover, the matrix provides flexibility by making it possible to
organize teams around specific projects, products, or markets. The utility of a matrix structure increases when the
pressures facing a firm are unpredictable and require both high degrees of control and extensive coordination of
resources. Many firms find it difficult to implement the matrix structure because it calls for high levels of resource
sharing across divisions; in fact, it's generally feasible only when strong culture and shared values support
cross-division collaboration.
A more recent development in organization design, the network structure consists of small, semi-autonomous, and
potentially temporary groups that are brought together for specific purposes a team, for example, that's been
assembled to work on a new-product idea. A network structure also includes external linkages with such groups as
suppliers and customers. Sometimes these external linkages take the form of strategic alliances. Authority is based
on the control of resources, knowledge, and expertise, rather than on hierarchical rank, and because it's highly
flexible, a firm can reconfigure staff and resources rapidly enough to exploit rich but fleeting bubbles of
opportunity. Drawbacks include the potential for confusion and ambiguity.