The Effect of Organizational Structure on Innovation

Organizational structure is the skeleton system based on which an organization functions. Organizational structure deals with the framework which defines the relation between people and positions in the organization. Organization structure is defined as the formal system of task and reporting relationships that controls, coordinates and motivates employees so that they cooperate and work together to achieve an organization’s goals. Several tasks are to be implemented in an organization, for these organizational tasks to be successful, they should be coordinated. Organizational structure supports division of work, categorizing the tasks and supervision in an organization. An effective organizational structure aids the efficient running of an organization. The factors that govern the formulation of an organizational structure are benefits of channelizing the tasks, hurdles due to communication and obstacles due to formatting the authority levels. Organizational structure helps the managers in a firm to describe, distribute and get job done. Organizational structure also helps in determining the goals, estimating the deadlines and setting the performance standards, regulate the operations with reporting systems. Based on the arrangement of activities the organizational structures can be defined into three types:

  1. Functional structure is the oldest and most common form of organizational structure. An organization when divided into several sub-units based on the specialized functions, this structure would be called as functional structure. In a functional structure grouping is done based on the specific functions like operations, production, finance and marketing. The advantages of an organization possessing a functional structure are specialization, accountability and clarity. Every sub-unit emphasizes on its own work, a member of the sub-unit is delegated with authority and responsibility. The sub-unit pretty clear on the goals and people know their roles. The functional structure of the organization has few disadvantages like, distance between top level management and the sub-units in an organization, coordination between different sub-units is not so easy, the organization becomes very resistive to change and communication problems would arise.
  2. The divisional structures are found in large scale industries which develop and deal with more than one product and operate in several markets across the globe. The organization is divided into several sub units based on the products, markets and consumer needs in different geographical regions. The sub-units are independent and work under a divisional manager, the divisional manager reports to the head office and delegated with powers of decision making on production, marketing functions. This allows the managers to make decisions on the respective divisions in time. This model facilitates the sub-units to concentrate on the consumer needs, encourages competition among the divisions and improved regulation as every sub-unit acts as individual profit center. This also has few disadvantages, like replication of functions (a sub-unit may require different sales teams). The competition among the sub-units may lead to negative consequences and it would difficult to control and coordinate each sub-unit.
  3. Adaptive structures are the organizational structures framed to handle the exclusive situations. There are two types of structures in this they are: i) Project Organization – The positive side of this structure is that the structural framework of the parent organization doesn’t get interrupted and the project aims to accomplish its task within the time frame and to reach the expected standards. There is a scope for better managing and control over the tasks, as the managers are delegated with authority and responsibility for results. ii) Matrix Organization – Matrix structure is a framework which allots resources from different functional sub-units to work on more than one project. There may be two diverse projects implemented in organizations simultaneously. A project manager is assigned to every project and he is responsible for assigning all the required resources to accomplish the tasks and meet the goals specified.

Innovation is the act or process of innovating; something newly introduced, new method, custom, device, etc. change in the way of doing things; renew, alter. Successful innovation requires an optimal overall formal business structure. As businesses grow there is a tendency to add layers, becoming more mechanistic and institutionalizing bureaucracy. High performing firms motivate and enable innovative behavior by creating permeable business boundaries helping break down the barriers separating functions, product groups and businesses. The list of factors influencing the motivation in an organization is technology, Complexity, Centralization and Formality.

Complexity can be described as the dissimilarities between the tasks and the sub-units. Complexity depicts the extent of diversity in the organization. The more is the number of tasks and number of jobs the more complex an organizational structure would be. It would be difficult to manage a complex organization. Horizontal differentiation, vertical differentiation and spatial differentiation are the three types of arrangements based on the complexity of the endeavors.

By formalization we mean clear role definition, written guidelines regarding duties and responsibilities of board members, and written procedures. Indeed, formalization helps rationalize behavior in organizations and is manifested in the rules governing behavior, including role relations of individuals occupying positions in the organization’s structure. Formalization is possible by specialization, delegation of authority and wide span of control.

Centralization is one the 14 principles put forwarded by Henri Fayol, according to Henry Fayol, reducing the role of low level employees in the process of decision making is called centralization. The hurdle dealing with centralization is that one has to come up with the right degree of centralization in each unique case. The effect of different organizational structures on innovation in an organization is as follows.

  1. Functional units are habituated to orthodox ways of working and are resistant to change, this would not allow employees to think out of the box. The coordination between different sub-units is time taking process; hence the gap between idea generation and idea implementation would be long. The gap between top level management and the functional units doesn’t allow employees to share vision of organization with all the employees. Functional structures have a system for closed communication, which do not encourage opinions, suggestions and feedback. In this structure sub-units are not aware of the performance of the other sub-units of the organization. All these factors put together makes innovation in functional organizations a tough task.
  2. Innovation in organizations following divisional structure is better than functional organizational structures. Divisional organization structures are always clearly focusing on consumer needs, production requirements and geographical areas of business. Divisional structure leads to positive competition between its sub-units, which encourage innovation in the organization. Divisional structures have a better control over its sub-units than the functional structures. This helps the management to explain the vision of organizations to its employees and encourage innovation.
  3. Adaptive Structures are a result of combination of functional and divisional structures. This organizational structure is an amalgam of functional expertise and team work. This encourages positive communication, constructive feedback and effective idea generation. These structured organizations share the vision and mission of the organization with all its employees. These organizations give the management a higher degree of control over its employees and their tasks. This gives a better chance for the management to reward the employees with incentives who come up with innovative ideas and support those ideas and see that those are implemented for the good of the company.

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