The Basic Building Blocks of Organizational Structure

This text explains the formation of organizational structures. It includes a case study as an example of one company's path to designing the organizational structure after several acquisitions. It also provides an overview of the linkages between leadership and departments.

The Basic Building Blocks of Organizational Structure

Division of Labor

Jim Pattison Group offers a dizzying array of products and services, including grocery stores, lumber, and billboards. One way that the organization could produce its lumber would be to have individual employees cut up and finish one tree at a time from start to finish. This would be very inefficient, however, so the company and most other organizations avoid this approach. Instead, organizations rely on division labor when creating their products (Figure 9.2 "The Building Blocks of Organizational Structure"). Division of labour is a process of splitting up a task (such as the creation of lightbulbs) into a series of smaller tasks, each of which is performed by a specialist.

The Building Blocks of Organizational Structure

Figure 9.2: The Building Blocks of Organizational Structure

The leaders at the top of organizations have long known that division of labor can improve efficiency. Thousands of years ago, for example, Moses's creation of a hierarchy of authority by delegating responsibility to other judges offered perhaps the earliest known example. In the 18th century, Adam Smith's book The Wealth of Nations quantified the tremendous advantages that division of labor offered, using an example of a pin (nail) factory. If a worker performed all the various steps involved in making pins himself, he could make perhaps twenty pins per day. By breaking the process into eighteen separate steps, however, ten workers could make upwards of 48,000 pins a day. In other words, the pin factory was a staggering 2,400 times more productive than it would have been without relying on division of labor. In the early 20th century, Smith's ideas strongly influenced Henry Ford and other industrial pioneers who sought to create efficient organizations.

Figure 9.3: Division of labour allowed eighteenth-century pin factories to dramatically increase their efficiency.

While division of labour fuels efficiency, it also creates a challenge - figuring out how to coordinate different tasks and the people who perform them. The solution is an organizational structure, which defines how tasks are assigned and grouped together with formal reporting relationships. Creating a structure that effectively coordinates a firm's activities increases the firm's likelihood of success. Meanwhile, a structure that does not match well with a firm's needs undermines the firm's chances of prosperity.

Figure 9.4: Division of labour was central to Henry Ford's development of assembly lines in his automobile factory. Ford noted, "Nothing is particularly hard if you divide it into small jobs".