Vertical Organization Design in Business Structures

Abstract

Organizations have to rapidly evolve and adapt in order to meet the demanding needs of the environment for which they operate. A factor in a company’s ability to be successful in the chosen environment is how the organization is designed. There are two sides of the spectrum associated with the design of an organization, vertical and horizontal. A company with a vertical design is more ridged and centralized, while a horizontal organization is free flowing, organic, and decentralized. This paper will investigate the vertical design of bureaucratic organizations focusing on the overall success of these organizations and determine if there is enough data to support the shift to an organizational design that is less vertical and more of a hybrid approach. The design elements of bureaucratic organizations that will be reviewed are the history, advantages, challenges, and the differences between civilian and government entities.

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Introduction

Organizational structure is a set of corporate assemblies and their relationships, within which managerial tasks are distributed among units, and the powers and responsibilities of managers and officials are determined. The organizational structure is built, on the one hand, in accordance with the tasks that the organization wishes to accomplish and goals the company aims to achieve. On the other hand, the structure at different levels provides the use of economies of scale to save resources of the organization. Thus, the structure connects external efficiency with internal efficiency. The distribution of tasks between departments and officials, the distribution of powers and responsibilities should remain stable for some time to ensure the reproduction and maintenance of the strategy. Therefore, the structure sets the static system properties of the organization’s management. It is critical to choose the right structure according to the long-term strategy, current and prospective demands, and the company’s profile.

However, as the company progresses and sets new goals, a particular organizational design may not be suitable for new types of activities. In this case, the management may look into adopting new structures in order to meet contemporary demands. As with the adoption of any other culture and technology, changes to the organizational structure are not straightforward and may be accompanied by difficulties. Resistance on behalf of employees, incompetence of the management team, and choice of an inappropriate structure are some of the examples of potential challenges. This paper provides an overview of the vertical structure which currently dominates the market, its key deficiencies, and possible solutions. Also, the paper describes the knowledge gap in the area of organizational structure and provides several recommendations on what kind of research is currently needed. In summary, current knowledge of organizational structure is mostly limited to theoretical foundations, and not much quantitative data is available.

What is a Vertical Structure

Linear and functional organizational structures were the first to be used in businesses (Young & Ghoshal, 2016). Linear structures came from traditional social institutions, such as the army (Young & Ghoshal, 2016). The structures, which were based on linear subordination with vertical connections, made it possible to provide leadership in a stable business environment in growing markets with stable technologies (Young & Ghoshal, 2016). In those cases where the work of the enterprise involved the implementation of various functions of economic activity, such as R&D, production, marketing, finance, and others, the linearization of line units occurred according to the functional principle (Young & Ghoshal, 2016). Thus, a variety of linear structures was formed, which became known as the functional structure.

The production and improvement of existing products as part of operational activities and the creation of new technology using innovative management were initially inherent in a number of industries. There were several strategic external influences that required changes in previously established procedures and management structures both at the firm and industry levels, in the history of Western production (Young & Ghoshal, 2016). The first of these was related to the global economic crisis called the Great Depression (Young & Ghoshal, 2016). This crisis demonstrated the inefficiency of the previous leadership principles applied during the last cycle of economic growth for new high-tech industries (Young & Ghoshal, 2016). At the stage of mastering new industrial technologies, a vertical integration strategy was widely used, in which the company controlled the entire production process from the early stages of processing raw materials to deliveries to the final consumer (Young & Ghoshal, 2016).

Most enterprises have organizational structures that are more consistent with the principles of building a vertical management structure. The vertical organizational management structure is an enterprise management structure in which there is a particular hierarchy (Macdonald, Burke, & Stewart, 2018). Almost any enterprise in its design, regardless of its type and form, has an element of verticality. The employees of the enterprise, in most cases, are subordinates to the general manager, directly or through their direct managers, or another person who is at the head of the enterprise.

The vertical structure is characterized by the number of levels of subordination and the presence of a single leader for each employee. The vertical organizational structure of management is also called bureaucratic or hierarchical (Macdonald, Burke, & Stewart, 2018). It has a high degree of centralization in the decision-making process (Macdonald, Burke, & Stewart, 2018). The head of the company that operates with a vertical organizational structure is a single person or group of individuals. In the direct subordination of the chief executive are the rest of the heads of departments as well as ordinary employees (Macdonald, Burke, & Stewart, 2018). All strategic decisions about the work of the company are most often made by the executive alone, while operational decisions are not carried out without his or her participation (Macdonald, Burke, & Stewart, 2018).

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The vertical organizational structure, on the one hand, helps ensure a high level of control of the processes occurring in the organization, and on the other hand, dramatically expands the area of ​​responsibility of company leaders, increasing their load. Another characteristic of an organization with a high rate of verticality of the organizational structure can be considered formalization (Macdonald, Burke, & Stewart, 2018). The formalization process allows companies to accelerate the adoption of operational decisions, clearly indicating the boundaries of responsibilities of each employee, department, or unit (Macdonald, Burke, & Stewart, 2018). However, a high level of formalized business processes can have a negative impact on staff creativity.

The main parameter of the vertical organizational structure determines the so-called height of the organization. Organization height is the number of consecutive subordinate management levels (Macdonald, Burke, & Stewart, 2018). Companies with a significant indicator of the height of the organizational structure are systems with a considerable amount of management levels (Macdonald, Burke, & Stewart, 2018). This fact may indicate a large scale of the organization when an increase in the number of management levels corresponds to an increase in the staff of the enterprise and the volume of its business processes.

The management of organizations with a tall hierarchy is most likely located further away from consumers and clients. Although information about consumer preferences is quickly and efficiently received by the lowest levels of management that are in direct contact with consumers, significant efforts must be made to transfer information through a large number of management levels and deliver it to the top management (Macdonald, Burke, & Stewart, 2018). The vertical organizational structure of management is characterized by the fact that information undergoes modification at each level of the hierarchy. This deformation of customer data leads to significant misses in the process of making strategic decisions by management. In this case, remoteness from consumers can become a crucial problem that is associated with this type of organizational design.

Inevitability of Bureaucracy in Government Entities

The vertical design is the manifestation of bureaucracy, and the latter is a complex social phenomenon that is part of most government bodies around the world. From the point of view of its public functions, it is inseparable from the process of public administration (Verkuil, 2017). The role of the bureaucracy is crucial for any political system since no society can succeed without a management apparatus that includes people who are always engaged in conducting public affairs (Verkuil, 2017). Encompassing a hierarchical structure and the capacity to carry out essential public functions, the bureaucracy also has an indisputable administrative power (Aubry & Brunet, 2018). In this regard, its position in society is, as a rule, more stable than the position of the political elite (Verkuil, 2017). Striving to become the embodiment of the general interests of society, in practice, it develops its own corporate interests.

Having the opportunity to realize these interests with the help of its daily control over the conduct of public affairs, a well-organized and strong bureaucracy can become independent and rise above society, subordinating it to its dictatorship. In this sense, a state bureaucracy that has inherited a system of power relations can be one of the main threats to civil society, since it significantly limits the participation of the masses in political life (Ang, 2017). The concept of bureaucracy as a specific form of organization of modern society was systematically presented by Max Weber, who considered bureaucratic rationality the embodiment of the rationality of capitalist production itself (Ang, 2017). At the same time, Weber pointed to the negative aspects of the development of bureaucracy, leading to the suppression of individuality, seeing the depersonalization of individuals in bureaucratic organizations a direct threat to democracy (Ang, 2017).

What is Wrong with Vertical Structure

The successful development of organizations in a particular field of business is usually accompanied by an augmentation of their scale (Joseph & Wilson, 2018). Expansion can be about both increasing the number of employees and growing market share, and raising the complexity of management and business processes to meet the specific needs of the company (Joseph & Wilson, 2018). It is known that the increase in organizational complexity is a systemic problem of corporate development, requiring new responsive and planned solutions in order to increase the efficiency of coming and existing functional processes of the organization (Joseph & Wilson, 2018).

One of the tools to solve this dilemma is the structural adaptation and restructuring carried out by the enterprise management team (Fransen, Delvaux, Mesquita, & Van Puyenbroeck, 2018). The decision should be based on the analysis of the vertical and horizontal division of labor in the organization and the hierarchies and interactions formed on their basis (Neis, Pereira, & Maccari, 2017). The aim of the management should be to examine the structural factors that complicate organizational communication and to propose approaches that may reduce the negative impact of the problems that arise from strictly adhering to the vertical structure (Katayama, Meagher, & Wait, 2018). The managers should also evaluate whether there is enough documented evidence that may help decide whether it is feasible and efficient to move to more modern hybrid approaches of organizational design (Neis, Pereira, & Maccari, 2017). For instance, using horizontal management arrangements in a vertical hierarchy may lead to some benefits (Karimi, Abokhamsi, & Saki, 2019).

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The main factors that contribute to the emergence, growth, and complication of the organization’s management system are the increase in its size and complexity that naturally occur as the business develops (Neis, Pereira, & Maccari, 2017). The increase in size leads to the division of the company into separate structural divisions that have their own leaders for the timely assignment of tasks from top to bottom and reporting from the bottom and upwards (Katayama, Meagher, & Wait, 2018). The increase in complexity of the company can be defined as an increase in the variety of managerial and technological operations performed in the process of the creation of products or services (Neis, Pereira, & Maccari, 2017).

When a company that was previously run by a single person and only employed a limited number of workers grows to be a larger organization with hundreds or thousands of employees, the design of the management apparatus takes a hierarchical form (Neis, Pereira, & Maccari, 2017). The growth and complexity of the company also lead to the division of activity in the management team (Joseph & Wilson, 2018). As a result, the entity is split into a number of groups, and functions of managing production, personnel, and technical, economic, and other aspects of the company are allocated between them (Katayama, Meagher, & Wait, 2018). The vertical hierarchy that is formed in this way seems to be objectively necessary for orienting all employees and departments of the company toward the final result (Joseph & Wilson, 2018). It implements a chain of teams – planned tasks descend from top to bottom, and reporting and information flow about the current state of business processes are generated from bottom to top. The number of management levels is substantially determined by the manageability standards, which are differentiated depending on the level of management and the type of work performed (Joseph & Wilson, 2018). With each additional layer of control, however, the task of ensuring the unity of administration is complicated because each level will necessarily come up with their own values and views, which may lead to some inconsistencies between departments or levels (Katayama, Meagher, & Wait, 2018).

In the simplest case, these views and goals aim to solve the interaction problems between the leader and the subordinates. A person responsible for some task seeks to reduce the magnitude of the received responsibility, while simultaneously increasing the volume of resources allocated for its accomplishment. The manager, on the other hand, may not always be able to verify the soundness of inquiries from subordinates (Turner & Miterev, 2019). In mass production enterprises, statistical data from previous timeframes during stable operation periods may serve as a foundation for a relatively reliable regulatory framework (Katayama, Meagher, & Wait, 2018). It can be used to assess the effectiveness of the usage of allocated resources. In other cases, however, a vertical organizational structure with a high number of management levels may serve as a hindrance to transparent operations, which in turn will inevitably lead to inefficient resource usage.

Each additional level of management, especially in big business, exacerbates the problems of high-quality training of new managers. Senior managers can become too isolated from production processes. In this case, seniors will be forced to delegate much of their responsibilities to other functional and technical units. This approach is not desirable because these entities usually have their own goals and performance targets that may be different from what the senior manager expects. As a result, the management process is transformed into an iterative procedure of finding compromise solutions (Katayama, Meagher, & Wait, 2018). This increases the time for making decisions, and there is a tendency toward many more complications as new management layers are added to the organizational design.

Each employee of the company below the top manager is subordinate to the corresponding leader. The subordination of all employees forms a linear relationship between a manager and subordinates (Pereira-Moliner et al., 2016). Since each manager is linearly connected with a higher manager, the chain of teams in any company goes from a hierarchical top to a lower level, ensuring the unity of leadership and integrity of management (Pereira-Moliner et al., 2016). The linear management structure implements the principle of leadership unity – each employee is accountable to only one leader. At the same time, a top manager is appointed at the level of the board of directors, in whose hands all the power for the operational management of the enterprise and responsibility for the efficient implementation of all business processes are concentrated.

A similar approach is used when dividing the enterprise into different functional unties. It is believed that it is more convenient for managers of departments of an organization to obey one person than a board of directors (Cristóbal, Fernández, & Diaz, 2018). In such an environment, the primary task of a top manager is to find the best links between the performance parameters of various structural units. The manager also has to ensure the maximum contribution of each department to achieving the goals of the enterprise. But since the tasks of the organization’s divisions are determined not only for the planned time period but also for future periods, the previously noted problems may also arise. As a result, an iterative process of coordinating the interests of all organizational units emerges during the initial stages of corporate design.

The planned tasks contain indicators of product quality in addition to indicators of the required amount of work, resource efficiency, development of units, and allocated resources (Neis, Pereira, & Maccari, 2017). Therefore, it is more beneficial for unit managers to resolve issues with a senior manager individually, bringing them into the process and attracting the managers of a much higher level than the direct supervisor (Katayama, Meagher, & Wait, 2018). Given the decrease in managers’ competence in production issues with the growth of their hierarchical level, there may be a need to interrupt the iterative procedure and look for other solutions.

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Based on the preceding, it seems that the transition to a functional division of labor in management and the use of a linear-functional management structure is initiated not only by the increasing complexity of control as a result of the development of production but also by the management structures themselves (Neis, Pereira, & Maccari, 2017). In the linear-functional management structure, all the previously described conditions are preserved, which necessitate the use of an iterative procedure for the formation of the plan – the problems of inconsistent values and views are preserved (Katayama, Meagher, & Wait, 2018). To directly obtain the desired result, there is a need to create a specific service that contains a sizeable regulatory framework for their solution, in addition to the direct development of planned tasks (Neis, Pereira, & Maccari, 2017).

In operational management, decision-making speed is even more critical, while the quality of the initial plan substantially determines the flow of operational decisions (Cristóbal, Fernández, & Diaz, 2018). When a decision concerns one unit and does not affect the work of others, or in other words, does not lead to a change in work schedules, redistribution of resources, or the elimination of disagreements, it is advisable to use the conventional method of decision-making. If the issue affects a number of functional units, then it is very likely that an iterative procedure is formed in the hierarchical structure of management (Katayama, Meagher, & Wait, 2018). An increase in the degree of complexity of the problem leads to a complication of the procedure for reconciling the interests of participants. In such circumstances, using the iterative method may lead to extra spending in terms of time and may adversely impact the quality of the decision (Katayama, Meagher, & Wait, 2018). From the foregoing, it can be concluded that the load of the management unit is primarily determined by the inherent features of hierarchical control structures built on the linear control principle.

Possible Enhancements

Adding Elements of Horizontal Structure

Taylor substantiated the construction of management structures according to the functional principle, believing that the division of labor in management also increases its productivity (Im, 2017). Just like in production, only specialists should work in the management apparatus (Im, 2017). Taylor’s enterprises were quite simple from a technical point of view, and the distribution of work was not an intricacy (Im, 2017). But enterprises characterized by a high level of technological development, especially individual and small-scale production, are very complicated from the management’s perspective (Will, Al-Kfairy, & Mellor, 2019). In such enterprises, the development of an optimal plan is not trivial, even from a theoretical point of view.

To develop a balanced and coordinated plan between departments, it is necessary to get rid of the shortcomings of the linear hierarchy as much as possible. It is also advised to leave the linear links to assure the final results of the units while minimizing the number of functional groups performing essential technical and economic functions. Semler took a step in this direction, eliminating the linear leadership at the top level of management (Goodman & Dingli, 2017). This approach and its modified versions are proposed to be spread to the entire management structure, yielding elements of horizontal control at each level of the hierarchy.

As was shown earlier, in the horizontal management structure, the heads of production units of the lower level are almost equally competent in matters of production and assessment of the status of their units (Will, Al-Kfairy, & Mellor, 2019). They can also justify the need for additional resources only if there are serious arguments that significantly affect the timing and quality of the implementation of the planned tasks. At the same time, the biased need for increasing the time for developing plans or making operational decisions is reduced, which reduces the iterative procedure by eliminating line managers. The number of management levels is reduced, which increases the flexibility of the organizational structure as a whole (Will, Al-Kfairy, & Mellor, 2019). This approach also reduces the cost of maintenance and, therefore, promotes the economic growth and efficiency of the enterprise (Neis, Pereira, & Maccari, 2017). The problems related to the management of the technical and economic parameters of production do not depend on the type of organizational structure (Will, Al-Kfairy, & Mellor, 2019). However, such issues are solved more quickly by reducing the number of levels of administration, which improves the quality of corporate management.

There is a significant relationship between the features of the approach used to build the organizational structure of management and the increasing complexity of management processes in the company (Cristóbal, Fernández, & Diaz, 2018). An increase in the complexity of management processes may adversely affect critical management functions. One such example is the planning capacity of the organization (Neis, Pereira, & Maccari, 2017). The development of a well-balanced plan that optimally distributes work across departments is an essential factor when it comes to the efficient use of resources. Therefore, it also ensures the effectiveness of the enterprise as a whole. Integrating concepts from the horizontal structure into the current hierarchical design may help achieve such favorable results. Flexibility is beneficial is this fast-changing world, and strictly adhering to the hierarchical model may serve as an impediment.

Introducing Flexibility Only When Needed

In contemporary business circumstances, firms are often involved in several types of activities. This diversification allows companies to abandon the area of ​​venture that is currently uncompetitive at any time (Will, Al-Kfairy, & Mellor, 2019). Therefore, there is a need for a transition to more flexible structures that could relatively quickly change their shape, adapt to new conditions (Cristóbal, Fernández, & Diaz, 2018). As a rule, such arrangements are formed on a temporary basis, for the period of implementation of a particular solution or achievement of a certain goal (Will, Al-Kfairy, & Mellor, 2019). An example of a flexible structure is matrix organizational design.

The matrix structure is a lattice structure in which the organization of management by functions is carried out by the heads of departments (Will, Al-Kfairy, & Mellor, 2019). The organization of project implementation is carried out by project managers (Cristóbal, Fernández, & Diaz, 2018). This structure is based on the principle of double subordination of performers – on the one hand, to the direct manager of the functional service, on the other hand, to the project manager, who is endowed with the necessary powers in accordance with the planned time period within which the implementation of the project takes place (Cristóbal, Fernández, & Diaz, 2018). Under such a system, the project manager has two groups of subordinates – permanent employees of the project group and employees of other functional departments who are subordinate to him or her temporarily, while maintaining their administrative subordination to the direct managers of the functional departments (Will, Al-Kfairy, & Mellor, 2019).

Particular persons or a group of persons are introduced, temporarily or permanently, into the established linear-functional structure to coordinate the horizontal relations needed for the implementation of a specific program or project (Cristóbal, Fernández, & Diaz, 2018). At the same time, the vertical connections that are characteristic to the organization are maintained. Most of the employees that are involved in the implementation of the program are subordinate to at least two managers but on different issues (Cristóbal, Fernández, & Diaz, 2018). Despite causing certain complexities in some circumstances, such an approach often leads to an increase in effectiveness. Therefore, this approach can be recommended to companies that are looking into a slight organizational shift.

Missing Knowledge

The vast majority of scientific knowledge on organizational structure is primarily concentrated on the benefits of particular designs and how they affect specific aspects of workplace productivity, such as motivation and burnout. However, there is a lack of knowledge about the strategies by which organizations with vertical hierarchies may switch to hybrid approaches with minimal effect on functional operations. For instance, while it may look feasible and attractive to employ matrix organizational structure in the organization that is vertically designed, there is little information about how well these transitions may take place (Will, Al-Kfairy, & Mellor, 2019). Companies will have to conduct their own research in order to assess all related risks and make the optimal decision.

Current literature also has resources on designing the organizational structure during the initial phases of company development. There is no explicit evidence or best practices related to integrating change of organizational structure within other change proposals (Will, Al-Kfairy, & Mellor, 2019). While contemporary change management systems may be suitable for provision for the transition to a different corporate hierarchy and design, there is no documented evidence on what is the most efficient and the most feasible way. It should be understood that organizational structure in every company is different because of varying factors that influence the interaction within the organization (Cristóbal, Fernández, & Diaz, 2018). For instance, corporate culture is one of the factors that are both different and influential (Cristóbal, Fernández, & Diaz, 2018). Therefore, it is costly to design and implement a scientific study that will collect both quantitative and qualitative data that is generalizable on the subject matter. One of the possible solutions is interviewing the companies that attempted to bring change to their organizational scheme. After obtaining enough data, the information can be synthesized to identify specific patterns.

Computer simulations have also been used to test various forms of organizational design. Because it is only a simulation, there is no guarantee that the results are accurate and applicable to actual companies. The efficacy of an organizational structure is determined by a high number of interrelated factors that cannot be fully simulated using digital tools at the time being. This view also supports the idea that studies should be conducted within real companies. The primary challenge is designing such a study so that it will be generalizable to as many companies as possible. The research will also incur high financial costs and time.

Conclusion

The organizational design of a company plays a critical role in determining how the company tackles issues, initiates, and works on new ventures, and distributes tasks between departments and employees. Therefore, the organizational structure is among the critical determinants of efficiency, effectiveness, and success. Two notable structural designs employed by the majority of companies in the world are vertical and horizontal. While the vertical structure is mainly associated with bureaucratic organizations, the horizontal design allows for freedom and flexibility. However, the vertical structure allows managers to impose stricter control, which may be necessary for large-scale organizations. This control is achieved by using hierarchies when distributing roles and responsibilities. Because many companies have some sort of hierarchy in place, the vertical structure can be considered as the most widely used structural design in the world.

As with any other system and strategy, the vertical structure has deficiencies and shortcomings. These challenges can be overcome by moving to a different organizational structure, but a complete shift is often not possible because of associated costs in terms of financial resources, inconvenience, and time. Therefore, most companies are turning to hybrid approaches that allow for flexibility by introducing some concepts from the horizontal structure while keeping the necessary level of control by partially adhering to the hierarchical organization. For instance, some organizations employ horizontal structure at a project level while keeping the rest of the company vertical. This approach may significantly increase the success rate of the projects.

Despite the presence of such possibilities, there is no documented evidence on the efficacy of using hybrid approaches. Furthermore, there is no scientific foundation that would allow top managers to assess risks associated with structural shifts adequately. Every organization plans its changes in accordance with its experience. However, it would be much more effective if there was a documented strategy based on scientific findings for employing the hybrid approach. Therefore, the scientific community needs to think about conducting quantitative and qualitative studies to evaluate the effectiveness of hybrid organizational structures and provide a framework for planning a structural shift.

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