Introduction

An organization is both an articulated purpose and an established mechanism for

achieving it. Most organizations engage in an ongoing process of evaluating their
purposes-questioning, verifying, and redefining the manner of interaction with their
environments. Effective organizations carve out and maintain a viable market for
their goods or services. Ineffective organizations fail this market - alignment task.
Organizations also constantly modify and refine the mechanism by which they
achieve their purposes-rearranging their structure of roles and relationships and
their managerial processes. Efficient organizations establish mechanisms that
complement their market strategy, but inefficient organizations struggle with these
structural and process mechanisms. For most organizations, the dynamic process of
adjusting to environmental change and uncertainty-of maintaining an effective
alignment with the environment while managing internal interdependencies-is
enormously complex, encompassing myriad decisions and behaviors at several
organization levels. But the complexity of the adjustment process can be
penetrated: by searching for patterns in the behavior of organizations, one can
describe and even predict the process of organizational adaptation.
Organizations are limited in their choices of adaptive behavior to those which top
management believes will allow the effective direction and control of human
resources. Therefore, top executives' theories of management are an important
factor in analyzing an organization's ability to adapt to its environment. A theory of
management has three basic components: (a) a set of assumptions about human
attitudes and behaviors, (b) managerial policies and actions consistent with these
assumptions, and (c) expectations about employee performance if these policies
and actions are implemented.
During the latter part of the 19th Century and the early decades of the 20th,
mainstream management theory, as voiced by managers and by management
scholars, conformed to what has been termed the Traditional model. Essentially, the
Traditional model maintained that the capability for effective decision making was
narrowly distributed in organizations, and this approach thus legitimized unilateral
control of organizational systems by top management. According to this model, a
select group of owner managers was able to direct large numbers of employees by
carefully standardizing and routinizing their work and by placing the planning
function solely in the hands of top managers. Under this type of management
system, employees could be expected to perform up to some minimum standard,
but few would be likely to exhibit truly outstanding performance.
Beginning in the twenties, the Traditional model gradually began to give way to the
Hu-man Relations model. This model accepted the traditional notion that superior

decision-making competence was narrowly distributed among the employee

population but emphasized the universality of social needs for belonging and
recognition. This model argued that impersonal treatment was the source of
subordinate resistance to managerial directives, and adherents of this approach
urged managers to employ devices to enhance organization members' feelings of
involvement and importance in order to improve organizational performance.
Suggestion systems, employee counseling, and even company unions had common
parentage in this philosophy. The Depression and World War II both acted to delay
the development and spread of the Human Relations model, and it was not until the
late forties and early fifties that it became the prime message put forth by
managers and management scholars.
Beginning in the mid-fifties, a third phase in the evolution of management theory
began with the emergence of the Human Resources model which argued that the
capacity for effective decision making in the pursuit of organizational objectives was
widely dispersed and that most organization members represented untapped
resources which, if properly managed, could considerably enhance organizational
performance. The Human Resources approach viewed management's role not as
that of a controller (however benevolent) but as that of a facilitator removing the
constraints that block organization members' search for ways to contribute
meaningfully in their work roles. In recent years, some writers have questioned the
extent to which the Human Resources model is applicable, arguing for a more
"contingent" theory emphasizing variations in member capacity and motivation to
contribute and the technological constraints associated with broadened selfdirection and self-control. The Human Resources model probably still represents the
leading edge of management theory, perhaps awaiting the formulation of a
successor model.

Organization Structure
Organizational structure reflects systems thinking: an organization is composed of
elements, relations between elements, and relations as a whole that constitute one
unit(Checkland, 1999). Organizational structure not only consists of hard
components, such as individuals, groups, teams and departments etc., but also soft
components, such as the relations between organizational components (Bunge,
1985a,b). According to Bunge (1979), structure is the superior composition of
relations. It is the relations between elements that capture the essence of
organizational activities. Adopting a systems perspective of an organization to view
structure indicates that structure consists of hard components at one end and soft
components at the other. At the hard end are the tangible elements of hierarchical
departments and groups. Relationships between these departments and groups
capture an element of softness.

Structural dimensions are traditionally examined along three dimensions of formal

relationship: hierarchical, functional, and the dimension of inclusion and centrality,
underlining two prime types of structure: mechanistic and organic organizations.
However, the knowledge economy makes new demands on organizational
structuring based on processes. Informal structure better depicts actual
organizational activities and reflects dynamic interaction that is critical to
knowledge creation.
Organizational structure is a primary driver of change since it provides the skeletal
structure for all organizational decisions and processes. Authors have categorized
the shift of organizational structure in various ways. For instance, Burns and Stalker
(1961) classify two types of organizations: mechanistic and organic structure. At a
broader level, numerous authors have postulated a shift along a perspective that
views organizations as machines, organisms and processes (Scott, 1981; Tsoukas,
1994), etc. Previous studies on organizational structure have established a threedimensional framework characterizing different types of structure. For instance,
Schein (1988) defines structure in terms of hierarchical dimension, functional
dimension, and inclusion and centrality dimension. However, Schein's framework
primarily explains formal structure in the organization, and does not reveal the
subtle energy that flows behind the organizational chart. This ``hidden energy'' is
commonly referred to as ``informal structure'' or ``informal relationship''; and this
energy plays a conspicuous role in many new forms of process based organizations,
such as network or knowledge based organizations.

Hierarchical dimension demonstrates relative ranks in a manner similar to the

organizational chart.
Functional dimension explains the different types of work to be done.
Inclusion and centrality dimension exhibits the degree to which any given
person is nearer to or farther from the central core of the organization.

A straightforward combination of the above dimensions only depicts the formal

organizational structure that is primarily reflected in the organizational chart.
However, the reality is that there are an increasing number of organizational
forms that cannot be simply illustrated by an organizational chart. This is
evidenced by the emergence of networks (Powell, 1990; Jarillo, 1988), the
knowledge-based organization (PerezBustamante, 1999), the virtual organization
(Davidow and Malone, 1992), etc. Central to all these new forms of organizations
and organizational activities is the rise of ``informal structure'', which is the
informal relationship that is highly connected to people's perception and
judgement (Vickers, 1965). People's perception of how organizational structure
works plays an important role in organizational structuring and effectiveness of
structure (Harrington, 1991). Informal structure refers to interpersonal, crossfunctional and inter organizational interaction that is not explicitly demonstrated
in the organizational chart. Therefore, the extent to which informal structure is
developed reflects the richness of the soft component of organizational
structure.

Structural Evolution
A central theme of structural studies focuses on the debate over whether or not
structure follows strategy to produce performance. The relationship of contingency
between environments, organization form and function received considerable
attention in the classic structure-conduct-performance studies (Chandler, 1962).
These studies elaborated changing external circumstances and the need to develop
appropriate structural forms other than hierarchical functional structure
representative of mechanistic structural thinking. Mechanistic structures were
developed to operate at high efficiency in stable environments and were based on
the belief that organizations are rational entities in which the design of
organizations is a science and people are considered as economic beings (Burnes,
2000). Mechanistic organizations are structured to demonstrate the following
characteristics:

Clear tiers of hierarchy: Organizational vision emanates from the top.

Decision is made through a long chain and over a prolonged process, and
communicated down to the employees
Functionalism: There is rigid departmental separation and work specialization
Strong management control and centralization of power: Vertical linkages are
used to coordinate corporate activities between the top and the bottom of

the organization. Top management controls planning, problem solving,

decision-making and directing
A higher level of formality: There are many bureaucratic and rigid rules and
set procedures, and little individual freedom of action ; communication is
formalized; there is restricted flow and sharing of knowledge; knowledge
management process is primarily based on deduction from practices and
personal skills into theorized and formalized knowledge. This hierarchical
functional structure however displayed unwanted side effects: rigid
bureaucracy hindered flow of information across functional and hierarchical
boundaries, whilst excessive specialization of work processes deterred
integration of expert knowledge and speedy response to the competitive
environment

As the organization size increased, the side effects grew and it became difficult to
exert controls and influence for effective organizational functions. This in turn led to
development of decentralization as a solution for effective control. The common
trajectory of structural transition depicts a scenario in which hierarchical structure is
giving way to flatter and more flexible structures in the post-modern world of
business, therefore calling for the rise of organic structure.
Structural evolution of Organic structure promotes a metaphor in which
organizations are seen as complex and social entities featured by a collection of
competing and interacting forces between individuals and social forces. The organic
structure has the following dimensional characteristics :

Flat and team-based. There is a shift from vertical decision making to

horizontal collaboration. Organization composition typically consists of top
management, strategic groups and project teams.
Divisionalized: Departmental barriers erode to facilitate cross-functional
teams and integration of specialized sources of knowledge
Decentralization of power and control: Managers empower employees to
proactively participate in organizational management and promote a culture
of openness and trust
A higher level of informality: There is freedom from rules; there are more
informal, face-to-face communications and two loops of communications
downwards and upwards (Ahmed, 1998); management expands to include
managing people, technology, knowledge, and processes; there is general
encouragement of interaction, which is regarded as the main mechanism to
create new knowledge.

As companies grow further in size, in particular, as they internationalize there is a

heightened and different type of demand placed upon structure in terms of control
over larger geographical disperse organizations. In such environment, the organic
metaphor results in the development of variations of more sophisticated,
decentralized, divisional structure, such as the matrix structure, which emerged in

the 1970s as a hybrid of hierarchical and flatter structures (Miller, 1986; Martinsons
and Martinsons, 1994). In matrix organizations, there exists a dual chain of
command that aims to achieve an equal balance of power between the vertical, i.e.
functions or divisions, and horizontal linkages, i.e. project teams of the organization.
Project managers and functional managers hold equal authority. The matrix
structure, flexible and adjustable to meet organizational needs (Martinsons and
Martinsons, 1994), may particularly benefit global companies seeking to achieve
international collective responsibility (Hankinson and Hankinson, 1998). However,
the limitations of matrix structure soon became transparent. The ambiguity inherent
in the matrix structure causes problems such as power struggles and a blurred
sense of accountability, resulting in lowered morale and job satisfaction (Peters,
1979). Companies struggled to come to terms with the deficiencies of the matrix.
The spur of globalization drove up the intensity of competition and environmental
flux. The changes served to accentuate further the deficiencies of the traditional
organizational forms. Consequently, there was an emergence of a range of new
forms of organizations, such as network organizations(Powell, 1990; Jarillo, 1988;
Miles and Snow, 1992), knowledge-based organizations (Perez-Bustamante, 1999),
virtual organizations (Davidow and Malone, 1992), modular organizations (Sanchez
and Mahoney, 1996), hypertext organizations (Nonaka and Takeuchi, 1995), etc.
Each of these, in fact, is a guise of process-based structures. Process structuring
takes a radical step in decentralization that was started earlier by adding
empowerment. Process-based organizations, by pushing responsibilities lower into
the organization, provide a higher level of decentralization. The effect of this is to
move the organizational structure from hierarchical to a laterally aligned activity
process-led organization form. The discussion above highlights that organizational
structure has evolved with increasing external and internal demands. As we enter
the knowledge-based economy, newer demands are being placed on structural
forms. These new challenges highlight the capability-based competitive advantage,
which will be discussed in the following section.

Competitive advantage in the knowledge economy :

As companies entered into the 1990s, knowledge became one of the most
important strategic resources. Knowledge production is critical to sustaining
competitive advantage and organizational success (Kogut and Zander, 1992;
Nonaka and Takeuchi,1995). Traditional types of competitive strategies based on
industry positioning, such as cost leadership, differentiation and focus (Porter, 1985)
were not sufficient to cope with dynamic environments. Competing on capabilities,
i.e. obtaining and sustaining competitive advantage through the development of a
distinctive set of organizational capabilities, has become a focus in the strategic
field. The essence of strategy does not lie in the organization's particular products
and markets, but the dynamics of its behavior (Stalk et al., 1992) and processes
(Day, 1994). In addition, the organization's ability to renew and achieve new and
innovative forms of competitive advantage becomes most important. This ability is
referred to as a firm's dynamic capability. Dynamic capability is built upon

organizations' capabilities and core capabilities. Capabilities relate to the integration

and joint operation of routines (Metcalfe and James, 2001). Core capabilities are
those valuable, rare, idiosyncratic and hard-to-imitate capabilities that define the
organization's fundamental business. If related to Porter's (1985) generic strategies,
capabilities are effectively linked to organizational outcomes in terms of efficiency,
quality and reliability, contributing to the workings of an operational strategy level.
Core capabilities are unique endowments to the firm that give the firm competitive
advantage in the marketplace.
In the dynamic world it is imperative that organizations constantly renew and create
new layers of these capabilities. Competitive advantage in the modern economy lies
upon the capabilities of creating knowledge, learning to learn and managing
strategic change. This requires a higher level of organizational capability: dynamic
capability. Dynamic capability is an organization's ability to achieve new and
innovative forms of competitive advantage given path dependencies and market
positions (LeonardBarton, 1992), and the ability to integrate, build, and recongure
internal and external competencies to address rapidly changing environments
(Teece et al., 1997). Building competitive advantage through dynamic capability
requires constant knowledge flow within and outside the organization and a
continuously updated knowledge repository. This new demand inevitably raises a
new challenge for organizational structure. The new focus is to develop new types
of organizational forms to facilitate knowledge management, in particular
knowledge flow. Effective management of knowledge demands:

Boundary-lessness. Knowledge-based organizations need to break away from

the restriction of spatial boundaries, and build a perceptual framework
bounded by organizational identity and trust. In this way, the organizational
knowledge pool can expand beyond the narrow confines of a physical
boundary. Doing so enables employees to access information without
hindrance from formal control structure. Informal relationships play an
important role in blurring the boundary.
Fluidity. Effective knowledge management demands a flow of knowledge,
rather than a stock of it (Perez-Bustamante, 1999). Organizational design
must smooth knowledge flow and allow knowledge to have a far greater
impact on performance. Informal relationships promote a proliferation of
internal and external networks to facilitate knowledge flow.
Interactiveness. Effective knowledge management relies to a great extent on
managing tacit knowledge. Informal relationships promote interpersonal,
cross functional and inter organizational interaction, and are the prime
method of sharing tacit knowledge as well as codifying and producing tacit
knowledge.
Flexibility. For effective production of knowledge-based outcomes, structure
should be flexible rather than definite, allowing appropriate and timely
restructuring of knowledge and temporary constellations of people and units

to meet organizational needs. Organizations cannot thus be viewed as solid

frameworks, but transient entities, created and remolded by different
processes. This requirement is fulfilled via informal relationships.
A potentially useful metaphor for describing such knowledge-based organizations is
the aforementioned communities of practice. Communities of practice are activity
systems where groups of people share a concern, a set of problems, or a passion
about a topic, and deepen their knowledge and expertise in this area by interacting
on a regular basis to achieve outcomes for both stakeholders and personal
development and learning (Lave and Wenger, 1991; Wenger, 1998). Communities of
practice are not a form of formal structure, but a process existing at a systems
level. Communities of practice exist in the minds of their members in the connection
that they have with each other and with the larger institution in which they reside
(Liedtka, 1999).Communities of practice are a structural aspect that not only
manages knowledge resources, but also helps rms to adapt to the emerging
threats and opportunities of the new economy (Wenger, 1998). Wenger (1998)
demonstrates benets of communities of practice in the following ways:

Reconstitute expertise that cannot be easily gathered within decentralized,

cross functional units and ensure organizational wide access to knowledge
resources whilst maintain high accountability and market presence.
Strengthen a crucial sense of identity and belonging, and commitment and
ownership to ensure a stable context for developing skills and reputation and
enable companies to compete on knowledge and for knowledge.
Establish networks to facilitate dialogue, leverage participation and
encourage exchanges of knowledge resources within and beyond
organizational boundaries.

These discussions indicate that a sincere commitment to organizations as

communities rather than as markets may enable the creation of capabilities and
develop dynamic capability that leads to competitive advantage in the knowledge
economy (Liedtka, 1999). These in turn require structural support characterized by
boundaryless, fluidity, interactiveness and flexibility, which are captured to some
extent in the structural dimension of informal relationships.
Developing structural dimensions for knowledge-based organizations : Informal
relationships play a significant role in organizational structuring. They are a critical
aspect underpinning the distinction between mechanistic and organic structure, and
an even more imperative dimension of process-based organizations. For example,
network organizations are essentially based on informal relationships independent
of the possible existence of formalized structures (Mayere and Vinot,1993).
Communities of practice are fundamentally composed of a large set of informal
relationships. Informal structures provide a much stronger ground for organizational
structuring in addition to the three traditional structural dimensions. The demands
on organizations in the knowledge economy make it clear that the four dimensions

together are not sufficient to capture the response required for modern structuring
transformation. This then leads to re-thinking organizational structuring at a higher
level and re-discovering the deeper underlying dimensions of structuring in the
dynamic marketplace. To activate knowledge-based organizations in the form of
communities of practice, structuring needs to incorporate dimensions at a higher
level. This higher level is characterized by trust-based relationships, externallyoriented interactive relationships, and emotionally-inclusive relationships.
Building trust enables effective, non-barrier communications that in turn ensure
ideas generated from associates are integrated and coordinated to benefit the
whole organization (Ackoff, 1994; Van de Ven, 1986), as well as a clear
understanding of organizational vision and strategy at all levels. Because of the
high requirement to share knowledge, knowledge-based structures must essentially
be trustedbased rather than control-based. To share knowledge, organizational
members must possess a high level of trust and optimism about their relationship
with each other (Liedtka, 1999). Empowered individuals share knowledge openly.
Trust-based relationships encourage development of policy transparency, effective
communication and collaborative skills (Miles and Snow, 1994).
Externally-oriented interactive relationship : The essential structure of knowledgebased organizations is an externally interactive exoskeleton of clearly specified,
objectively structured agreements that guide interactions, rather than internal
schedules, procedures and routines (Miles and Snow, 1992). The degree of external
interaction reflects the openness of organizational structure and the ambiguity of
organizational boundary, as well as the competitiveness of the environment. Insular
attitudes and perspectives lead to knowledge protection and restricted sharing.
Collaborative environments on the other hand extend boundaries externally,
facilitate knowledge sharing and smooth knowledge flow, thereby promoting overall
knowledge production. In the knowledge management context, external
relationships are necessarily voluntary, explicit and transparent allowing a deeper
exploration of informal, personal and behavioral linkages.
Emotionally-inclusive relationship : Emotionally-inclusive relationships enable
structuring to allow organizational members to replay organizational values and
competencies in personalized ways. This offers the opportunity for creativity and
innovation within a cultural context that provides coherence (Hatch, 1999). The
synergy of positive organizational emotions and maximum autonomy of workers
encourages overall creative contributions and the production of organizational
wisdom, eventually developing the capability of self management of individuals and
project groups (Perez-Bustamante, 1999; Bierlyet al., 2000). Emotionality requires
strategic suspension of rational imperatives and encouragement of playfulness and
experimentation in order to achieve diversity(March, 1976). Knowledge-based
structures require a balance of diversity (multiple contributions) and unity
(interpretation of various contributions as a single performance)

These three dimensions co-exist and cross-develop with formal and informal
structures. They are the additional fundamental dimensions that help to address the
challenges posed by the knowledge economy. Taking the seven dimensions into
consideration, mechanistic structure demonstrates strength in functional
relationships, hierarchical relationships and control and centralization. Organic
structure presents a shift towards development of informal relationships, trustbased relationships, externally-oriented interactive relationships and emotionallyinclusive relationships. Knowledge-based organizations in the form of communities
of practice push forward the shift and require full development of the latter four
dimensions.

Conclusions
Entering a knowledge era, organizations will need to become more adaptable and
exible in order to capture opportunities in the dynamic environment. Traditional
understanding of organizational structure fails to capture the essence of
organizational development in the face of new challenges and demands. Structural
dimensions adopted from Schein's hierarchical, functional, and inclusion and
centrality dimensions are fairly adequate at mapping conventional structures.
However, to develop and map new forms of structure, which are capable of meeting
the demands of knowledgebased environments, necessitates incorporating higher
levels of dimensions. These higher dimensions are: informal relationships, trustbased relationships, emotionally inclusive relationships and externally-oriented
relationships. In these higher levels of dimensions, informal relationships play an
important role in dening and understanding the intrinsic nature of structural
activities within the organization. These four dimensions underlie the real energy of
organizations competing on dynamic capability in the knowledge economy. The
overall structural transition presents a trend from structuration to metaphor: in the
dynamic environment, organizational structure will need to be more open than
precisely dened, more emotionally-inclusive than rationally-inclusive, more
interactive than integrative, more temporal, more exible, and trust- and
informality-based.