Project Based Organizations

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The purpose of this section is to describe a project based organization and compare it to other basic organization types: functional and matrix organizations. Many companies will not perfectly fit either of these definitions. Yet in most cases one will be able to identify the basic organization type that most closely matches a company’s structure.

A functional organization groups employees and activities by functions (e.g. marketing, engineering, finance). Each function is typically led by a function manager, who reports to the senior management of the company. A key advantage of functional organizations is that knowledge, skills and facilities for each functional area are consolidated. This promotes economies of scale. In addition employees develop in-depth functional skills. (Daft, 2007) This makes the functional organization well suited for mass production of consumer goods and other industries where specialization of functions and scale effects are key (Hobday, 2000). A main weakness of the functional organization is its rigid structure and low horizontal coordination (between functions). This makes it slower to respond to environmental changes and specific customers’ requirements. (Daft, 2007)

A matrix organization groups employees and activities simultaneously by both: functions and major cross-functional projects. In a balanced matrix organization authorities and responsibilities are shared equally between function managers and project managers. Function managers and project managers report to the senior management of the company. (Hobday, 2000) Generally employees in a matrix organization report to the functional managers. This leads to the key weakness of a matrix organization: Employees and resources are often torn between functional and project demands (Lindkvist, 2004). The main advantage of a matrix organization is the combination of faster market adaptation and flexibility via projects and crossfunctional integration on the one hand and in-depth functional expertise on the other hand. (Daft, 2007)


Project based organizations are highly decentralized and build their core business on autonomous project teams with finite project life spans. According to Gareis (2002) the organizational strategy of PBOs is defined as “management by projects”. Project managers in PBOs hold a lot of power and typically report directly to the senior management of the company. The main advantage of PBOs is their flexibility. They allow quick adaptation to changing environments and individual client’s demands and support innovation. (Bresnen, Goussevskaia, & Swan, 2004; Mintzberg, 1983; Svensson & Von Otter, 2001). Therefore PBOs are most appropriate for businesses that face several complex tasks at once and have a fast changing environment. Typical businesses within this environment are high-technological and service providing corporations, which carry out knowledge-intensive projects (e.g. consulting, advertisement, law). (Thiry & Deguire, 2007). Hobday (2000) argues that PBOs are “probably best suited for large, risk-intensive projects, where resources have to be combined and shared with other firms” (Hobday, 2000, p. 892). One of the key challenges of project based organizations is cross-project coordination and making sure that projects are aligned with the strategy of the company. Also PBOs are weak where functional organizations are strong: building in-depth functional knowledge and economies of scale.


As any major organizational change the transition of a company towards a PBO puts severe pressure on an organization. (Thiry, 2008). Therefore companies need to carefully weigh the benefits, risks and necessary actions before deciding on this type of organization. The purpose of this section is to...
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