Chapter 2

　　organisation structure

　　Chapter learning objectives

　　Upon completion of this chapter you will be able to:

　　§ explain the different ways in which an organisation might be structured

　　§ list advantages and disadvantages of each type of organizational arrangement

　　§ define the terms scalar chain and span of control

　　§ what factors influence the span of control

　　§ give reasons why ownership and management of the organisation are often separated

　　§ explain what is meant by centralised/decentralised structure

　　§ what are the advantages and disadvantages of the informal organisation

　　§ identify what impact the informal organisation has on the business

　　§ how can managers foster the benefits of the informal organization while at the same time reducing its potential disadvantages.

　　1 Organisational structure

　　1.1 Different types of structure

　　A typical pattern of structure change can be represented by the following sequence.

　　Entrepreneurial

　　§ This type of structure is built around the owner manager and is typical of small companies in the early stages of their development.

　　§ The entrepreneur often has specialist knowledge of the product or service

　　§ Example owner/managed business

　　AdvantagesDisadvantages

　　§ Fast decision making.

　　§ More responsive to market.

　　§ Goal congruence

　　§ Good control

　　§ Close bond to workforce§ Lack of career structure.

　　§ Dependant on the capabilities of the manager/owner

　　§ Cannot cope with diversification/ growth.

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　　Advantages

　　§ There is only one person taking decisions – this should lead to decisions being made quickly.

　　§ As soon as an element of the market alters, the entrepreneur should recognise it and act quickly.

　　§ A lack of a chain of command and the small size of the organisation should mean that the entrepreneur has control over the workforce and all decisions within the organisation leading to a lack of goal congruence.

　　Disadvantages

　　§ This type of structure is usually suited to small companies where due to the size; there is no career path for the employees.

　　§ If the organisation grows, one person will not be able to cope with the increased volume of decisions etc.

　　Functional structure

　　§ This type of structure is common in organisations that have outgrown the entrepreneurial structure and now organise the business on a functional basis.

　　§ It is most appropriate to small companies which have few products and locations and which exist in a relatively stable environment.

　　§ For example a business making one type of electrical component for use in a car manufacturing company.

　　AdvantagesDisadvantages

　　§ Economies of scale.

　　§ Standardisation.

　　§ Specialists more comfortable.

　　§ Career opportunities.§ Empire building.

　　§ Slow.

　　§ Conflicts between functions.

　　§ Cannot cope with diversification.

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　　Advantages

　　§ This organisational structure relates to an organisation which has outgrown the entrepreneur stage. Rather than duplicating roles in different parts of the company, similar activities are grouped together so leading to:

　　§ lower costs

　　§ standardisation of output/systems, etc.

　　§ people with similar skills being grouped together and so not feeling isolated.

　　§ Due to the larger size of the organisation and the grouping into functions, there is a career path for employees – they can work their way up through the function.

　　Disadvantages

　　§ Managers of the functions may be try to make decisions to increase their own power/be in the best interest of their function rather that work in the best interest of the company overall.

　　§ Due to the longer chain of command, decisions will be made more slowly.

　　§ This style of structure is not suited to an organisation which is rapidly growing and diversifying – the specialists in for example the production function would not be able to cope with making gas fires and radios.

　　Product/Division/Department

　　§ Organisation structured in accordance with product lines or divisions or departments.

　　§ They are headed by general managers who enjoy responsibility for their own resources.

　　§ Divisions are likely to be seen as profit centres and may be seen as strategic business units for planning and control purposes.

　　§ Some departments, e.g. accounts will be centralised.

　　AdvantagesDisadvantages

　　§ Enables growth.

　　§ Clear responsibility for products/divisions

　　§ Training of general managers.

　　§ Easily adapted for further diversification.

　　§ Top management free to concentrate on strategic matters.§ Potential loss of control.

　　§ Lack of goal congruence.

　　§ Duplication.

　　§ Specialists may feel isolated.

　　§ Allocation of central costs can be a problem

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　　Advantages

　　§ If an organisation wants to grow and diversify, the functional structure can not cope, so instead the divisional structure should be adopted. Should the company want to diversify further, it is easy to ‘bolt on’ another division.

　　§ It encourages growth and diversity of products, e.g. by adding additional flavours etc to capture other segments of the market. This in turn promotes the use of specialised equipment and facilities.

　　§ Due to the break down of the company’s activities into the divisions, it should mean that the divisional managers can clearly see where their area of responsibility lies and it should leave the top management free to concentrate on strategic matters, rather than to get involved in the day to day operations of each division – although this can lead to a lack of goal congruence.

　　§ The focus of attention is on product performance and profitability. By placing responsibility for product profitability at the division level, they are able to react and make decisions quickly on a day to day basis.

　　§ The role of the general manager is encourages with less concentration upon specialisation. This promotes a wider view of the company’s operations.

　　Disadvantages

　　§ In most divisionalised companies, some functions, e.g. accounting or human resources will be provided centrally. If this is the case, the cost of the centralised function could be recharged to those divisions using e.g. the human resource function. There are different ways of calculating the recharge and divisional managers may complain if the profitability of their division is reduced by an amount that they perceive as being arbitrary.

　　Geographically structured

　　§ Grouping activities on the basis of location.

　　§ Common in organisations that operate over a wide geographic area.

　　§ Often, some departments e.g. accounts will be centralised.

　　§ For example Kaplan.

　　AdvantagesDisadvantages

　　§ Enables geographic growth.

　　§ Clear responsibility for areas.

　　§ Training of general managers.

　　§ Top management free to concentrate on strategic matters§ As for divisional structure above

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　　Product divisionalisation is generally preferred over say geographic divisionalisation when the product is relatively complex and requires a high cost of capital equipment, skilled operators etc., e.g. the car industry.

　　Matrix

　　§ A matrix structure aims to combine the benefits of decentralisation (e.g. speedy decision making) with those of co-ordination (achieving economies and synergies across all business units, territories and products).

　　§ It usually requires employees from various departments to form a group to achieve a specific target.

　　§ They require dual reporting to managers and the diagram shows a mix of product and functional structures.

　　§ For example in a university, a lecturer may have to report to both subject and department heads.

　　AdvantagesDisadvantages

　　§ Advantages of both functional and divisional structures.

　　§ Flexibility.

　　§ Customer orientation.

　　§ Encourage teamwork and the exchange of opinions and expertise.§ Dual command and conflict.

　　§ Dilution of functional authority.

　　§ Time-consuming meetings.

　　§ Higher admin costs.

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　　Advantages

　　§ In today’s rapidly changing environment, there is a need for effective coordination in very complex situations. If a car manufacturer wants to design, produce and market a new model, the process involves most parts of the organisation and a flexible/adaptable system is needed to achieve the objectives. The more rigid structure experienced in a divisional company would not have the flexibility to be able to coordinate the tasks and the people, whereas the matrix structure can cope.

　　§ The production managers could be replaced with customer managers, in which case the whole team will be focused on meeting the needs of the customer.

　　Disadvantages

　　§ Where the matrix structure can cause difficulty is in the lines of control. These may become ambiguous and conflict with each other. A team member may answerable to the product manager and to his functional superior, and this may cause confusion and stress. Time consuming meetings may be required to resolve the conflict, so resulting in higher administration costs.

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　　Few organisations adopt a pure structural type; the skill is in blending the structure to the organisation’s circumstances. There is a whole range of ‘shades of grey’ between these pure types of structure, e.g. a company may move from a functional to a divisional structure by a series of small incremental changes.

　　Test your understanding 1

　　Outline the main features of a functional organisational structure.

　　Test your understanding 2

　　Food plc is company that manufactures dried packet and tinned soups, tinned vegetables and is about to start making specialist soups for sale in small delicatessens hot healthy ‘food on the go’. They have recently recruited a specialist from ‘Gourmet Soups’ to help them with their new venture. The packet and tinned soups are sold to 2 major supermarkets, the tinned vegetables to many outlets. Design an organisational structure for Food plc.