Chapter 5 - Organisational structure

Organisational 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 organisational 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 tall and flat organisational structure
• explain what is meant by centralised/decentralised structure
• list advantages and disadvantages of centralised/decentralised structure
• explain the nature of the ‘informal organisation’
• 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 organisation while at the same
time reducing its potential disadvantages.

1. Organisational structure

Different types of structure

A typical pattern of structural 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
Advantages Disadvantages
• Fast decision making. • Lack of career structure.
• More responsive to market. • Dependant on the capabilities of the
• Goal congruence manager/owner
• Good control.
• Cannot cope with
• Close bond to workforce. diversification/growth.

Advantages ( more details )

• 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 ( more details )

• 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.
Advantages Disadvantages
• Economies of scale. • Empire building.
• Standardisation. • Slow.
• Specialists more comfortable. • Conflicts between functions.

• Career opportunities. • Cannot cope with diversification.

Advantages ( more details )

• This organisational structure relates to an organisation which has outgrown the

entrepreneurial 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 ( more details )

• 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, leading to empire building and conflicts between the functions.
• 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.
Advantages Disadvantages
• Enables growth.
• Clear responsibility for • Potential loss of control.
products/divisions. • Lack of goal congruence.
• Training of general managers. • Duplication.
• Easily adapted for further • Specialists may feel isolated.
diversification.
• Allocation of central costs can be a
• Top management free to concentrate problem.
on strategic matters.

Advantages ( more details )

• 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 control over the activities of the division and possible 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 manger is encourages with less concentration upon
specialisation. This promotes a wider view of the company’s operations.

Disadvantages ( more details )

• 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.

Advantages Disadvantages
• Enables geographic growth.
• Clear responsibility for areas.
• Training of general managers.
• As for divisional structure above.
• Top management free to concentrate
on strategic matters.

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 Structure
• A matrix structure aims to combine the benefits of decentralisation (e.g. speedy
decision making) with those ofco-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.
Advantages Disadvantages
• Advantages of both functional and
divisional structures. • Dual command and conflict.
• Flexibility. • Dilution of functional authority.
• Customer orientation. • Time-consuming meetings.

• Encourage teamwork and the exchange • Higher admin costs.

of opinions and expertise

Advantages ( more details )

• In todays rapidly changing environment, there is a need for effective coordiantion in

very complex situations. If a car manufacturer wants to design, produce and market a
new model, the process involves most parts of rthe organisation and a
flexible/adaptable system is needed to acieve the objectives. The more rigid strucuture
experienced ina dividional company would not have the flexibility to be able to
coordinate the tasks and the people, whereas the matrix structrure can cope.
• The production managers could be replaced with customer managers, in which case
the whole team will be focussed on meeting the needs fo the customer.

Disadvantages ( more details )

• 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.

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

Outline the main features of a functional organisational structure.

SOLUTION

• Most common structure found in organisations

• Jobs are grouped on the grounds of common specialisation
• They sell few products (that are closely related)
• Operate from few locations
• Operate in a stable environment
• Found in smaller companies

Further aspects of organisational structure

Ownership and management of larger organisations are often separated. One of the main
reasons for this is that the managers do not have access to sufficient funds and therefore they
rely on banks and the market (the owners) to provide the investment.

In order to ensure that managers are managing the business in the best interests of the owners,
many safeguards/controls etc are put in place, which will lead to for example formal
organisational structures being set up for an organisation.

The divorce of ownership and management (control) is dealt with in more detail later.

Scalar chain

This is defined as the line of authority which can be traced up or down the chain of
command, and thus relates to the number of management levels within and organisation.

Span of control

A manager’s span of control is the number of people for whom he or she is directly
responsible.

Tall versus Flat structures

A tall structure has many managerial levels (hierarchies) and a ‘narrow’ span of control.
A flat structure has few managerial levels and a ‘wide’ span of control.

The factors that influence the span of control include:

• nature of the work – the more repetitive the work, the wider the span of control
• type of personnel – the better managers and personnel are, the wider the span of
control
• location of personnel – the more widely spread the personnel the narrower the span of
control.

What other factors could influence the span of control within an organisation?

Other factors could include:

Management style

Level of organisational support for routine tasks

The dangerous nature of the work

Centralisation and decentralisation

Another method of analysing structures is by reference to the level at which decisions are
made.

• In a centralised structure, the upper levels of an organisation’s hierarchy retain the

authority to make decisions.
 • In a decentralised structure the authority to take decisions is passed down to units and
people at lower levels.
• The factors that will affect the amount of decentralisation are:
• Management style.
• Ability of management/employees.
• Locational spread.
• Size of the organisation/scale of activities.

The advantages and disadvantages of decentralisation are:

Advantages Disadvantages
• Loss of control by senior management.
• Senior management free to concentrate
• Dysfunctional decisions due to a lack of
on strategy.
goal congruence.
• Better local decisions due to local
• Poor decisions made by inexperienced
expertise.
managers.
• Better motivation due to increased
• Training costs.
training and career path.
• Duplication of roles within the
organisation.
• Quicker responses/flexibility, due to
smaller chain of command.
• Extra costs in obtaining information.

The informal organisation and its relationship with the formal

organisation
So far, we have been looking at formal organisational structures -they have been designed by
management to try and ensure that an organisation can meet its goals

We now look at the informal organisation. This organisation evolves over time and is a
network of relationships that exist within an organisation. The relationships arise due to
common interests or friendships. These relationships can be across divisions and it is through
these relationships that daily interactions between members of staff take place.

Within a formal organisation, an informal organisation will be present and all organisations
have some mix of the two.

There are many reasons for the informal organisation, including.

• individuals’ goals may differ from the organisations – workers with the same goals
gravitate together.
• personal relationships may arise between individuals.
• a group of individuals may share common interests, e.g. football and so form an
informal group.
 • certain members of the organisation may be natural leaders and so lead a group, even
though they have no formal managerial place.
• workers find new ways of doing things which save them time.

Advantages Disadvantages
• inefficient organisations
• better motivation
• opposition to change can be intensified

• better communication
• the ‘grapevine effect’

Advantages ( more details )

• If managers can work with the informal groups within their department, there should
be higher levels of motivation and productivity.
• Interdivisional communication should be better through the informal network. This
could lead to increased innovation which should help the company succeed.

Disadvantages ( more details )

• If the formal structure is in conflict with the informal structure, the organisation may
end up being inefficient at meeting its objectives. This can arise due to, e.g. formal
lines of communication being blocked as informal lines of communication are more
efficient and become more important.
• If managers try to implement change, they may find opposition from not only the
formal but also the informal organisation e.g. change in one division, may lead to
company wide unrest as word of the changes spread through the informal network,
and other divisions start to be concerned that ‘they will be next’ (the grapevine
effect).

The impact of the informal organisation on the business

The informal organisation can either enhance or hold back the business. Managers need to be
aware of the informal structure and ensure that they

• adapt the formal structure to complement the informal one

• maintain a looser formal structure so that the informal structure can thrive. For
example, hold monthly meetings to inform employees of the company’s goals but
allow the informal structure to flourish e.g. ad hoc teams to form so that innovation
and communication is not stifled
• at the very least take account of the informal structure in decision making. For
example, if a manufacturing department has split itself into two informal ‘cliques’ and
output is in decline, the declining output could have nothing to do with the formal
structure, but be due to lack of integration of the whole division due to the cliques.
Rather than changing the formal structure, management could for example mix
 members of the two ‘cliques’ on training courses, and so try and reduce the impact of
the informal organisation.

In his studies at the Hawthorne works of the Western Electric Company in Chicago between
1924 and 1927, Elton Mayo concluded that informal groups exercised strong social controls
over workers’ habits and attitudes, e.g. an individual productivity bonus scheme failed as
workers were unwilling to show up their less capable colleagues.

What other methods could be employed to integrate a department and reduce the impact of
the informal organisation ?

Methods could include:

Away days, ensuring that teams for the activities are picked with members from both cliques.

Change shift patterns so that the cliques are broken up on the production line.

Change break times, so that one ‘clique’ does not take its break together.

2. Chapter summary