Chapter 13 Organisational structure

13.1 Business objectives and organisational structure

The internal structure of a business should be designed to help achieve its objectives. When these
objectives change, as they often do over time or in new circumstances, then the structure needs to
change. The division of responsibilities and the relationships between different sections of the
business change considerably in different circumstances, as follows.

New competitors enter the industry

An organisational structure is not fixed for all time. It needs to adapt and be flexible enough to allow
the business to be responsive to meet changing conditions, including different objectives. This
flexibility will allow the structure to meet the needs of the business as they change over time.

The business grows and develops

As a business expands, its internal structure must change. If the business grows, another manager or
supervisor might be required. It could become too timeconsuming for one person to control the
work of all the employees, even if delegation is used. A decision would then need to be made about
how responsibilities were to be divided – by function or by product.

Business objectives change

For example, if one of the long-term objectives of the business is to increase sales in other countries,
then the organisational structure must be adapted to create a regional marketing department. If the
objective becomes one of making innovative products using the latest technology, then the business
structure must include a research and development department. Structure must reflect the
objectives of the business.

Intrapreneurship is being encouraged

Many businesses are now seeing intrapreneurship as a way of giving them a competitive advantage.
Traditional bureaucratic hierarchies are often poor at innovation as they are inflexible, focused on
topdown communication and do not encourage teamworking between departments. Structural
changes are needed to encourage intrapreneurs.
13.2 Types of organisational structure
The functional structure
A functional structure splits an organisation into departments based on their major area of
responsibility. Each of these departments is led by a functional manager. All authority rests with this
departmental head. Other employees are grouped according to their role. For example, in the
marketing department there might be sales managers, market researchers and promotions
managers. This type of structure is usually also organised hierarchically.

Advantages of functional structure

• Employees often display a high level of departmental loyalty and pride in the work of their
department.

• It encourages employees to become specialists and this can increase efficiency and productivity.

• Departments are led by managers who are specialists in the functional area.

Disadvantages of functional structure

• The structure is a vertical one and this often does not allow for good connections between
departments.

• Coordination between departments is therefore difficult, for example, when developing a new
major project.

• Communication flows through the department heads to the top management, so employees may
feel remote from senior management.

• There might be competition between departments, which may not benefit the whole organisation.
For example, competition for financial resources is based on getting the most for the department
and not necessarily considering what is best for the business as a whole.

The hierarchical structure

In a hierarchical structure, there are different layers of the organisation with fewer and fewer people
at each higher level. The main features of a hierarchical structure are levels of hierarchy, chain of
command and span of control.

Levels of hierarchy - Each level in the hierarchy represents a grade or rank of staff. Lower levels are
subordinate to superiors on a higher level. The greater the number of levels, the greater the number
of different grades or ranks in the organisation. A narrow (or tall) organisational structure has many
levels of hierarchy and this creates three main problems:

• Communication through the organisation can become slow, with messages becoming distorted or
filtered in some way.

• Spans of control are likely to be narrow as there is a clear relationship between the number of
levels in a hierarchy and the average span of control (see Spans of control below).

• Those on lower levels can feel remote from the decision-making power at the top. In contrast, a
flat organisational structure will have few levels of hierarchy but will tend to have wider spans of
control.
Chain of command - Typically, instructions are passed down the hierarchy. Information, for example
about sales or output levels, is sent upwards. The taller the organisational structure, the longer will
be the chain of command, thus slowing down communications.

Spans of control - Spans of control can be either wide (with a manager directly responsible for many
subordinates) or narrow (a manager has direct responsibility for a few subordinates).

The benefits of a flat organisational structure with wide spans of control are that:

• Each worker is delegated more authority as there is less direct control from a manager who is
responsible for many other employees.

• Employee empowerment can be an important motivational force.

• A short chain of command results in better communications: there is a clear link between the
number of hierarchy levels and the spans of control.

• There are few levels of hierarchy so fewer middle managers are needed, reducing business costs.
This increases the average size of each span of control. This helps to demonstrate the clear link
between the number of levels of hierarchy and spans of control.

Advantages of a hierarchical structure

The role of each individual will be clear and well-defined. There is a clearly identifiable chain of
command. This traditional hierarchy is most frequently used by organisations based on a role
culture, where the importance of the role determines the position in the hierarchy.

Disadvantages of a hierarchical structure

A hierarchical structure tends to indicate that one-way (top downwards) communication is standard
practice. This is rarely the most efficient type of communication. There are no horizontal links
between the departments or the separate divisions, and this can lead to lack of coordination
between them. Managers are often accused of having a narrow vision because they are not
encouraged to look at problems in any other way than through their experience of their own
department. This type of structure is very inflexible and often leads to change resistance. This is
because all managers tend to defend both their own position in the hierarchy and the importance of
their own section or department.

Structure by product or geographical area

When the structure of a business is based on the different ranges of products that it makes or areas
that it operates in, it can be referred to as a divisional organisational structure. Each of these
product divisions will be self-contained. They have their own marketing, production and research
teams. A senior manager in these teams will report to the head of the product type. Key functions
such as strategic decision-making and finance are usually still centralised.

Product structure can help a business:

• focus on specific market segments

• respond to consumer needs and market changes more quickly

• measure the performance and profitability of each division separately.

Potential disadvantages include:

• duplication of roles, for example, each division has its own sales team

• rivalries between divisions might develop as they each focus on divisional objectives

• loss of overall central control over each division.

Delayering

Narrow hierarchical structures often have communication and employee motivation problems. One
approach many senior managers use to solve these problems is to remove whole layers of
management to create shorter structures. This process is known as delayering.
The matrix structure

This approach to organising businesses aims to eliminate many of the problems associated with the
hierarchical structure. The matrix structure cuts across the departmental lines of a hierarchical chart
and creates project teams made up of people from all departments or divisions. This method of
organising a business is task- or project-focused. The matrix organisation gathers together a team of
specialists with the objective of completing a task or project, instead of highlighting the role or
status of individuals. Emphasis is placed on an individual’s ability to contribute to the team rather
than their position in the hierarchy.
13.3 Delegation and accountability

Processes of accountability

• Give clear expectations before the employee starts the job.

• Make sure the employee has the appropriate skills, providing training if necessary.

• Establish two-way communication to provide feedback on how the employee is performing while
doing the job, not just at the end of the task.

• Agree a clear measurement of performance so that the worker knows when they will be assessed
as having done a job well or poorly.

• The consequences of good or poor performance need to be made clear to the employee.

The impact of delegation on a business

Delegation means the passing down of authority from higher to lower levels in the organisation, in
order for subordinate employees to perform tasks and take decisions.
13.5 Centralisation and decentralisation

With centralisation there is minimum delegation to managers in other areas, departments or

divisions of the business. All, or most, major decisions are taken by a few senior managers at the
centre of the organisation, which could be based at its head office.

Decentralisation passes decision-making authority to managers down the hierarchy. Managers in

functional areas, departments or divisions in the business take decisions that, in a centralised
structure, would be taken at head office. Decentralisation must involve delegation. A centralised
organisation insists on all sections of the business following the same procedures, which gives the
business a feeling of uniformity and consistency. Head office is able to exert considerable control
over all operations. Decentralised organisations allow employees to be empowered and this
demonstrates trust in them.

Good examples of decentralised businesses are multinationals which allow regional and cultural
differences to be reflected in the products they sell. Clothing retailers with operations in several
countries often allow local managers to decide on the exact range of clothing to be sold in each
country. It could be disastrous for a business to try to sell European winter clothes in Singapore, for
example. Centralised businesses will want to maintain exactly the same image and product range in
all areas. This may be because of cost savings or to retain a carefully created business identity in all
markets.
13.6 Line and staff management functions

Line managers are those who have authority over others in a hierarchical structure. For example,
the sales director will have line authority over the sales managers for each of the different products
the firm sells. Line managers carry out line functions that directly impact on the core activities of the
business.

Staff managers do not have line authority over others. They are specialists who are employed to give
advice to senior line managers. They might be economists, specialist market researchers or scientific
experts advising on the environmental impact of certain products or processes. These managers
carry out staff functions. They support the line managers and help the organisation by offering
specialised advice and analysis.

There is always potential for conflict between line and staff functions. Due to their professional
status and experience, staff managers can be very well paid. They are often accused of having less
loyalty to the business as their services might be in great demand by a wide range of firms. This
could lead to them being attracted by better rewards in other organisations. The line managers
might resent experts coming into the organisation and telling them how to do their jobs. Some staff
managers might have frequent access to, and communications with, the directors of the business.
This can cause jealousy from line managers who do not have the same easy access to directors.