Chapter 6: Business organisation structure

I. Organizational Structures
1. Entrepreneurial Organizational Structures
a) Simple Structure:
o The simple structure is characteristic of small, young organizations. At the top of
the organization is a small group, or possibly one person, which exercises direct
control over everyone else.

o Example: A small decorating firm might have an owner-manager overseeing a few

workers such as a plasterer, painter, and electrician. The owner directly manages
these workers and coordinates their activities to serve local customers.

b) Dominance of a Single Entrepreneur:

o In small firms, a single entrepreneur or management team will dominate (as in the
power culture). If the firm grows, it might need more managerial skills than the
owner/entrepreneur can provide.

c) Centralization:
o Centralization is advantageous, as it reflects management’s full knowledge of the
business and its processes.

o However, senior managers might intervene too much, potentially leading to

micromanagement and a lack of empowerment among employees.

d) Handling Simple but Fast-Moving Environments:

o This structure can handle an environment that is relatively simple but require fast
responses.

e) Direct Supervision for Coordination:

o Coordination is achieved by direct supervision, with few formal devices.

o It is thus flexible, allowing for quick adjustments and personalized management, but
relies heavily on the central figure’s ability to manage all aspects.

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II. Functional Organizational Structures
Functional organizational structures are designed with departments based on
specialized functions, such as marketing, finance, and production. Each department
operates independently, concentrating on its specific tasks and objectives.

Advantages:
• Suits Centralized Businesses:
• Expertise is Pooled:
o The functional structure is well-suited for centralized businesses, where
o Pooling expertise means dividing work into specialized areas where top management makes most decisions and directs the functional
employees with similar skills and expertise are grouped together. departments accordingly.

o Benefit: o Benefit
§ Increased Efficiency: Employees become more efficient as they § Ensures Uniformity: Centralized decision-making ensures that all
focus on tasks they are skilled at. departments follow the same policies and procedures.

§ Higher Quality Work: Specialization leads to higher quality work due § Consistency in Decision-Making: Decisions are consistent across
to expertise in specific areas. the organization, reducing confusion and discrepancies.

§ Enhanced Collaboration: Grouping similar expertise can improve

collaboration and innovation within the function.

• Avoids Duplication:
o Avoiding duplication means that in a functional structure, multiple
departments do not perform the same functions. Instead, functions are
centralized in one department, such as having a single accounting
department instead of several scattered ones.

o Benefit:
§ Reduces Redundancy: Centralizing functions reduces unnecessary
duplication of efforts.

§ Enables Economies of Scale: Centralized departments can operate

more efficiently and benefit from economies of scale.

§ Leads to Cost Savings: Reducing duplication and taking advantage

of economies of scale result in significant cost savings.

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Disadvantages:
• Focus on Internal Processes and Inputs:
o Functional structures often prioritize internal efficiency and processes over
customer needs and outputs, resulting in an inward-looking approach.

o Drawback:
§ Decreased Adaptability: The focus on internal processes can
reduce the organization's ability to adapt to market changes
and customer demands.
§ Potential Impact on Customer Satisfaction: Customer
satisfaction may be affected if their needs are not prioritized.

• Communication Problems:
o Communication problems in organizations often arise when different
functions develop their own jargon and working methods.

o Drawback:
§ Misunderstandings: Specialized jargon and unique methods
can lead to misunderstandings between departments.
§ Hindered Collaboration: Collaboration between departments
can be hindered by these communication issues.

• Poor Coordination:
o Poor coordination in organizations, where interdepartmental decisions
often need escalation to higher management levels.

§ Escalation to Higher Management: Interdepartmental decisions

often require approval from senior management.

o Drawback:
§ Slower Decision-Making: The need for escalation can significantly
slow down the decision-making process.
§ Increased Burden on Senior Management: Senior management
faces a higher workload due to the constant need for approval and
coordination.
§ Reduced Responsiveness: The organization becomes less
responsive to issues that require quick interdepartmental coordination.
§ Potential for Bottlenecks: Decision-making can become a
bottleneck, slowing down the overall organizational efficiency.

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III. Matrix Organizational Structure
• Matrix Organizational Structure: A setup where employees have two bosses –
one for their regular department work (functional manager) and one for specific
projects (project manager).

o Functional Managers: Leaders who manage departments such as

marketing, finance, or engineering.

o Project Managers: Leaders who manage specific projects, bringing

together team members from different departments to work on a common
goal.

• Examples:
o Dual Reporting Relationships: Sarah, a marketing expert, reports to the
Marketing Manager for her regular tasks and to the Project Manager for a
new advertising campaign.

o Functional Manager Role: The Marketing Manager ensures Sarah has the
right skills and tools for her job.

o Project Manager Role: The Project Manager coordinates Sarah's work

with other team members from finance and engineering for the campaign.

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IV. Divisional Structures V. Centralization and decentralization - the role of head office in divisions
When an organization reaches a certain size, it may be appropriate to structure it into In divisional structures, the role of the head office can vary in terms of decision-making
divisions or ‘semi-autonomous’ blocks. power and control over the divisions. This variation depends on whether the
organization is centralized or decentralized..
Semi-Autonomous Blocks:
1. Centralized Organizations:
• Each division operates almost independently, making its own decisions.
o The head office retains most of the power and decision-making authority.
Focus Areas:
• Divisions may be based on geography (e.g., UK division), products (e.g., soup o Divisions report to the head office on various performance-related matters.

division), or customer types. o Example: Major strategic decisions and financial approvals are handled by
the central head office.

2. Decentralized Organizations:
o More decision-making power is given to divisional heads.

o Divisions have greater autonomy in making business decisions.

o Example: Divisional heads can make decisions about local marketing

strategies or product development.

Examples of Divisions: Implications:

• Subsidiary Company: A smaller company owned by the holding company. • Centralized Approach:
• Profit Centre: A part of the company responsible for generating profit. o Ensures uniformity and consistency across the organization.
• Strategic Business Unit (SBU): A unit within the larger company with its own o Can slow down decision-making processes due to the need for head office
objectives and strategies. approval.

• Decentralized Approach:
o Encourages flexibility and faster decision-making at the divisional level.

o Allows divisions to tailor strategies to their specific markets or products.

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VI. Anthony's Hierarchy
Robert Anthony classified management activities into three categories: strategic,
tactical, and operational. Each level has distinct responsibilities and time frames for
decision-making.

1. Strategic Management:
o Level: Senior management
o Focus: Direction setting, policy making, and crisis handling
o Time Frame: Long-term (3 to 5 years)
o Responsibilities: Ensures the organization has a clear direction and long-
term goals.

2. Tactical Management:
o Level: Middle management
o Focus: Establishing means to achieve corporate goals, mobilizing
resources, and innovating
o Time Frame: Medium-term
o Responsibilities: Bridges the gap between strategic plans and day-to-day
operations by creating actionable steps.

3. Operational Management:
o Level: Supervisors and operatives
o Focus: Routine activities to execute tactical plans
o Time Frame: Short-term
o Responsibilities: Handling day-to-day operations and ensuring that tactical
plans are carried out effectively.

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VII. Structural forms for organisations
2. Factors Influencing the Span of Control
1. Scalar chain and span of control
Several factors influence how many employees a manager can effectively oversee,
Scalar Chain:
known as the span of control.
• The scalar chain is about the levels of management in an organization.
Think of it like a ladder: the more steps on the ladder, the more levels of
management there are.

• A long scalar chain means many levels (tall organization), and a short
scalar chain means fewer levels (flat organization).

• Example: In a military structure with many ranks from general to private.

Orders pass down through many levels, creating a long scalar chain.

• Example: In a large corporation, you might have many levels from the
CEO at the top, down to managers, team leaders, and finally the regular
employees. This creates a long scalar chain.
The type of tasks a manager handles impacts their span of control. These tasks can be
divided into supervisory and non-supervisory work.
Span of Control:
• The span of control is about how many employees a manager supervises. Types of Manager's Work:

• A narrow span of control means fewer employees per manager, and a • Supervision: Directly overseeing employees.
wide span of control means more employees per manager. • Non-supervisory Work: Tasks that do not involve direct supervision, such as:

• Example: If a manager oversees 3 employees, the span of control is o Solitary Work: Includes planning and scheduling.
narrow. If they oversee 15 employees, the span of control is wide. o Entrepreneurial Activities: Dealing with external parties and new ventures.
o Interaction with Superiors and Colleagues: Communicating and
• Example: A small classroom where one teacher teaches five students
coordinating with other managers and staff.
(narrow span of control) versus a large lecture hall where one professor
teaches 100 students (wide span of control).
Key Influences on Span of Control:
1. Amount of Non-Supervisory Work:
o More non-supervisory work (like planning or dealing with external
matters) means the manager has less time for direct supervision,
leading to a narrower span of control.

2. Delegation of Authority:
o If a manager can delegate tasks effectively, they can handle a wider
span of control because subordinates can operate more independently.

3. Geographical Dispersion of Subordinates:

o If team members are spread out in different locations, it requires more
effort to supervise them, often resulting in a narrower span of control.

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3. Tall and flat organisations
Tall organizations have many management levels and a narrow span of control,
whereas flat organizations have fewer management levels and a wide span of control.

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Question 6.1:
Question 6.2:
Which of the following statements about an organisation chart is NOT true?
Which of the following is a correct definition of 'span of control'?
O An organisation chart provides a summary of the structure of a business.
O The number of employees subordinate in the hierarchy to a given manager
O An organisation chart can improve internal communications within a business.
O The number of levels in the hierarchy 'below' a given manager's
O An organisation chart can improve employees' understanding of their role in a business.
O The number of employees directly responsible to a manager
O An organisation chart can indicate functional authority but not line authority within a
business.

Not true statement: “An organisation chart can indicate functional authority but not lin
authority within a business.” Question 6.3:
Y ple is a growing organisation which has recently diversified into a number of
significant new product markets. It has also recently acquired another company in
one of its overseas markets.

What would be the most appropriate form of organisation for Y plc?

O Geographical departmentation
O Divisionalisation
O Functional departmentation

Geographical Departmentation:
• Organizing a company based on geographic regions or territories.
• Example: A multinational corporation operating in distinct regional markets
(e.g., North America, Europe, Asia) might use geographical departmentation to
address specific regional needs and regulations.

Divisionalisation:
• Organizing a company into semi-autonomous divisions, each focusing on
specific products, services, or markets.
• Example: A conglomerate with diverse product lines such as electronics,
automotive, and healthcare might use divisionalisation to manage each product
line as a separate entity, focusing on its unique market dynamics.
An organisation chart typically indicates both line authority (direct chain of command)
Functional Departmentation:
and functional authority (specialist roles and advisory positions). Line authority is
• Organizing a company based on major functions such as marketing, finance,
shown through direct reporting lines, while functional authority may be shown through production, and human resources.
dotted lines or other visual cues. • Example: A company specializing in a single product or service might use
functional departmentation to optimize efficiency and expertise within its core
functions.

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Question 6.4: Question 6.5:
Which of the following principles of classical management is challenged by Which of the following statements about the informal organisation is NOT true?
matrix management?
O The influence of the informal organisation was highlighted by the Hawthorne Studies,
in the way group norms and dynamics affected productivity.
O Structuring the organisation on functional lines
O Informal organisation can pose a threat to employee health and safety.
O Structuring the organisation on geographical lines
O Informal organisation can stimulate innovation.
O Unity of command
O Managers in positions of authority generally cannot be part of the informal
O Decentralization of decision-making
organisation.

• Matrix Organizational Structure: A setup where employees have two bosses –

The informal organization refers to the network of personal and social relationships
one for their regular department work (functional manager) and one for specific
that arise spontaneously as people associate with one another in the workplace.
projects (project manager).
o The Hawthorne Studies conducted in the 1920s and 1930s highlighted the
o Functional Managers: Leaders who manage departments such as
influence of informal organizations on productivity. The studies showed how group
marketing, finance, or engineering.
norms, relationships, and dynamics could affect workers' performance and
productivity.
o Project Managers: Leaders who manage specific projects, bringing
together team members from different departments to work on a common o Informal organizations can pose a threat to employee health and safety if informal
goal.
norms or practices encourage risky behavior, disregard formal safety protocols, or
create peer pressure to neglect safety measures.

o Informal organizations can stimulate innovation by fostering open communication,

collaboration, and the sharing of ideas among employees. Informal networks often
facilitate creativity and problem-solving outside the constraints of formal structures.

o Managers in positions of authority can indeed be part of the informal organization.

They often participate in informal networks and relationships, which can help them
understand the organization's culture, gain insights from employees, and influence
group norms positively. The informal organization includes individuals at all levels
of the organization, not just non-managerial employees.

• Unity of Command: Matrix management challenges the principle of unity of

command by introducing dual-reporting lines. Employees have more than one
supervisor, which can lead to confusion, conflicting priorities, and challenges in
accountability.

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 Question 6.7:
Question 6.6:
Which of the following statements is/are true?
Which of the following is an advantage of centralisation?
(1) An informal organisation exists within every formal organisation
O It helps to develop the skills of junior managers
(2) Objectives of the informal organisation are broadly the same the formal organisation
O It avoids overburdening top managers in terms of workload and stress
(3) A strong, close-knit informal organisation is desirable within the formal organisation
O Senior managers can take a wider view of problems and consequences
O Statement (1) only
O Statements (1) and (3) only
The correct answer is: Senior managers can take a wider view of problems and
consequences. O Statements (2) and (3) only
O Statement (3) only
Rationale: A centralized organisation is one in which authority is concentrated in one
place. If all decisions are made in the same place, then it will be easier for the decision-
makers to see the "bigger picture' and therefore understand the consequences of their
o Statement (1) is true.
decisions.
Informal organizations naturally develop within every formal organization as
The first two options are advantages of decentralisation, where decisions are delegated. individuals form social relationships, networks, and groups based on common
interests, friendships, and mutual support. These informal structures exist
alongside the formal organizational structure and can significantly influence the
workplace environment.

o Statement (2) is not true.

The objectives of informal organizations often differ from those of formal
organizations. While formal organizations focus on achieving specific business
goals, objectives, and tasks, informal organizations are more concerned with
fulfilling social and psychological needs of employees, such as building
relationships, gaining social support, and enhancing job satisfaction. The informal
organization may support or sometimes conflict with formal organizational goals.

o Statement (3) is not true.

This statement is true with some caveats. A strong, close-knit informal organization
can be desirable as it can enhance communication, foster teamwork, and improve
morale among employees. It can also drive innovation and problem-solving by
creating a supportive and collaborative work environment. However, if not
managed well, it can also lead to resistance to change, the spread of rumors, or
conflicts with formal organizational policies.

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Question 6.8:
What is an organisation which has removed the internal barriers Question 6.9:
which separate hierarchy levels and functions and also between
Which of the following statements are true?
the organisation and its suppliers, customers and competitors
known as? (1) With a shared service centre services are likely to be less tailored
(2) The IT function is commonly provided using shared service approach
O Modular organisation
(3) A shared service centre is not part of the organisation
O Hollow organisation
O Jobless structure O Statement (1) and (3) only
O Boundaryless organisation O Statements (1) and (2) only
O Statements (2) and (3) only
• Modular Organization:
o A modular organization outsources non-core functions to other companies o Statement (1) is true.
while retaining control over core activities. Shared service centers (SSCs) aim to standardize and streamline processes to
achieve economies of scale and efficiency. As a result, services provided by SSCs
• Hollow Organization: may be less tailored to the specific needs of individual business units compared to
o A hollow organization outsources most of its processes and functions, services provided directly within those units.
maintaining only the central core functions internally. It relies heavily on
external vendors and partners to perform various business activities. o Statement (2) is true.
This statement is true. IT services are commonly centralized in shared service
• Boundaryless Organization: centers to leverage economies of scale, ensure consistency, and improve
efficiency. Centralizing IT functions can reduce costs, standardize technology
o A boundaryless organization removes traditional barriers that separate
platforms, and provide consistent support across the organization.
different levels of hierarchy, functions, and external entities such as
suppliers, customers, and competitors. This type of organization promotes
open communication, collaboration, and integration both internally and
o Statement (3) is not true.
externally. A shared service center is part of the organization. It is an internal service provider
that centralizes certain business functions (such as HR, finance, or IT) to improve
efficiency and service quality within the organization. Although it operates as a
separate entity within the organization, it remains an integral part of the overall
corporate structure.

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