Chapter 8 - Unit 2.

2: Organizational Structure

Introduction to Organizational Structure

Organizational structure refers to the formal interrelationships and hierarchical arrangements of

human resources within a business. Businesses can organize their human resources in different
ways depending on their size and nature.

●​ Small firms (e.g., sole proprietorships) may have informal structures where the owner
performs multiple roles such as marketing, operations, and finance.
●​ Larger businesses require a formal structure to define roles and responsibilities clearly,
improving efficiency through accountability and responsibility.

Key Elements of Organizational Structure

1.​ Accountability: Specifies who is responsible for each task, ensuring control and
efficiency.
2.​ Responsibility: Defines who is in charge of whom within the hierarchy.

Example: In a secondary school, the principal holds the highest authority, with department heads
managing teachers, who in turn guide students.

To gain a better understanding of different types of organizational structures, the following

terminology is stipulated in the syllabus:

1.​ Delegation
2.​ Span of control
3.​ Levels of hierarchy
4.​ Chain of command
5.​ Bureaucracy
6.​ Centralization
7.​ Decentralization
 8.​ Delayering
9.​ Matrix structure

1. Delegation

As a business grows, managers need to relinquish some of their roles and responsibilities
because they are not able to effectively control all aspects of the organization. This passing on of
control and decision-making authority to others is called delegation. It involves the line manager
entrusting and empowering staff to complete a task or project but holding them accountable for
their actions.

●​ Effective delegation benefits both managers and employees by saving time and
empowering staff.
●​ Poor delegation leads to confusion and demotivation, reducing productivity.

2. Span of Control

The span of control refers to the number of people who are directly accountable to a manager.
Hence, the higher up a person is in a hierarchy, the wider their span of control tends to be.

●​ Wide Span of Control: Fewer managerial layers, cost-efficient, but may reduce team
cohesion.
●​ Narrow Span of Control: More managerial levels, better supervision, but increased
costs.

Factors influencing span of control (MOST):

●​ Manager’s experience: Skilled managers handle larger teams.

●​ Organizational culture: Democratic cultures have wider spans.
●​ Subordinates’ skill level: Skilled employees require less supervision.
●​ Task complexity: Complex tasks demand a narrower span.
3. Levels of Hierarchy

The hierarchy in a business refers to the organizational structure based on a ranking system.

●​ Top-level (e.g., CEO, Board of Directors)

●​ Middle-level (e.g., Department Heads, Managers)
●​ Lower-level (e.g., Supervisors, Employees)

Advantages:

●​ Establishes clear lines of authority.

●​ Provides a sense of belonging and motivation.

Disadvantages:

●​ Rigid and inflexible.

●​ Can create communication barriers.

4. Chain of Command

The chain of command refers to the formal line of authority through which communications and
orders are passed down in an organization.

●​ Short chain: Faster communication, more flexibility.

●​ Long chain: Clearer hierarchy, but slower decision-making.

5. Bureaucracy

Bureaucracy is the execution of tasks that are governed by official administrative and formal
rules of an organization. Bureaucratic organizations are characterised by prescribed rules and
policies, standardized procedures and formal hierarchical structures.
Characteristics:

●​ Standardized policies.
●​ Formal chains of command.
●​ Extensive paperwork and administrative procedures.

Pros and Cons:

●​ Advantages: Ensures consistency, reduces risk, provides clear responsibilities.

●​ Disadvantages: Slows down decision-making, creates inefficiencies.

Theories:

●​ Karl Marx viewed bureaucracy as necessary but costly.

●​ Max Weber saw bureaucracy as ideal for efficiency and fairness.

Centralization

Centralization refers to an organizational structure where decision-making authority is

concentrated in the hands of a few senior executives or a central leadership team. These key
decision-makers, usually directors or senior managers, maintain control over major strategic and
operational choices.

Characteristics of Centralization:

●​ Decision-making is concentrated at the top of the hierarchy.

●​ Lower-level employees have limited autonomy.
●​ Direct chain of command and clear lines of authority.
●​ Standardized procedures and policies across the organization.
●​ Favored by traditional management theorists like Henri Fayol, Frederick Taylor, and
Henry Ford.

Advantages of Centralization:

●​ Consistent decision-making: Ensures uniformity in strategic goals and policies across

the organization.
 ●​ Strong leadership: Centralized decision-makers can maintain a clear vision and
corporate direction.
●​ Efficient resource allocation: Helps in avoiding duplication of efforts and optimizing
costs.
●​ Quick implementation of policies: Reduces delays caused by multiple levels of
approvals.

Disadvantages of Centralization:

●​ Limited employee involvement: Employees may feel disengaged due to a lack of

participation in decision-making.
●​ Slow response to local issues: A rigid structure may delay addressing regional or
department-specific problems.
●​ High pressure on top management: Senior executives bear the burden of
decision-making, which may lead to inefficiencies.

Decentralization

Decentralization refers to the distribution of decision-making authority to different levels of

management and employees within an organization. It allows regional offices, departments, or
teams to make decisions relevant to their specific functions while still aligning with the
organization's broader objectives.

Characteristics of Decentralization:

●​ Decision-making is spread across various levels of the organization.

●​ Greater autonomy and responsibility for middle and lower management.
●​ Encourages creativity, innovation, and employee empowerment.
●​ Strategic decisions remain centralized, but operational decisions are delegated.

Advantages of Decentralization:

●​ Faster decision-making: Managers at different levels can make quicker decisions

without waiting for approval from the top.
 ●​ Increased motivation and engagement: Employees feel more valued and responsible
for outcomes.
●​ Flexibility and adaptability: Organizations can respond more effectively to local market
needs and external changes.
●​ Encourages leadership development: Provides opportunities for employees to develop
decision-making skills.

Disadvantages of Decentralization:

●​ Potential inconsistency: Different branches or departments may implement policies

differently, leading to inefficiencies.
●​ Coordination challenges: Ensuring alignment between decentralized units and central
headquarters can be difficult.
●​ Higher costs: More training and resources are required to develop competent
decision-makers at various levels.

Factors Influencing Centralization vs. Decentralization:

1.​ Size of the Organization: Larger firms tend to be more decentralized for efficiency.
2.​ Nature of Decision-Making: High-risk, strategic decisions are often centralized, while
operational decisions may be decentralized.
3.​ Corporate Culture: Innovative industries favor decentralization, while highly regulated
industries may prefer centralization.
4.​ Management Competency: Experienced managers may support decentralization, while
inexperienced ones may require centralized oversight.
5.​ Technology Utilization: Advanced ICT allows for better communication and
decentralization of work processes.

Delayering

Delayering refers to the process of removing one or more levels of management in an

organization to create a flatter hierarchical structure. This helps in reducing bureaucracy,
improving communication, and increasing efficiency.
Characteristics of Delayering:

●​ Reduces the number of hierarchical levels in the organization.

●​ Widens the span of control for managers.
●​ Encourages direct communication between leadership and employees.
●​ Often implemented as a cost-cutting strategy.

Advantages of Delayering:

●​ Improved efficiency: Reduces unnecessary managerial layers and speeds up

decision-making.
●​ Enhanced communication: Fewer hierarchical levels mean more direct interactions
between employees and leadership.
●​ Cost savings: Reducing management layers lowers salary and administrative expenses.
●​ Increased responsibility for employees: Employees take on more accountability,
promoting empowerment and professional growth.

Disadvantages of Delayering:

●​ Increased workload for managers: Managers may struggle with larger teams due to a
wider span of control.
●​ Employee resistance: Some employees may feel uncertain about job security and career
progression.
●​ Potential loss of experienced managers: Removing layers may lead to the loss of key
talent and institutional knowledge.

Matrix Structure

A matrix structure is an organizational framework that combines functional and project-based

structures. Employees report to both a functional manager (e.g., marketing, finance) and a project
manager (e.g., a new product development team).

Characteristics of a Matrix Structure:

●​ Employees work across different departments on various projects.

 ●​ Dual reporting system: Employees have a functional manager and a project manager.
●​ Encourages teamwork and knowledge-sharing.
●​ Suitable for dynamic and project-driven environments.

Advantages of a Matrix Structure:

●​ Enhanced communication and collaboration: Employees interact across departments,

fostering innovation.
●​ Efficient resource utilization: Skilled employees can contribute to multiple projects
rather than being confined to a single department.
●​ Flexibility in management: Adapts to changing business needs by reassigning
employees as required.
●​ Encourages skill development: Employees gain exposure to different functions and
expertise.

Disadvantages of a Matrix Structure:

●​ Confusion in authority: Employees may struggle with dual reporting relationships.

●​ Potential power struggles: Conflicts may arise between functional and project managers
over resource allocation.
●​ Complex coordination: Managing multiple projects and reporting lines can be
administratively challenging.
●​ Time-consuming decision-making: Requires continuous alignment between teams,
which can slow down processes.

Organization Charts (AO2, AO4)

An organization chart is a diagrammatic representation of a firm's formal organizational

structure. It visually displays how authority, responsibility, and communication flow within an
organization. Formal groups are established to carry out specific functions or job roles, such as a
team of finance specialists or a department of marketers. While most formal groups are
permanent, businesses can also establish temporary teams to address specific issues or projects,
such as in matrix structures.
An organization chart showcases five key features of a business:

1.​ Functional departments – It displays the various operational areas of a business, such as
Marketing, Production, Finance, and Human Resources, each headed by a director.
2.​ Chain of command – It illustrates the hierarchy of authority within the organization,
indicating who reports to whom.
3.​ Span of control – It shows the number of subordinates reporting to a manager, impacting
decision-making and delegation.
4.​ Levels of hierarchy – It defines the number of layers between the CEO and front-line
employees, influencing communication and efficiency.
5.​ Decision-making authority – It clarifies whether decision-making is centralized (held by
top management) or decentralized (distributed among various levels).

Types of Organizational Structures

The syllabus specifies different types of organizational structures, including flat (horizontal),
tall (vertical), and structures based on product, function, or region. Understanding these
structures is crucial for adapting to external changes.

(i) Flat (Horizontal) Organization Charts

A flat organizational structure has fewer levels in the hierarchy, meaning minimal layers exist
between operatives and senior management, such as the CEO. Consequently, managers have a
wider span of control, as illustrated in Figure 8.11.

Advantages of Flat Structures:

●​ Encourages delegation – Employees take on more responsibility, fostering career

development and motivation.
●​ Improved communication – Fewer hierarchical layers mean faster decision-making and
clearer communication channels.
●​ Cost-effective – Fewer managerial levels reduce overhead costs associated with salaries
and administrative expenses.
 ●​ Reduces hierarchy gaps – Eliminates the ‘them and us’ culture, making employees feel
more connected to senior management.
●​ Fosters innovation – Empowers employees to take initiative, which is beneficial for
creative industries.

Disadvantages of Flat Structures:

●​ Increased workload for managers – A wider span of control means managers may
struggle to provide adequate supervision.
●​ Risk of inefficiencies – Without clear hierarchical authority, decision-making can
become ambiguous.
●​ Limited opportunities for promotion – Fewer management levels may reduce career
progression opportunities.

(ii) Tall (Vertical) Organization Charts

A tall organizational structure has multiple levels of hierarchy, meaning managers have a
narrower span of control, as shown in Figure 8.12. This structure is commonly used in
traditional businesses where employees report directly to a designated supervisor.

Advantages of Tall Structures:

●​ Greater managerial oversight – Managers can closely supervise subordinates, ensuring

tasks are performed efficiently.
●​ Clear authority and responsibility – Well-defined roles and chains of command reduce
confusion.
●​ Encourages specialization – Employees focus on specific tasks, increasing productivity.
●​ More opportunities for promotion – Multiple hierarchical levels provide room for
career growth, motivating employees.
●​ Better coordination and control – Smaller teams enhance cohesion and accountability.

Disadvantages of Tall Structures:

 ●​ Slower decision-making – Information must pass through multiple levels, causing
delays.
●​ Higher administrative costs – More managers and bureaucracy increase operational
expenses.
●​ Risk of rigid bureaucracy – Employees may feel restricted by excessive rules and
procedures.
●​ Weaker communication flow – Messages can become distorted as they move up and
down the hierarchy.

(iii) Organization by Product, Function, or Region

In addition to structuring an organization as tall or flat, businesses may choose to organize

employees based on product, function, or region.

1. Organization by Product

●​ Large businesses with diverse product portfolios structure their teams according to
different product lines.
●​ Each department focuses on a specific product category, such as consumer goods or
industrial equipment.
●​ Example: Fast-food conglomerates like Yum! Brands manage KFC, Pizza Hut, and Taco
Bell as separate entities.

2. Organization by Function

●​ Employees are grouped based on their functional roles, such as Marketing, Finance,
Production, and HR.
●​ This structure enhances expertise and efficiency within each functional area.
●​ Many corporations use this model for specialized operations.

3. Organization by Region

●​ Suitable for multinational corporations (MNCs) with operations in different geographical

locations.
 ●​ Regional offices have autonomy to make localized decisions, improving responsiveness
to market demands.
●​ Example: A manufacturing company may have separate management teams in Thailand,
Singapore, and Vietnam.

Changes in Organizational Structures (HL Only)

Organizational structures are not static and do not necessarily have to adhere strictly to
traditional tall or flat hierarchies, nor do they have to be organized solely by product, function, or
region. As businesses operate in dynamic environments, both internally and externally, they must
adopt flexible structures to remain competitive and responsive to market demands. Two
prominent approaches that reflect these flexible structures are Project-Based Organization and
Charles Handy's Shamrock Organization.

1. Project-Based Organization

A Project-Based Organization (PBO) is structured around projects or development plans,

rather than permanent departments. In this system, human resources are assembled into project
teams for a defined period, with each project being led by a project manager who is responsible
for ensuring its successful completion.

Characteristics of Project-Based Organizations:

●​ Teams are composed of individuals from various functional areas.

●​ Focus is on completing specific projects rather than adhering to a fixed position within
the company.
●​ Teams dissolve after project completion, and members may be reassigned to new
projects.
●​ Highly flexible and responsive to industry trends and client demands.
●​ Project managers oversee multiple teams working on separate projects simultaneously.

Industries Using Project-Based Structures:

 ●​ Construction: Different teams may work on projects such as bridge-building, highways,
or skyscrapers.
●​ Software Engineering: Tech firms often assign developers to various app development
or system improvement projects.
●​ Entertainment: Film production companies create teams for each movie or series before
disbanding them upon completion.
●​ Aerospace: Aircraft and defense system development involve specialized,
project-specific teams.
●​ Oil Exploration: Teams are deployed based on drilling and extraction projects in
different locations.

Advantages of Project-Based Organizations:

Flexibility: Businesses can quickly respond to market changes and technological advancements.

Efficiency: Teams are assembled based on skills required, ensuring expertise in every project.

Innovation: Encourages creativity and innovation as employees work on diverse projects.

Cross-functional Collaboration: Employees gain experience across different departments,

improving problem-solving capabilities.

Disadvantages of Project-Based Organizations:

Lack of Job Security: Employees might feel uncertain about their roles once a project
concludes.

High Administrative Costs: Constantly forming and dissolving teams requires significant
coordination.

Coordination Challenges: Managing multiple projects simultaneously can lead to inefficiencies

if communication is weak.

While project-based structures allow for agility and adaptability, they must be managed
effectively to avoid issues related to uncertainty and administrative complexity.
2. Charles Handy’s Shamrock Organization

Charles Handy, a renowned business theorist and co-founder of the London Business School,
proposed the Shamrock Organization Model in 1991. He argued that traditional hierarchical
structures were becoming less effective in modern business environments. Handy emphasized
that organizations should become more flexible, focusing on the needs of workers through job
enrichment, flexible working hours, and outsourcing.

Concept of the Shamrock Organization

The Shamrock Organization is named after the three-leafed clover, symbolizing the three distinct
groups of workers within a business:

i. Core Workers (Professional Core)

●​ Full-time, permanent employees who form the backbone of the organization.

●​ Typically include senior managers, specialists, and professional technicians.
●​ Crucial to maintaining business operations and long-term growth.
●​ Often receive high remuneration, job security, and benefits.
●​ Example: Engineers in a manufacturing firm or analysts in a financial institution.

ii. Peripheral Workers (Contingent Workforce)

●​ Part-time, temporary, or contract-based employees hired as needed.

●​ Provide flexibility in workforce management, reducing costs during off-peak periods.
●​ Often paid on an hourly or piece-rate basis.
●​ Example: Cashiers in retail chains, seasonal hospitality staff, or freelance graphic
designers.

iii. Contract Workers (Outsourced Specialists)

●​ External firms or individuals who are hired to complete specialized tasks.

●​ Offer expertise in areas such as IT support, marketing, legal services, and security.
 ●​ Help businesses focus on core activities while reducing costs associated with maintaining
an in-house team.
●​ Example: A company hiring an external advertising agency to develop its branding
strategy.

Implications of the Shamrock Model:

●​ Cost Efficiency: Outsourcing reduces labor costs, allowing businesses to operate leaner.
●​ Flexibility: Companies can scale operations up or down based on demand without
significantly affecting full-time staff.
●​ Motivation & Productivity: Core workers are highly skilled and well-compensated,
leading to better productivity.
●​ Job Insecurity: Peripheral workers often face instability, which can affect morale and
loyalty.
●​ Dependency on Outsourcing: Over-reliance on external specialists may lead to issues
with quality control and coordination.

Strategic Changes in Organizational Structures

1. Evolution from Tall to Flat Structures

●​ Many modern businesses have moved away from tall hierarchical structures, which
were common in the mid-20th century.
●​ Delayering has become a key strategy to improve efficiency by reducing the number of
management levels.
●​ Flatter structures lead to:
○​ Faster decision-making processes.
○​ Improved communication between employees and management.
○​ Greater employee empowerment and job satisfaction.
○​ Lower operational costs by reducing excessive managerial roles.
2. Cultural and Technological Influences on Structure

●​ Globalization has forced businesses to reconsider organizational structures to remain

competitive in international markets.
●​ Technology enables more businesses to adopt flexible work structures such as remote
working, matrix structures, and decentralized decision-making.
●​ Cross-cultural management is crucial for multinational corporations, as organizational
effectiveness depends on recognizing cultural differences.

3. The Role of Strategic Human Resource Planning

●​ Businesses must adapt their organizational structures in response to changing internal

and external conditions.
●​ Organization charts help visualize responsibilities, authority lines, and formal
communication paths.
●​ Inefficient structures can lead to:
○​ Communication breakdowns
○​ Demotivation of employees
○​ Coordination issues and decision-making delays

4. Future Trends in Organizational Structures

●​ Agile organizations that prioritize collaboration and adaptability will likely dominate the
future business landscape.
●​ Remote and hybrid work models are becoming more prevalent, reducing the need for
strict hierarchical control.
●​ Gig economy and freelancing are leading to a rise in non-traditional employment
models, further reinforcing Handy’s Shamrock Organization concept.
●​ AI and automation are transforming workforce structures, replacing certain job roles
while creating new ones that require technological expertise.