3.2. Organizational Structures

Relationships within an organisation

Any business organisation, whatever its size, whether in the public or private sector, will need to establish an internal structure. The internal structure of a business will show:

• Who is in charge

• Who makes the decisions

• Who carries out decisions

• How decisions and information are communicated

That is, the organisational structure will establish the relationships between managers and their subordinates necessary to achieve business objectives.

Organization charts

The formal structure within an organisation can be represented by means of an organisation chart. Traditionally, an organisation chart is constructed with those individuals near or at the top having more authority and responsibility than those at the bottom.

The relative positions of individuals within the boxes show formal relationships, and lines between boxes show formal lines of communication between the individuals.

Departmentalisation

The most common method of establishing formal relationships between individuals is by establishing departments. A department is defined as a unique group of human resources established by management to perform a particular task within the organisation.

Department groupings can be established in a number of ways. Consider the ways in which a producer might be split into departments:

• By function. By far the most common method among medium-to-large organisations. Departments are established to perform specific tasks, for example, marketing, finance, production, sales, and personnel.

• By process. Divisions are based on operations, with each department specializing in a particular task.

• By product/service. An organisation that produces many different products or brands may find it difficult to co-ordinate across them. Organizing according to product allows managers to group together the resources needed to produce each product.

• By customer. Departments can be established to deal with different groups of main customers. For example, most banks have specialized mortgage, foreign exchange, and small business departments

• By territory. Departments can be created according to the place in which work is done or by geographical market areas. Most large organisations operate on a regional basis. Multinational organisations will have offices, factories, and often shops in different countries.

Organisational levels and the span of management

When deciding on a firm’s organisational structure, management will take into account two important factors:

• The chain of command

• The span of management (or span of control)

The hierarchy in a business refers to the layers of management from the most senior managers down to those managers or supervisors of the lowest rank, i.e. ‘top – down management’. In a small business there are unlikely to be many layers. For example, in a one-person enterprise – a sole trader – the business owner makes and implements all the decisions as both manager and worker.

The structure of the hierarchical organisation is presented as a pyramid. It is narrow at the top indicating few senior managers, while the base, representing a large number of ‘shop-floor’ operatives or low-grade workers, is broad.

The top layers of management – directors or chief executives – are usually concerned with strategic, long-term plans and policies and with checking that subordinates carry these out. A distinct chain of command runs in a line from the top layers of management down through each department in the organisation to the ‘shop floor’. Orders are passed down this chain of command while information on which further decisions are taken – sales, revenues, output, staff turnover, etc. – is passed up the organisation.

Advantages of the hierarchical structure:	Disadvantages of the hierarchical structure:
Clear management structure Clear division of responsibility and allocation of authority Organisation can be controlled from the top	Many layers of communication can slow down speed at which decisions can be implemented Top layers of management may stifle the initiative and motivation of middle managers and subordinates Senior managers may have limited experience and understanding of functions within the whole organisation Co-operation and co-ordination across departments may be difficult

Flat and tall organisation structures

Within any hierarchy there will be a span of control. This refers to the number of individuals a manager supervises. The more individuals in a manager's charge, the wider his or her span of control. Thus, if 5 employees are directly under the control of the production manager, his or her span of control is 5.

In general, the greater the height of the organisation chart, the smaller the span of control. It follows that the lower the height of the chart, the greater the span of control tends to be.

Organisation charts with little height are usually referred to as flat organisations, while those with height are referred to as tall.

Flat organisations are those which have relatively few or even just one level of management. Many UK enterprises have adopted flatter structures in order to reduce levels of management and bureaucracy, and to give their workforce greater decision-making responsibilities.

Advantages of wide span of control:	Disadvantages of wide span of control:
Fewer levels of management and decision making Lower supervision costs Greater decision-making authority for subordinates can increase job satisfaction	Direct supervision of subordinates can become difficult and management can lose control Subordinates may have more than one boss Motivation and output may be impaired if orders become confused

Flat structure may become unworkable as business expands.

Advantages of narrow span of control:	Disadvantages of narrow span of control:
Allows for tight control and close supervision Communication with subordinates is easier	Subordinates may feel left out of decision-making process and lack motivation Management and administration costs are high Coordinating decisions of numerous managers can be difficult Too much supervision may stifle initiative and motivation

Centralised and decentralised organisations

If a business is centralized, authority, responsibility, and decision-making is concentrated at the top of the hierarchy with a few senior managers. ‘Subordinates’ have little, if any, authority or power to make decisions. The main advantage of centralization is the ability of senior managers to make quick decisions, especially when the business environment is changing rapidly.

A decentralised organisation is one in which authority and responsibilities have been delegated to lower levels of management. Complete decentralization would mean that subordinates would make all the decisions.

In general, the larger the organisation, the more decentralised it is likely to be because it would be impossible for senior management to maintain direct control over all business activities. For example, large retail organisations like Tesco’s and B&Q which have a number of branches at different locations operate a decentralised structure. Each store will have a manager able to take decisions on staff requirements, store layout, stock control, etc., but who is ultimately responsible to a regional manager and company directors.

Certain functions within a business will always remain controlled from the centre. For example, decisions about budget allocation between departments, advertising, and growth, are likely to be centralized because they affect the whole organisation.

Advantages of centralised organisations:	Disadvantages of centralised organisations:
Senior management maintains control of the business and can make decisions quickly from the point of view of the whole organisation Systems and procedures such as personnel, purchasing, advertising, can be standardized and may gain economies of scale Reduces risk of duplication of activities and efforts Senior managers may be more experienced decision-makers	Subordinates may lack motivation Few opportunities for decisions to be made based on local conditions Senior managers may have little experience or understanding of activities and constraints in individual departments
Advantages of decentralised organisations:		Disadvantages of decentralised organisations:
Reduces stress and burden on senior managers. Senior managers can concentrate on strategic decisions Subordinates enjoy more decision-making and improved motivation Subordinates can make decisions based on local conditions affecting their area of work Delegation allows greater flexibility and a quicker response to changing market conditions Middle managers can be groomed for senior positions		More bureaucracy and consultation is involved Slows down decision-making Decisions taken by different departments may conflict Senior managers lose control

The matrix organisation

A matrix organisation is an organisation that has been modified primarily for the purpose of completing a special project. The project – for example the development of a new product – may either be short-term or long term, with employees with different skills to complete the project borrowed from various departments within the organisation to form project teams.

Advantages of a matrix structure:	Disadvantages of a matrix structure:
Communication within the project team is easier Specialist staff can contribute ideas and help to solve problems Team spirit helps to motivate staff	Employees may have more than one boss Staff loyalties may be divided between their old department and the project team New lines of authority and communication may be difficult to understand