PURPOSES OF ORGANISATIONS

An organisation is a group of people with a common purpose. The purpose is

defined by the entity for which they work. In smaller businesses, such as
partnerships and small companies, it is common for those who work for the
organisation to have created it, or to have had some part in creating it. By
contrast, larger organisations have to employ or involve more people, the
majority of which will have little or no connection with the founders or
owners.
THE DEVELOPMENT OF ORGANISATIONS
Organisations have been around for thousands of years. The mighty armies of
Greece and Rome were organisations, and the Phoenician merchants who
plied their trade across the oceans could not have run successful businesses
without some organisational structure. Whenever two or more people come
together to pursue the same outcomes, we have an organisation.
Organisations exist because synergy can be achieved by combining human
resources. Together, those in an organisation can produce more than the sum
total output of individuals working alone.
The industrial revolution of the eighteenth and nineteenth centuries brought
a need for more systematic and formal consideration of how organisations
should be configured. Adam Smith used the example of the division of labour
in a pin factory to describe the benefits of specialisation:
One man draws out the wire, another straights it, a third cuts it, a fourth
points it, a fifth grinds it at the top for receiving the head: to make the head
requires two or three distinct operations: to put it on is a particular business,
to whiten the pins is another ... and the important business of making a pin
is, in this manner, divided into about eighteen distinct operations, which in
some manufactories are all performed by distinct hands, though in others the
same man will sometime perform two or three of them. (The Wealth of
Nations, 1776)
Generally, businesses start as small entities, and many remain so. Every
country in the world has thousands of sole traders, many of which work alone
and are able to make their living without involving others. However, if the
activities of the business grow, it eventually becomes necessary to utilise the
labour of others. In family concerns, the trader may involve a spouse,
children or siblings, and this may not even require the creation of any
contractual relationships. Yet it does require some degree of organisation.
Who carries out which tasks? Does everybody do the same work or does each
individual specialise? To what extent should everyone be able to carry out the
tasks usually reserved for others? How do we ensure that all work is done,
but there is no wasteful duplication of effort? These questions can be
addressed in a relatively informal manner in a small business where all
control is in the hands of a single person. However, the very same questions
have to be asked in the largest and most complex businesses, and for these
the answers are less straightforward.
THE ENTREPRENEURIAL STRUCTURE

The entrepreneurial structure is adopted by smaller businesses. It is simple,

informal and very fluid, in that it may change on a day-to-day basis.
This structure is adopted by sole traders who employ others, some small
partnerships and some small companies. Those who own and control the
business take decisions on the work to be done, how it will be done and by
whom. It is quite common for employees to be expected to multitask and not
to expect rigid job descriptions. Specialisation may be possible, such as a
family member dealing with bookkeeping, but that individual may also be
required to carry out additional tasks, perhaps if there is no bookkeeping
work to be done at certain times.
The entrepreneurial structure is perfect for many small businesses, but is too
informal and can even be chaotic once the level of business activity reaches
a certain level. Eventually, the entrepreneur has to consider formalising the
roles that employees play, and creating jobs with defined duties and
responsibilities.
THE FUNCTIONAL STRUCTURE
The functional structure is the most common organisational model. It is
usually depicted as a triangle, with the chief executive officer at the top and
reporting lines of others flowing vertically. The functional structure is formally
depicted as an organisation chart. Figure 1 shows a typical organisation chart.
The duties of individuals are allocated according to the functions they
perform. For example, a small company may have a production manager,
finance manager, sales manager and IT manager reporting to the chief
executive officer. Each of the functional managers is responsible for a
department.
Many larger companies have general managers or assistant general
managers responsible for groups of functions. For example, the General
Manager (Marketing) may be responsible for advertising, public relations,
merchandising and direct sales, and there may be a departmental manager
responsible for each of these activities.
For each function, employees are grouped together to perform similar or
complementary tasks.
Just as the organisation as a whole can be
represented on an organisation chart, so too can each department. Figure 2
shows how a finance department might be organised.
The functional structure has several advantages:

it facilitates specialisation, by bringing together those with the

knowledge and skills necessary to carry out each function, and
therefore should create economies of scale

it enables the organisation to operate through clear lines of authority

and well defined responsibilities, with all employees knowing to whom
they report and for whom they are responsible

it prevents duplication of effort, thereby reducing inefficiencies

it accommodates specialists.

The disadvantages of the functional structure are:

it can be inflexible, particularly in a period of rapid change, and in

economic systems where it is difficult or costly to recruit or dismiss
employees

it encourages demarcation lines to be created, which may make

employees reluctant to carry out tasks that they consider not to be
their responsibility

as organisations become larger, there may be coordination problems

as the number of functions increases

as information tends to flow through formal organisational lines, larger

organisations may encounter communication problems

some argue that the functional model is too inward looking, focusing
on processes instead of considering deliverables defined by customer
needs.

The functional structure is common to many organisations, but different

concepts can be deployed within it. For example:
the organisation can be tall or flat: tall organisations have many levels (a long
scalar chain), while flat organisations have fewer levels
the organisation may have many employees reporting to each manager, few
employees reporting to each manager, or a combination of these: this socalled span of control will depend on many factors, including the nature of
the work, variety of tasks performed, capabilities of employees and risk
factors
some organisations concentrate authority at the top of the management
hierarchy, with key decisions taken by senior executives, while others
empower subordinates, with greater discretion permitted further down the
management chain: this relates to the concept of centralisation and
decentralisation.
Functional organisation by product
The functional model can be adapted for organisations that offer a range of
products. Just as managers responsible for different products can report to
the product manager, it is also possible for each product manager to have his
or her own functional structure. In this way, several functions are duplicated
across the organisation, as the manager responsible for each product may
have their own production, sales, marketing, finance and administration
departments. This is shown in Figure 3.

This organisation structure is sometimes appropriate if the design, production

and marketing of each product is unique or significantly different to those for
other products. This structure can also be suitable if products are distinctive
brands. For example, some manufacturers of detergents offer both quality (or
premium) products and discount products. Although they compete with one
another to some extent, the products are usually targeted at different market
segments.
Functional organisation by geographical region
Many organisations operate across different regions, or across international
frontiers, so they may consider it to be appropriate to maintain separate
functional structures in each location. This approach is not appropriate to all
geographically dispersed businesses, but is suitable for organisations whose
geographical locations have distinctive but contrasting characteristics. For
example, companies with a presence in the UK, Ireland and Germany would
be able to identify major differences in the demographic profiles, personal
and family values and tastes in the three locations, while companies
operating in Belgium, Luxembourg and the Netherlands would identify
differences that are less crucial in commercial terms.
Functional organisation by geographical location is especially important for
large companies that operate across several continents.
MATRIX STRUCTURE
The matrix structure evolved in companies that sought to overcome some of
the rigidities of the functional organisation structure. It was first deployed in
the aerospace industry in the USA in the 1950s.
The most common application of the matrix structure is the creation of an
extra layer of responsibilities across the traditional functional structure. As
well has occupying a position in the organisational pyramid, which defines
line relationships, employees have responsibilities to project managers. In
this way, the employee may have two or even more managers. For example,
an individual working in the finance department may report to the head of
finance but may also have some duties in relation to IT/IS or marketing
projects. The managers responsible for these projects will be able to call upon
staff across organisational boundaries on a formal basis.
Figure 4 shows the matrix organisation.
Matrix organisations can be taken further in environments that are less
dependent on rigid chains of command and lines of communication. For
example, in some professional firms and consultancies, a position in a
functional organisation chart is only important for the purpose of establishing
accountabilities under employment law. As one individual working in such an
organisation put it, when asked Who is your manager?, the reply was It
depends what day it is.
There are several advantages of adopting a matrix structure:

by involving individuals formally in teams allocated to specific projects,

the organisation can capitalise on the knowledge, skills and experience
they can offer

communication lines are shortened in that project managers can deal

with staff assigned to them

bureaucracy should be reduced

employees jobs are enriched, and this may improve motivation

more ambitious individuals can exploit opportunities made available to

them and more readily pursue advancement

cooperation between departments can be increased, and the

disadvantages of work being demarcated by silos can be reduced

the matrix approach may make employees more responsive to change

and more willing to welcome change.

The disadvantages include the following:

the matrix structure sacrifices the notion that every employee should
be responsible to one manager, and this can result in conflicting
demands on the employee, in terms of what work should be done, how
time should be apportioned and how work should be carried out

the different managers to whom the individual reports may have very
different styles, which may create conflict, or even confusion as to the
best or correct approach

the matrix structure creates additional time management pressures,

which may have an effect on costs

if the matrix is not designed or implemented systematically, it can

create organisational inefficiencies, such as slower decision taking.

BOUNDARYLESS ORGANISATIONS
Traditionally, organisations bring people together in one or more physical
locations in order to process inputs and create outputs, all within a formally
defined structure. Advances in information communications technology have
resulted in new approaches that have redefined where, when and how people
work. The most obvious evidence of this is the reduction in reliance on the
9.00am to 5.00pm working day, the emergence of flexible working
arrangements and increases in work sharing and home working.
Organisations have also adopted new ways of configuring relationships.
Virtual organisation

A virtual organisation is one which operates primarily through electronic

communications, taking advantage of the efficiencies made possible by
information technology. It removes many of the features of the working
environment that were once taken for granted, such as bringing managers
and staff together at a defined location. People work together remotely, with
little or no dependence on physical premises. Instead, communications take
place through media such as emails, e-conferencing, extranet and intranet.
This virtual aspect of the operation sometimes extends to links with suppliers
(upstream), and customers (downstream). By extending the virtual concept
to customer relationships, the dependence on retail premises and customerfacing staff is eliminated. Amazon is often cited as the first major virtual
business in this respect.
The virtual organisation model can be adopted wholly or in just certain parts
of the business. For example, one major insurance company maintains a
large head office which serves as a base for functional departments, but
many of the staff working for certain departments work from home and rarely
if ever need to visit the office.
Some service organisations can adopt the virtual approach in its entirety,
with a token physical presence at a registered office to satisfy statutory
registration requirements.
The advantages of virtual organisations are:

Costs can be greatly reduced, as there is less dependence on

premises. This can result in significant reductions in overheads, such as
electricity, water, mortgage or rent, and service staff.

The adoption of e-business solutions can create efficiencies, such as

automated re-ordering and seamless transaction processing. In fact,
while the virtual organisation is a relatively new business concept,
many of the technologies deployed have been available for many
years. For example, electronic data interchange (EDI) was first
developed in the 1960s.

Jobs with the organisation may be more attractive, as the need for
daily commuting is removed. This can be particularly appealing to
those with family commitments at certain times of day, and those who
would be deterred from working due to the cost of transport and car
parking.

The virtual organisation has a modern image which may appeal to

several stakeholder groups, including customers, suppliers and
distributors. Increasingly, this approach to business aligns with the
expectations of such groups.

The disadvantages of virtual organisations are:

There is heavy reliance on information technology, so if things go

wrong this can have a catastrophic effect. Problems can arise from lack

of connectivity, hardware and software failures, malware and security

breaches.

Those who lack basic IT skills, or are unprepared to use information

technology equipment, have no prospect of doing business with virtual
organisations or working for them.

In some cultures, there remains a preference for the personal touch,

so virtual organisations may find it difficult to achieve a foothold.

Some of those who work for virtual organisations feel isolated as direct
human interaction on a face-to-face basis is minimal. Feeling
personally connected to a work group can be motivational, and this
effect is lost when members of teams do not meet on a regular basis.

Hollow organisation
A hollow organisation is one which relies heavily on outsourcing, enabling it
to maintain low staffing levels while capitalising on the competences of
partner organisations.
The most common application of this model is where an organisation
identifies those competences that are core and must be retained. These are
then kept in-house, while all non-core operations are contracted out.
The hollow organisation must forge strong strategic links with trusted
partners. An example of this organisational form is Nike, a sports goods
manufacturer, which sub-contracts production activities whilst maintaining
total control over design and quality specifications.
Modular organisation
A modular organisation extends the hollow concept by breaking down
production processes into modules. Production is outsourced, but each
external organisation is responsible for only one element of the process. For
example, in producing the Dreamliner aircraft, Boeing enters into contracts
with many suppliers, each of which is responsible for one component or
assembly. The outputs of these suppliers can then be integrated.
The modular organisation is a more efficient, contemporary version of the
model previously used by many car manufacturers, who often owned the
subsidiaries which produced components that make up the final product. The
modular organisation removes the need for complex ownership structures
through holding companies and subsidiaries, and also creates forced
efficiencies, as those responsible for each module have to compete with
organisations in the same marketplace for their services.
SHARED SERVICES ORGANISATIONS
The shared services organisation is a medium through which defined services
can be provided across the organisation by a dedicated unit. This differs from
outsourcing, in that the shared services provider is actually a part of the

organisation.
Shared services organisations reduce the level of duplication of tasks. For
example, instead of each part of the organisation employing human
resources or information technology specialists, these services can be
provided centrally, through a single team. In this way, they can reduce costs
significantly and also standardise the policies and processes across the
business. Management and operational support can be delivered through
facilities such as hotlines or helpdesks.
An example of a very effective use of the shared services concept is the
provision of professional training courses and support across large
consultancy firms operating on a regional or multinational basis.
While the use of shared services organisations is increasing, the model is not
suitable for all. For example, if the business units are very diverse, a
centralised model may not be appropriate. It has also been suggested that
potential cost reductions should not be over-estimated, as many
organisations will still rely on local provision to meet the idiosyncratic needs
of each business function or locality.