CHAPTER 3

ORGANISATIONAL AND
BUSINESS STRUCTURES

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TOPIC LIST
1. The management 7. Introduction to business
hierarchy structure
2. Introduction to 8. Sole tradership
organizational structure 9. Partnerships
3. Types of organizational 10. Companies
structure
11. Which business structure
4. Centralization and should a business take?
decentralization
12. Alliances
5. Span of control: tall and
flat businesses
6. Mechanistic and organic
organizations
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 1. The management hierarchy

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 2. Introduction to
organizational structure

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 2.1 What is organizational structure?

 Organizational structure: formed by the grouping

of people into departments or sections and the
allocation of responsibility and authority
 => Sets out how the various functions are
formally arranged (operations, marketing,
human resources, finance, etc)

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 What is an organizational structure?
 Organizational structure is a framework to:
➢ Link individuals in an established network
➢ Allocate the tasks to be done to suitable
individuals/groups
➢ Allocate authority required to perform the
task
➢ Coordinate the objectives and activities of
separate groups for general aims
➢ Facilitate the flow of work

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The building blocks of organizational structure
Henry Mintzberg (1979) suggests
all businesses can be analyzed into
6 building blocks
6

3
4 5

1
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The building blocks of organizational structure
• People directly involved in the process of
Operating core obtaining inputs and converting them into
outputs

• Conveys the goals set by the strategic apex

Middle line • Control the work of the operating core

• Ensures the organization follow its mission

Strategic apex • Manages relationship with the environment
• Top management
• Support services (cafeteria, security, legal)
Support staff to the operating core. These functions are
independent

• Determine and standardize processes,

Technostructure techniques, outputs, skills

• Values, beliefs and traditions (the business

Ideology culture) 8
Basic principles of organizational structure

Principle Comment

Division of work Work should be divided and allocated rationally,

based on specialization
Scalar chain Authority should flow vertically down a clear
chain of command from highest to lowest rank
Correspondence of authority Holder of an office should have enough authority
and responsibility to carry out all the responsibilities
Appropriate centralization Decisions should be taken at the top where
appropriate
Unity of command (for A subordinate should receive orders from 01 boss
people) only
Unity of direction (for the There should be one head and one plan for each
organization) activity
Equity Organizational policies should be just
9
Other approaches to organizational structure
Multi-skilled team:
individuals are trained
Multi-skilling
to perform a variety of
tasks

Multi-skilled structure:
project or task-force
teams
Values
Multi-functional units.
Matrix organization,
against “unity of
Flexibility - command”
Organisations and
processes are being Flexible deployment of
re-engineered to the labour resource:
flexible structures part-time .temporary,
etc
Virtual organizations:
201053_Ch3_Organisational & Business Structures staffs and resources10
are linked by
associated technology
Communicating the organizational
structure
Organization
of the
business

Organization
Job description
chart

Disadvantages: Frequent Include responsibilities,

Advantages: analyze authorities, and work
update, unshown
organization,
informal relationships, Typical descriptions: job
provide at a glance
may imply managers at title, department,
info, highlights
the same level, superiors, and
formal relationship
encourage bureaucracy, subordinates…
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3. Types of organizational
structure

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 Types of organizational structure
Mintzberg’s 6 building blocks can be combined to form 5 different organizational
structures as belows:
Types of Environment Internal factors Key building Key Typical
organizational block coordinating structure
structure mechanism
Simple Simple Small Strategic apex Direct Entrepreneurial
Dynamic Young supervision
Simple task
Machine Simple Large Technostructure Standardization Functional
bureaucracy Static Old of work
Regulated
Professional Complex Professional Operating core Standardization -
bureaucracy Static Simple systems of skills

Divisionalised Simple Very large Middle line Standardization Divisional

Static Old of output
Diverse Divisible tasks
Adhocracy/ Complex Young Operating core Mutual Matrix
Innovative Dynamic Complex tasks adjustment
13
The suitability of each structure will be dependent on the size of the business, as a business
grows it will progress from entrepreneurial to functional to a divisional structure
 Entrepreneurial structure

Entrepreneur/
boss

Employee Employee Employee Employee

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Entrepreneurial structure

• Entrepreneur has
specialist knowledge
Features • Entrepreneur has
total control

• One product
Most • Group of similar
suitable products
15
Entrepreneurial structure
• Quick decisions
Advantages • Goal congruence
• Adaptable to change

• Can’t expand beyond a certain

size
• Can’t easily cope with
diversification into new
Disadvantages products, …
• Lack of career development
opportunities for low-level
employees 16

• Too centralized
Functional structure

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Functional structure

• Jobs grouped by common feature

• A clear line of reporting and

Features authority
• Formal procedures
• Vertical flow of authority (scalar
chain)a

• Single product/closely-related
Most product forms
• Relatively stable environment
suitable • Small enterprise

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Functional structure

• Good career opportunities

• Efficient - functional tasks are
well-known and understood
Advantages • Exploit functional specialist

• Unsuitable for growth and

diversification
• Authoritative (non-participative)
Disadvantages resulting in clear levels of authority
• Poor/low decisions
• Inter-functional disputes, functional
heads build empire
19
Divisional structure
Divisionalisation: the division of a business into autonomous regions (geographic divisionalisation) or
product business (product/brand divisionalisation), each with its own revenue, expenditures, profit
responsibility

20
Divisional structure

• Business is split into divisions

• Division by product/brand or
Features location
• Divisions are given
responsibility for their profits

• Large and/or diversified

Most businesses
• Diversity by product and/or
suitable location
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Divisional Structure
• Flexible in growth and diversification
• Good for developing managers as given
responsibility for their divisional profit
• Reduce number of levels of management
Advantages • Encourage efficiency, lower costs, higher profits
• Better decisions
• Release top management to concentrate on
strategic issues
• Reduce unprofitable products

• Squabbles over allocation of central costs may

occur
• Interdivisional trading problems (transfer price)
Disadvantages
• Problems in identifying independent products or
markets for which separate divisions can be set up
22
Matrix structure

23
Matrix structure
• Vertical and lateral lines of
communication

Features
• Project/customer/customer-project
managers liaise with functional
managers
• Maybe contemporary

• Complex/hi-tech industries

Most • Educational establishments where there

may be lecturers reporting to both

suitable
subjects and course heads
• RD departments

24
Matrix structure
• Reflect importance of
project or customer
• Coordination between
Advantages businesses and
technology, information,
etc

• Dilution of the authority of

functional heads
Disadvantages • Conflicting demands on staff time
• Conflicting demands of staff and
other resources

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 4. Centralisation and
Decentralisation

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What is centralization?
Centralized organization: One in which decision-making authority is
concentrated in one place, that is strategic apex.

Geography – some
functions are Authority – the
centralized rather extent to which
than ‘scattered’ in people have to refer
different locations decisions upwards to
(IT supports, info their superiors
storage, etc)

Centralization

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Centralization vs. decentralization

Centralization – Decentralization
upper levels retain – authority to make
authority to make decisions is passed
decision down to lower levels

Authority/
Decision-making
ability
28
 Centralization (Potential benefits)

Easier to implement common policies and practices for the whole

business.

Prevents other parts of the business form becoming TOO

independent.

Easier to c-ordinate and control from the centre – e,g. with

budgets

Economies of scale & overhead saving easier to achieve.

Quicker decision-making (usually) – easier to show strong leadership

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 Centralization (Possible Drawbacks)

More bureaucratic – often extra layers in the hierarchy.

Local or junior managers are likely to be much loser to customer

needs.

Lack of authority down the hierarchy may reduce manager

motivation.

Customer service: lost flexibility

and speed of local decision -making

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 Decentralisation (Potential benefits)

Decisions are made closer to the customer

Better able to respond to local circumstances

Improved level of customer service

Can enable a flatter hierarchy

Good way of training and developing junior management

Facilitates empowerment: should improve staff motivation

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 Decentralisation (Possible Drawbacks)

Decision-making not necessarily “Strategic”

Harder to ensure consistent practices and policies at each

location

May be some diseconomies of scale – e.g. duplication of roles

Who provides strong leadership when needed (e.g in a crisis)?

Harder to achieve tight financial control – risk of cost-overruns

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 Factors affecting decentralization
Centralised Decentralised

Leadership style Authoritative Participative

Size Small Big

Diversification Specialized Diversified

Communication Ineffective Effective

Ability of management Less able More able

Technological Backward technology Advanced technology

advancement
Geography of locations Concentrated Spread
Local knowledge Not needed Needed
requirement
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 5. Span of control

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Span of control
- Span of control: number of people (subordinate)
reporting directly to a manager
- Scalar chain: the chain of command from the
most senior to the most junior.
- Wide spans of control/short scalar chains => flat
management hierarchy
- Narrow spans of control/long scalar chains => tall
management hierarchy

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 Tall vs. flat organizational structures
Tall business: has a large number of levels in
its management hierarchy (in relation to its
size)

Flat business: has a small number of

hierarchical levels (in relation to its size)

36
Tall vs. flat organizational structures
Span of control – scalar chain

Short scalar chain

Long scalar chain

Wide span of control

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Narrow span of control

Tall vs. flat organizational structures

38
 TALL VS FLAT BUSINESS
For Against
- Narrow control span -Inhibit delegation
TALL BUSINESS - Enable team members to -Tight supervision leading to
participate in decisions block the initiatives
- Large number of steps on - Same work passed to many
promotional ladder- helps hands
management training and - Increase administration
career planning and overhead costs
- Slow decision-making
- More opportunities for - Requires jobs to be
FLAT BUSINESS delegation delegated
- Relatively cheap - Managers may only get a
- Speeds up communication superficial idea
between strategic apex and - Sacrifices control
operating core - Middle managers are
maybe needed to bridge the
vision from the strategic
201053_Ch3_Organisational & Business Structures apex 39
 6. Mechanistic vs. Organic
organizations

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 Mechanistic vs. organic organizations

Organization:
stable, efficient
Mechanistic
(bureaucracies)
Environment:
static, slow-
changing
Organization
Organization:
flexible, adaptive
to changes
Organic
Environment:
dynamic, fast-
201053_Ch3_Organisational & Business Structures
changing 41
 Mechanistic vs. organic organizations
Factor Mechanistic organization Organic organization
Task Specialized and broken down into Need specialist knowledge
sub-tasks contributing to common task
How the task fits in Focus on the completion of the Focus on the contribution of
task, rather than its effectiveness the task to the organization’s
effectiveness
Co-ordination Managers’ responsibility People adjust, redefine through
interaction with others

Job description Precise job descriptions Less precise, whatever to

complete the task
Legal contract, Hierarchical structural control. Network structure of control
common interest
Decision-making Senior managers who are assumed Relevant technical, decision
to know everything making authority can be
anywhere
Mission Loyalty and obedience to Committed to the mission,
42
more
superiors highly valued than loyalty
Mechanistic organizations: bureaucracy
Bureaucracy: a continuous of official functions bounded
by rules.
Continuous organization: the business does not disappear
if people leave: new people will fill their roles
Official functions: the business is divided into areas (eg:
operation, marketing, etc.) with specified duties. The
authority to carry them out is given to the managers in
charge.
Rules: a rule defined and specifies a course of action that
must be taken under given circumstances.
Mechanistic organizations: bureaucracy
Characteristics of bureaucracy: (Read Ebook)
Advantages of bureaucracy Disadvantages of bureaucracy

- Ideal for standardized, routine tasks - Slow decision making

- Be efficient in stable environments - Uniformity creates conformity,
- Rigid adherence to procedures, law, inhibiting staff’s personal development
safety, security, and fairness - Inhibit innovation
- Some people are suited to the - Hard to learn from mistakes
structured and predictable - Slow to change
environment - Poor uptake or use of technology
- Communication is restricted to
established channels, ignoring
opportunities for networking,
feedback, and suggestions for better
customer services.
Organic organizations
Control mechanism Description
Status There are differences of status
Commitment The degree of commitment
employees have to the goals
Shared values and culture Hierarchical control is replaced by
the development of shared beliefs
and values. Corporate culture
becomes more powerful guide to
the behaviors
7. Introduction to business structure

46

201053_Ch3_Organisational & Business Structures

Introduction to business structure
 Business structure – legal form of the
business:
- Sole tradership
- Partnership
- Companies
 Substantially, businesses may form an
alliance or a group structure

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 8. Sole tradership
 Sole tradership: A single proprietor owns the business, taking all
the risks and enjoying all the rewards of the business
- No legal distinction between the proprietor and the business
- The proprietor/trader: wholly liable for the business’s debts in
his/her own name.
- Financed by a mixture of owner’s capital, loans, and short-term
credit
- Allowed to offer fixed charges, but not floating charges over the
business’s assets
- Sold traders do many different tasks.
- Take drawings from the business
- Can be sold as a going concern
- If the trader dies, the sole tradership ceases to exist- no
perpetual succession
Adv/disadvantages of Sole tradership
Advantages Disadvantages

- Flexibility of being their - There are limits to skills

own boss, taking all and time-consuming ➔
decisions work overload and hard
- No publicity to expand
requirement, but just a - Have unlimited liability
simple financial for the business’s debt.
statement for tax
purposes ➔ offering
privacy and cost savings

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9. Partnership
Partnership: the relation which subsists
between persons carrying on a business in
common with a view of profit
- Partners are jointly and severally liable for
the debts of the partnership
- Partnerships also face financing issues as
well as a sole trader
- Partners take drawings from the business
- All partners are actively involved in their
business and there are scopes among them.
- A share in partnership can be difficult to sell
- There is no perpetual succession
- There are 03 forms of partnership: general,
limited, and limited liability partnership 50

201053_Ch3_Organisational & Business Structures

General partnerships
- General partnership is not a legal entity
- All partners are jointly and severally
liable for the partnerships debts
- If one partner dies/becomes insolvent,
the others must take on his/her ‘share’
of the partnership’s debts
- Partnership agreement or Partnership Act
1890
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Adv/disadvantages of General Partnership
Advantages Disadvantages

- Flexibility of being their - They each have unlimited

own boss, taking all liability for the business’s
decisions debt, but they have to share
- No publicity requirement, profits
but just a simple financial - The general partnership is
statement for tax purposes based on trust. So if the
➔ offering privacy and cost relationship fails then the
savings agreement is at an end and
- Multiple partners share the partnership ceases to
skills and work load. exit.

52
Limited liability partnerships (LLPs)

- Have a legal identity separate from their

owners
- There are some publicity requirements
for LLPs
- LLPs under the Limited Liability
Partnership Act 2000

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 10. Companies
• Company: a legal entity registered as such under statute (the
Companies Act 2006)
• The company has unlimited liability for its own debt
• Shareholders have limited liability for the unpaid debts
• The company is legally distinct from its owners
• The company can offer a floating charge over its security for
lending
• Shareholders take dividends, not drawings from the business
• Directors run the company; shareholders do not take part in the
management unless they are also directors
• Shares are a form of property that can easily be sold
• The death of a shareholder has no effect on the company-
• There are 02 types of a company: public and private company
• Private companies: may not offer their securities for sale to the
public while it’s possible for public companies to do so. 54
Adv/disadvantages of Company
Advantages Disadvantages

- Separate legal entity - Separation of ownership and

- Limited liability of its control
shareholders - Ownership of assets
- Perpetual succession - Accounting records and
- Transferability of returns: companies are subject
shareholders’ interests to stringent rules in compliance
- Security for loans includes with act 2006
floating as well as fix charges - Publicity: financial position is
exposed to others like
competitors, creditors, etc
- Regulation and expenses:
Stringent rules by the Company
Act 2006
55
11. Which business structure should a
business take?

Read Ebook to check factor differences

between the company and general partnership
12. Alliances
A business of whatever form may enter into various
types of alliance with other businesses, creating
business structures in the form of:
- Joint venture
- Licenses
- Strategic alliances
- Agencies
- Groups

57
Alliances
Joint venture
• A separate business is formed in which businesses take a financial
stake (usually shareholders) – usually but not always a limited
company
License
• A permission to another company to manufacture or sell a
product, or to use a brand name (e.g TDTU & ICAEW; franchise)
Strategic alliance
• An informal contractual agreement between parties or a minority
cross-shareholding arrangement. No separate company is formed
(e.g: bank & Paypal, Visa, Mastercard)
Agent
• E.g. distribution channel (e.g. Big 4, accounting service)
Group
• When a company owns the majority of shares in another one, a
group of companies may form
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 .
 END OF CHAPTER 3

THANK YOU FOR YOUR

ATTENTION!

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