Chapter 3: Organisational and

business structures
Chapter 3: Organisational and business structure
Content
1. Introduction to organisational structure
2. Types of organisational structure
3. Centralisation and decentralisation
4. Span of control: tall and flat businesses
5. Mechanistic and organic organisations
6. Introduction to business structure
✓ Sole trader
✓ Partnerships
✓ Companies
✓ Which business structure should a business take?
7. Alliances
Chapter 3: Organisational and business structure
1. Introduction to organizational structure
Organisational structure: Formed by the grouping of people into
departments or sections and the allocation of responsibility and authority,
organisational structure sets out how the various functions are formally
arranged
• Link individuals
• Allocate the tasks
• Give each individual or group the authority required to perform the
allocated tasks.
• Co-ordinate the objectives and activities of separate groups.
• Facilitate the flow of work, Information resources through the business.
Chapter 3: Organisational and business structure
1. Introduction to organizational structure
The building blocks
Chapter 3: Organisational and business structure
1. Introduction to organizational structure – the building blocks
Chapter 3: Organisational and business structure
1. Introduction to organizational structure
Co-ordinating mechanisms of 6 blocks

Standardisation of Standardisation of
Direct supervision
work skills

Standardisation of
Mutual adjustment
outputs
Chapter 3: Organisational and business structure
1. Introduction to organizational structure – Classical principle (Henry Fayol)
Chapter 3: Organisational and business structure
1. Introduction to organizational structure
Modern principle: emphasise such as:
• Multi – skilling: multi-skilled teams enable tasks to be performed more
flexibly, using labour more efficiently
• Flexibility:
✓Project or task force teams
✓Matrix organization
✓Flexible deployment of the labour resource
✓Virtual organisations
Chapter 3: Organisational and business structure
1. Introduction to organizational structure – Communicating the
organizational structure
Chapter 3: Organisational and business structure
2. Type of organizational structure
 Chapter 3: Organisational and business structure
2. Type of organizational structure
Entrepreneurial structure
• Has specialist knowledge of product/service
• Has total control over running of the business
Advantages
• Quick decisions can be made with skill and flair
• Goal congruence - the entrepreneur's objectives are pursued exclusively
• Flexible/adaptable to change
Disadvantages
• Cannot expand beyond a certain size
• Cannot easily cope with diversification
• Lack of career structure for lower level employees
• May be too centralised
 Chapter 3: Organisational and business structure
2. Type of organizational structure
Functional structure
• Similar to Mintzberg's machine bureaucracy
• Jobs grouped by common feature
• Clear lines of reporting and authority exist
• Formal procedures and paperwork
• The vertical flow of authority (scalar chain)
 Chapter 3: Organisational and business structure
2. Type of organizational structure - Functional structure
 Chapter 3: Organisational and business structure
2. Type of organizational structure - Functional structure
Most suitable:
• Single product/closely-related product forms
• Relatively stable environment
• Smaller enterprise
Advantages
• Good career opportunities, employees can progress 'up through the ranks’
• Can be efficient as functional tasks are well-known and understood by individuals
• Exploits specialist functional skills
Disadvantages
• Structure is very rigid and unsuitable for
- Growth
- Diversification
• Tendency towards authoritative non-participative management style as clear levels of authority are enforced
• Poor decisions/slow decisions which have to pass along a line of authority
• Functional heads may build empires and inter-functional disputes may result
 Chapter 3: Organisational and business structure
2. Type of organizational structure – Divisional structure
 Chapter 3: Organisational and business structure
2. Type of organizational structure – Divisional structure
Suitable:
• There are larger, more diversified businesses
• There is diversity by product and/or location
Advantages
• Flexible in adapting to growth and diversification - extra divisions can simply be added into the structure
• Good for developing managers as they are given responsibility for divisional profit
• Reduces the number of levels of management
• Encourages a greater attention to efficiency, lower costs and higher profits
• Better decisions on performance made by managers 'in the know'
• Releases top management to concentrate on strategic issues
• Reduces the likelihood of unprofitable products and activities being continued
Disadvantages
• Squabbles over allocation of central costs can occur
• Interdivisional trading problems, ie at what transfer price should the trades take place?
• It may be impossible to identify completely independent products or markets for which separate divisions can be set up
 Chapter 3: Organisational and business structure
2. Type of organizational structure – Matrix structure
 Chapter 3: Organisational and business structure
2. Type of organizational structure – Matrix structure
 Chapter 3: Organisational and business structure
3. Centralisation and Decentralisation
• Centralised organization: One in which decision-making authority is
concentrated in one place, that is the strategic apex.
 Chapter 3: Organisational and business structure
3. Centralisation and Decentralisation
Factors affecting the amount of decentralisation in a business
• Leadership style
• Size of organisation
• Extent of activity diversification
• Effectiveness of communication
• Ability of management
• Speed of technological advancement
• Geography of locations
• Extent of local knowledge needed
 Chapter 3: Organisational and business structure
3. Centralisation and Decentralisation – Which is better?
Chapter 3: Organisational and business structure
4. Span of control
Chapter 3: Organisational and business structure
4. Span of control
Influences on the span of control:
• A manager's capabilities
• The nature of the manager's workload
• The geographical dispersion of subordinates
• Subordinates' work
• The nature of problems
• The degree of interaction between subordinates
• The amount of support that supervisors receive from other parts of the
organisation or from technology
Chapter 3: Organisational and business structure
4. Span of control
Tall and flat businesses
• Scalar chain; The chain of command from the most senior to the most
junior.
• Tall business: One which, in relation to its size, has a large number of
levels in its management hierarchy, normally because there are narrow
spans of control.
• Flat business: One which, in relation to its size, has a small number of
hierarchical levels, normally because there are wide spans of control.
Chapter 3: Organisational and business structure
4. Span of control
Chapter 3: Organisational and business structure
4. Span of control – Tall business
For Against
Narrow control spans Inhibits delegation
Small groups enable team members to Rigid supervision can be imposed, blocking
participate in decisions initiative

A large number of steps on the

promotional ladder - assists The same work passes through too many
management training and career hands
planning
Increases administration and overhead costs
Slow decision making and responses, as the
strategic apex is further away
Chapter 3: Organisational and business structure
4. Span of control – Flat business
For Against
Requires that jobs can be delegated. If
More opportunity for delegation managers are overworked they are more
likely to be involved in crisis management

Managers may only get a superficial idea

of what goes on
Relatively cheap Sacrifices control

In theory, speeds up communication Middle managers are often necessary to

Between strategic apex and operating core convert the grand vision of the strategic
apex into operational terms
Chapter 3: Organisational and business structure
5. Mechanistic and organic organization
Chapter 3: Organisational and business structure
5. Mechanistic and organic organization
Mechanistic: bureaucracy
• Continuous organisation: The business does not disappear if people
leave: new people will fill their shoes
• Official functions: The business is divided into areas with specified
duties, Authority to carry them out is given to the managers in charge
• Rules: A rule defines and specifies a course of action that must be
taken under given circumstances
Chapter 3: Organisational and business structure
5. Mechanistic and organic organization
Mechanistic: bureaucracy
Chapter 3: Organisational and business structure
5. Mechanistic and organic organization
Mechanistic: bureaucracy
Chapter 3: Organisational and business structure
5. Mechanistic and organic organization
Organic organisation
Chapter 3: Organisational and business structure

6. Introduction to business structure

- Sole tradership
- Partnership
- Company
Chapter 3: Organisational and business structure
6. Introduction to business structure - Sole tradership
• A single proprietor owns the business, taking all the risks and enjoying all the
rewards of the business.
• Features
• No legal distinction
• The proprietor is wholly liable for the debts of the business, borrowing money
• Financed by a mixture of owner's capital
• Sole traders take drawings from the business
• Proprietor to take a very active role: doing many different thing
• Managing the business
• A sole tradership business can be sold as a going concern by its owner
• If a sole trader dies, the business's assets and liabilities form part of their estate but
the sole tradership as such ceases to exist
Chapter 3: Organisational and business structure
6. Introduction to business structure - Sole tradership
Chapter 3: Organisational and business structure
6. Introduction to business structure - Partnership
• The relation which subsist between persons carrying on a business in
common with a view of profit.
• It can either be a formal or informal arrangement
=> The financing issues that face sole traders also face many general and
limited partnerships
• Partners take drawings from the business
• All the partners may be as actively involved in the business as the typical sole trader.
• A share in a partnership is not a form of property as such and selling it can be
difficult
• If a partner dies, a general or limited partnership is dissolved - there is no 'perpetual
succession‘
=> There are three forms of partnership: general, limited and limited liability
partnerships
Chapter 3: Organisational and business structure
6. Introduction to business structure - Partnership
- General partnership:
• All partners are jointly and severally liable for the partnership's debt.
• Have a partnership agreement in place, which sets out the terms on which they agree to
operate together in business.
- Limited partnership:
• In a limited partnership regulated by the Limited Partnerships Act 1907, the partnership
has no separate legal identity.
• One or more partners however may have limited liability for the partnership's debts
provided there is at least one, fully liable partner.
- Limited liability partnership:
• These are little different from limited companies
• A legal identity separate from their owners
• There are similar publicity requirements for LLPs as for limited companies.
Chapter 3: Organisational and business structure
6. Introduction to business structure - Partnership
Advantages and disadvantages of general and limited partnerships
• Partners are flexibility of 'being their own boss’ but without the loneliness
and pressure of the sole trader
• No publicity requirement of general limited partnerships to prepare
financial statements for taxation purposes.
• Multiple partners will have different skills
• More time to devote to management and expansion
• Each have unlimited liability for the business's debts, but they have to
share profits.
• It is based on trust
• if the relationship fails and partners fall out, the agreement is at an end and
the partnership ceases.
Chapter 3: Organisational and business structure
6. Introduction to business structure – Company
Company: A legal entity registered as such under statute (the
Companies Act 2006). The company has unlimited liability for its own debts
Features:
• Legally distinct from its owners
• The company can offer a floating charge over its changing assets as security
for lending
• Shareholders take dividends, not drawings, from the business
• Directors run the company
• Shares are a form of property that can easily be sold by their owners
• If a shareholder dies transferred to another person without any effect on
the company at all - there is what is known as 'perpetual succession'
Chapter 3: Organisational and business structure
6. Introduction to business structure – Company
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Chapter 3: Organisational and business structure
6. Introduction to business structure – Company
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Chapter 3: Organisational and business structure
6. Introduction to business structure
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Chapter 3: Organisational and business structure
6. Introduction to business structure
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Chapter 3: Organisational and business structure
7. Alliances - Joint venture
• A separate business can be formed in which the businesses take a financial stake
and management is provided as agreed.
Benefits
• Less capital is required than if the businesses were on their own, so there is less risk
• Reduces competition
• Enables firms to gain access to restricted markets
• Access to the skills of each party
Disadvantages
• Disputes over how the business should be run, costs incurred, management charges,
etc
• If the joint venture breaks down, the special skills of a business may be used against
it by its former joint venture partner
Chapter 3: Organisational and business structure
7. Alliances - Licences
Licences: A licensing agreement is a permission to another company to
manufacture or sell a product, or to use a brand name.
• restricted geographically
• the licensor can retain control over where the product is sold and can
prevent competition with his own products or those of other licensees
• The most common form of licensing agreement is the franchise, which
usually involves an annual fee plus a minimum order for goods, usually at a
discount
Chapter 3: Organisational and business structure
7. Alliances – Strategic alliances
Strategic alliances
• A strategic alliance is an informal or weak contractual agreement between
parties or a minority cross- shareholding arrangement
• benefits and disadvantages are similar to those of joint ventures
In addition:
• The looser arrangement is easier to break
• They may contravene competition laws
• There may be less commitment than to a joint venture, so the benefits are
not as great
Chapter 3: Organisational and business structure

7. Alliances – Agents
Agents
• Agents can be used as the distribution channel where
• local knowledge and contacts are important, eg exporting. The
agreements may be restricted to marketing and product support.
• The main problem for a business that uses agents is that it is cut off
from direct contact with the customer
Chapter 3: Organisational and business structure

7. Alliances – Groups
Chapter 3: Organisational and business structure

7. Alliances – Groups
Chapter 3: Organisational and business structure
• Practice question 1
Michael is a manager at a large car manufacturing factory. He is responsible
for a team of car production workers who fit seats into the new vehicles. He
sets the team clear targets for seat installations each day, based on the goals
handed down to him by the directors. He monitors performance closely to
ensure targets are met. It is clear that, in terms of Henry Mintzberg's building
blocks, Michael is part of the organisation's
• A operating core
• B middle line
• C strategic apex
• D technostructure
Chapter 3: Organisational and business structure
• Practice question 2
Marchant Ltd is a relatively new company operating in a complex and ever-
changing environment. It offers high technology project management
expertise to the construction industry. The company has five senior
managers who are functional specialists. Project managers are each
responsible at any one time for a specific contract. In terms of organisational
structure, Marchant Ltd would be classified as
A. a machine bureaucracy
B. a professional bureaucracy
C. divisionalised
D. an adhocracy
Chapter 3: Organisational and business structure
Practice question 3
In terms of its organisational structure, Daventry plc is a flat business. This
characteristic gives which advantage to the managers of the company?
A. Participative decision-making
B. Facilitation of management training
C. Greater opportunity to delegate
D. Narrow spans of control
Chapter 3: Organisational and business structure

• Practice question 4
Greatbatch plc must have a minimum of
A. one shareholder and two directors
B. two shareholders and one director
C. three shareholders and two directors
D. two shareholders and two directors
Chapter 3: Organisational and business structure
Practice question 5
• Porteous Ltd and Reynold Ltd have formed a new company to exploit the
possibilities of a new technology. Porteous Ltd has a 40% stake in the new
company and Reynold Ltd has the balance. Porteous Ltd and Reynold Ltd
will contribute in similar proportions to the management of the new
company. This arrangement is an example of a
• A licensing agreement
• B joint venture
• C strategic alliance
• D group structure
Chapter 3: Organisational and business structure
• Practice question 6
• Which statement regarding the features of a limited company is true?
A. Shareholders have unlimited liability for the unpaid debts of the
company
B. Shareholders have the right to take part in the
management of the company
C. The company has unlimited liability for its own unpaid debts
D. The company must have at least two shareholders
Chapter 3: Organisational and business structure
• Practice question 7
Semolina plc operates a chain of car repair workshops branded CarFix.
Semolina plc has agreed that Cedric can use its brand and its marketing
expertise to perform only its range of car repair services in his workshop.
Cedric has agreed to pay Semolina plc an annual fee and to order a minimum
level of CarFix parts monthly, at a discount to the wholesale price.
What is the nature of the arrangement that Cedric and Semolina plc have
entered into?
• A A joint venture
• B A franchise
• C A strategic alliance
• D A partnership
Chapter 3: Organisational and business structure
• Practice question 8
Lan plc trains bankers. It has been established for over 30 years. Lan plc has a
large operating core which consists of all the well-qualified lecturing staff.
They need to keep their teaching material constantly updated to reflect
current issues in the complex banking industry, and to ensure that the
company’s courses remain competitive. The lecturers are supported by a
large administrative team which follows procedures to ensure the smooth
delivery of courses.
• Which of the following organisational structures does Lan plc have?
• A Entrepreneurial
• B Machine bureaucracy
• C Professional bureaucracy
• D Divisionalised
Chapter 3: Organisational and business structure
• Practice question 9
Jane’s job description at Glue Pot plc states that her role ¡s part of the
company’s technostructure. According to Henry Mintzberg, a
technostructure
• A ensures that an organisation follows its mission
• B provides ancillary services
• standardises work processes
• controls the work of the operating core
Question 1: An organization is a social arrangement which pursues
collective….., which controls its own performance and which has a
boundary separating it from its environment
A. Strategy
B. Mission
C. Goals
D. Tactics
E. Stakeholder
F. Profits
Question 2: What is the term given to the idea that the combined
output of a number of individuals working together will exceed that of
the same individuals working separately?
A. Sympathy
B. Hamonization
C. Synergy
D. Systems thinking
Question 3: Which one of the following statements is true?
A. Limited company status means that a company is only allowed to
trade up to a predetermined turnover level in any one year
B. For organisations that have limited company status, ownership and
control are legally separate
C. The benefit of being a sole trader is that you have no personal
liability for the debts of your business
D. Ordinary partnership offer the same benefits as limited companies
but are usually formed by professionals such as doctors and
solicitors
Question 4: Which of the following groups may be considered to be
stake holders in the activities of a nuclear power station?
I. The government
II. Environmental pressure groups
III. Employees
IV. Local residents
A. I, iii, iv
B. I, ii, iii, iv
C. Iii only
D. I, iii only
Question 5: Which of the following statements about an organization
chart is not true?
A. An organization chart provides a summary of the structure of a
business
B. An organization chart can improve internal communications within
a business
C. An organization chart can improve employees’ understanding of
their role in a business
D. An organization chart can indicate functional authority but not line
authority within a business
Question 6: Which of the following is a correct definition of span of
control?
A. The number of employees subordinate in the hierarchy to a given
manager
B. The number of levels in the hierarchy below a given managers
C. The number of employees directly responsible to a manager
Question 7: Which of the following principles of classical management
is challenged by matrix management?
A. Decentralisation of decision making
B. Structuring the organization of functional lines
C. Unity of command
D. Flexible in geographical line
Question 8: Which one of the following is an advantage of
centralization?
A. It helps to develop the skills of junior managers
B. It avoids overburdening top managers in terms of workload and
stress
C. Senior managers can take a wider view of problems and
consequences
Question 9:

What is not an advantage of a hierarchical structure?

A. Clear chain of command
B. Quick response to change
C. Discipline and stability
A. Small span of control
Question 10

Specialisation is a feature of which organisational structure?

a) Matrix
b) Divisional
c) Entrepreneurial
d) Functional
Question 11

What is a virtual organisation?

a) An organisation that uses information and communications
technologies to coordinate activities without physical boundaries
between different functions
b) An organisation that uses internet technologies to sell products
to customers
c) An organisation that manages the supply chain using digital
technologies
d) An organisation that coordinates the workforce via video
conferencing
Question 11

What is a strategic alliance?

a) Any form of partnership between one firm and another
b) Formal agreement committing two or more firms to exchange
resources to produce products or services
c) Formal agreement to share profits from a shared investment
d) Formal agreement to share knowledge
Question 12:

What is not a purpose of an organisational structure?

a) To coordinate people and resources
b) To organise lines of communication
c) To formalise authority
d) To limit workers' rights
Question 13: Order of command that runs from top to bottom is
explained by:
A. Scalar chain
B. Unity of command
C. Unity of direction
D. Esprit de Corps
Question 14: Following theory states that physical and mental effort at
work is as natural as rest or play
A. Scientific management
B. Theory X
C. Theory Y
D. Modern management