HAPTER

ORGANISATIONAL
STRUCTURE
1. Types of organisational structure
To begin this section, we'd like to ask you to think about the organisation you work
for and your role within it. Do you always report to the same person, or does it vary?
What precisely is your role? Is it highly specific or flexible based on the business
needs? Are there specific divisions all with different responsibilities, or do you all just
”pitch in” as needed? Do you work for the benefit of yourself, your team, your division
or for the benefit of the organisation as a whole?

If we were to collate the answers to these questions for everyone reading this text, we
would have different answers. But why is that? Surely, by now, there must be a
standardised way of organising and structuring a company?

Well, the answer is no, there isn’t! Just like people, not all organisations function in
the same way, and this can be due to any number of reasons such as choice, tradition,
or even necessity. As a result of this, not all organisational structures are the same.
The organisational structure is the arrangement of roles, responsibilities and
reporting relationships within an organisation.

There are four main types of organisational structure. These are entrepreneurial,
functional, divisional and matrix. Let’s explore them more closely:

Entrepreneurial/simple
An entrepreneurial (or simple) structure primarily exists in small businesses where
there is a single boss, often an entrepreneur. They manage each member of their
team, with each subordinate directly reporting to the boss.

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Team members’ roles can be flexible based on the needs of the business, making it
a dynamic structure adaptable to the changing needs of a small business in a fast-
changing marketplace.

Advantages Disadvantages

Flexible – staff members have varying Lack of control mechanisms, e.g. often
and wide-ranging roles based on the few rules and internal processes. This is
needs of the business OK if the boss manages the business
well, but can cause problems as the
organisation grows.

Good control for the boss, who is May be a lack of specific functional
often key to organisational success in expertise, e.g. marketing undertaken by
small organisations. administration staff without having
specific marketing expertise.

Functional
A functional structure groups an organisation into functional areas, such as IT,
marketing and human resources. A functional structure allows employees to focus
their skills and knowledge on one subject. It can be argued that functional
structures allow greater operational efficiencies, whereby employees with shared
skills and knowledge are grouped together with a specific focus for their work.
Below you will see an example of functional structure in action.

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Some of you reading this might work in an accounting department with clear goals –
to process all the invoices, chase receivables, pay suppliers, manage relationships
with banks, manage foreign exchange and producing monthly management
accounts. And, you'll probably have qualified or part-qualified accountants
performing those roles. That means that the goals are clear and the skills of the
people doing the work are high, ensuring that work is done well.

Seems great, right? Well, in some ways it can be! However, we need to understand
that each organisation works differently. As a result, there are advantages and
disadvantages to this structure.

Advantages Disadvantages

Functional expertise enables planning Poor communication between

and focus on specific activities. functions who do not work together on
a day-to-day basis.

Control is gained over key activities Lack of goal congruence. People start
through clear responsibilities being acting for the benefit of their function
assigned. not the organisation as a whole.

Budgets can be assigned to each No direct responsibility for products

department to control costs and or key markets (e.g. country locations)
review performance using variance - may cause a loss in focus on these key
analysis. areas.

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Divisional
Like a functional structure, a divisional organisational structure consists of several
teams (divisions) focusing on a single product or service line. However, it differs
from a functional structure because divisions are more independent than
departments and have a focus on products, geographical locations or customer
groups rather than functional responsibilities.

Typical divisional splits are based on:

Products - Useful when the organisation produces a number of different products,

each of which has different requirements for production, marketing, etc.

Geographical areas (e.g. different countries) - Useful for large companies where
there are significant differences in geographical areas and local expertise is needed.
Large multinational or global organisations may have multi-layered divisional
structures (a division within a division). For example, a company may have a
European headquarters, but they may also have offices in local divisions within that
area (France, Germany, Spain, and so on).

Customer types – Useful where different customers have different needs, e.g. a
consultancy firm may have divisions based on customers in different industries
(banking, retail, insurance, etc.).

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Example company
Unilever, a multinational consumer goods company uses divisional splits effectively,
with many different products on the market, ranging from personal care and home
care to food and beverages. Having a range of products and operations in many
countries, allows Unilever to have multiple customer types. Division works well for
Unilever because if it has a product that doesn’t succeed in one market, it has
multiple other products that could.

Advantages Disadvantages

Can specialise, e.g. in a Poor communication between

product/area/customer. divisions, e.g. marketing departments in
each division may not coordinate
campaigns or share knowledge.

Performance management can use Possible competition or overlap

profit based measures, as both between divisions if not clearly
revenues and costs are associated with defined. E.g. two different divisions of a
each division. This facilitates consultancy practice proposing for the
accountability and motivation. same job (which surprisingly does
sometimes happen in large practices).

Easy to set up new divisions as the Repetition of work in each division

organisation expands. increases cost. E.g. monthly accounts
being produced in each local country
division separately rather than once in a
central department.

Develops managers by giving them full

responsibility for whole business units.

Matrix
A matrix structure is when the organisation is divided into multiple reporting lines,
usually causing individuals to have more than one superior.

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For example, a manufacturer of consumer goods may have three divisions: food,
personal care, and cleaning products. It may also be divided into three structural
divisions, such as sales, marketing, and distribution.

Each employee will, therefore, work in two divisions - one functional and one
product. In this case, an employee who sells food would be part of the sales division
as well as the food division, both of which are controlled by different managers.

Matrix structures are very common in project-based environments, such as

consultancy practices, where project-based teams are set up containing people
from a range of divisions or departments. In this instance, each individual will
report to a project team head and a department head. For example, NASA uses
matrix structures effectively by organising teams where employees report to both a
functional manager and a project manager. In doing so, NASA can efficiently
coordinate complex products using effective communication strategies.

Advantages Disadvantages

Retains expertise in two areas (e.g. Higher administrative costs because

functional and product). of the large number of departments and
divisions.

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Advantages Disadvantages

Flexible as new teams can be easily set Each employee has two bosses and two
up or shut down (e.g. as projects begin areas of responsibility, causing
or end). confusion and conflict.

Good teamwork and communication Difficult to coordinate as a team

between people from different member may have to work to the
divisions/functions now working schedules of two different teams.
together in the same team with a
common objective.

Structure and strategy

Ideally the structure should be designed to be the most appropriate for the
strategy being pursued. Small businesses with a flexible approach will tend to be
best suited to an entrepreneurial structure. As the business grows, a functional
structure facilitates more control, while the development of new products or
expansion abroad should mean a change to a divisional structure. A project-focused
organisation is likely to be best suited to a matrix structure.

Structural change can have significant implications on the organisation in terms

of how it operates, its staff, the organisation’s culture and its relationship with
customers, suppliers and other stakeholders. Therefore, in the real world, it may
be that strategy is defined within the bounds of the current structure to avoid this
upheaval. This is particularly true if the organisation is following an incremental or
emergent approach to strategy formulation (where strategy is developed in small
steps).

Boundary-less
Highly reliant on outsourcing, there are three elements to boundary-less
organisational structures: hollow, virtual and modular.

• Hollow structure - Outsourcing any non-core activities (activities that are

not strategically important), whilst maintaining the core activities in-
house only. An example could be found in a factory. Some activities could be
outsourced to an external company, such as payroll and marketing, whereas
the core activity of making a product remains in-house.

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• Virtual structure - As of the more minimalist organisational structures, virtual

structures enable the organisation to operate as a web of networks, often
outsourcing each area of the network. A prime example of this can be found
within online retailers such as Amazon, where areas such as distribution and
production are externally sourced.

• Modular structure - The structure in place with many manufacturers whereby

certain elements of the manufacturing process are outsourced to other
companies. For example, the key activity of a mobile phone manufacturer
could include solely the assembly of the final product. The sourcing of
electronic components to add into a phone, such as batteries or memory
cards, may be something that is kept away from the organisation itself.

2. Centralisation vs decentralisation
Centralisation
Centralisation is where the majority of decisions are made by senior management
or by a centralised function, rather than by divisional or lower-level managers. For
example, if IT decision-making were centralised, a single IT function would make all
IT-related decisions. The divisional or lower-level managers act to carry out the
wishes of the senior management or centralised function.

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Advantages include:

• Coordination between divisions as each individual division is supervised and

managed by the same central function. This function can align all of the
objectives of each division to ensure that they are consistent with the overall
organisational objectives.

• Costs can be reduced by avoiding duplication of tasks (e.g. each divisional

manager researching and negotiating their own deals on IT) and by bulk
purchasing (e.g. IT deals negotiated for the organisation as a whole).

• Standardised processes ensure consistency of approach throughout the

organisation. The central function will have a set way of doing everything and
will feed this down to each and every division.

Disadvantages include:

• Increased workload for top management that may result in them not being
able to prioritise important jobs, motivate or drive success.

• Slower decision-making due to higher levels of workload.

• Limited development of lower managers as they are not being given the
responsibility that they may require to improve and climb the management
ladder.

Shared services approach

A great example of a centralised approach would be a shared services approach. This
involves centralising certain functions within an organisation to be used by
multiple departments or business units. Instead of each department having its
own separate resources for things like IT, finance and human resources, these
services are consolidated into a single, centralised unit.

Decentralisation
In a decentralised organisation, authority is delegated down the structure to
divisional or lower-level managers to make decisions about their areas of the
business. The head office then focuses on making strategic decisions. For
example, if IT was delegated, local managers would make their own decisions about
the extent to which they use IT, what they purchase, and where they purchase it from.

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Advantages include:

• Divisional expertise applied to make decisions appropriate to

product/customer/local area. For example, the Indian division of a Brazilian
company probably has a better idea of how to operate in India than the
Brazilian-based corporate office. Therefore, it makes sense to delegate this
responsibility.

• Motivating for lower-level managers as they have more power and control
over their own divisions. This allows them to tailor their division to maximise
its own strengths.

• Quick decisions as power is delegated. For example, an incident has

occurred at our Brazilian company's Indian division. The head of this division
knows swift action is needed and takes it. Problem solved! However, if this
company operated under a centralised function, they would have to first send
a report and suggested solution up the chain and wait for a decision to be fed
back down the chain. By then, it may be too late to mitigate the effects of the
incident.

• Developing staff who are able to take more responsibility locally. This helps
identify successful managers and means they have decision-making skills
when they are promoted to head office positions.

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• Senior management is free to concentrate on strategic issues. It is hard to

work out where the company is going to be in ten years and how to get there
when you are constantly concerned with day-to-day operations.

Organisations can use a mixture of both a centralised and decentralised

approach for different decisions. For example, IT might be centralised to create a
consistent approach and save costs, while marketing is decentralised as it needs to
be targeted at local customers.

Example
When UK bookselling chain Waterstones was first opened by Tim Waterstone, it was
run along a decentralised model. Each branch of the chain made its own decisions
about stock, made its own deals with suppliers and was responsible for its own profit
and loss.

Tim Waterstone sold his business, and it eventually found its way into the portfolio of
HMV Media Group. This company was adept at selling music and video through large
stores and ran a centralised model and so decided Waterstones should also move to
a centralised model.

Centralisation refers to the level in the organisation where decisions are made.
Under HMV, decisions were made at company headquarters. The reasoning was
sound: centralised buying would bring cost benefits through economies of scale.
Centralised stock control would avoid overstocks and dead stock. Review and control
processes could be streamlined and turned into deployable intelligence. Marketing
and promotions could be nationalised, and so on.

Sadly, the Waterstones branch managers did not enjoy losing their autonomy, and
there was significant resistance to the change. Meanwhile, the HMV discovered that
the level and the type of demand for books varied wildly from town to town and
could not be effectively managed centrally. Branch managers were in fact best placed
to forecast local demand. HMV divested the chain and it's now run with a degree of
centralisation and degrees of branch-level autonomy.

This shows the importance of getting the level of control right. What worked for sales
of CDs and DVDs didn't work as well for books, and this made a big impact on the
success of each division.

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3. Forms of organisational structure

There are two key forms of organisational structure that you need to be aware of.
These are vertical and horizontal structures and open and closed systems. Let's
take a look at these.

Vertical and horizontal structures

Organisations can be described as vertical or horizontal (also called tall and flat)
depending on scalar chain and span of control.

Scalar chain
This relates to the number of management levels within an organisation. The
chain reaches from the most senior staff member to the most junior. If there are
many levels of management, then the chain will be long; if there are only a few levels
of management, then the chain will be short.

Span of control
This relates to the number of people a manager has control over. If the manager is
responsible for a large number of people, then their span of control is wide; if they
are responsible for only a few members of staff, then their span of control is narrow.

There are a few factors that affect how many people a manager will be supervising:

• Geographical location – If the employees are widely dispersed, managers

may only have control over the employees in their geographical location,
making their span of control narrow.

• Level of competency – If the employees are highly skilled and do not need
much supervision, then a manager will be able to supervise more employees,
making their span of control wide. Similarly, if the job the employees are doing
is simple and repetitive, they may not need much supervision, and there can
be a wider span of control.

• Workload – If each manager has their own tasks as well as managing the
employees, then they may be able to supervise fewer staff, making their span
of control narrow.

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Vertical

Vertical (or tall) organisational structures focus on a strict hierarchical layering

system, meaning that power of authority remains at the top of the system.

This may apply to the organisation as a whole or to a specific project, team or

department within the company. Within this structure, the scalar chain will be long,
and the span of control will be narrow.

A large chain of stores would be a good example of a vertical structure. The staff will
report to the department manager, who will report to the branch manager, who will
then report to the regional manager, and so on. There are many levels of
management.

Advantages:

• Employees can be more closely supervised.

• The lines of responsibility and control will be clear.

• There will be more opportunity for promotion.

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Disadvantages:

• More bureaucratic as the employees have less freedom which can lead to
them being dissatisfied.

• Decisions will take longer as they will have to go through many layers of
command.

Horizontal

Horizontal (or flat) organisational structures have fewer levels of management, but
each manager is responsible for more employees. The scalar chain is short, and
the span of control is wide.

A video game developer would have a horizontal structure. The owner is at the top
level, followed by the team leader for each game. Each team leader is responsible for
all of the employees who work in their team.

Advantages:

 Decisions are made quickly as they have to go through fewer management

levels.

 Generally more cost-effective as fewer formal managers (managers are paid

higher wages than non-managers).

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Disadvantages:

 Less room for promotion and progression for employees.

 Managers have less control over employees which could have a negative
impact on productivity.

Closed and open systems

Systems are generally described as a group of interacting units or elements that
have a common purpose. Systems may be classified as open or closed.

Let’s say you've pulled up to some traffic lights and there is nobody else around. The
light stays red as it is on a timer and is not affected by you being there. This is a
closed system as it is not affected by its environment.

The next traffic lights you drive up to turn green, allowing you to drive through
almost straight away. This traffic light is controlled by a sensor and is, therefore,
affected by you being there. This is an open system as it does respond to its
environment.

We can also apply this “systems theory” to organisations.

Open systems
Open systems interact with other internal systems or the outside environment
via the exchange of information.

Open systems have open boundaries that allow information to flow from both
inside and outside the business. The controllers of open systems concentrate on
their external and internal environment and customer needs and reactions.

For example, the public relations department of an organisation that needs to

communicate with the external environment regularly is an open system, a marketing
department uses customer feedback to adapt its product portfolio, or the Board of
Directors responds to shareholder concerns about a new objective and changes
strategy.

Closed systems
Closed systems are not influenced by external factors, and knowledge is shared
and transmitted only within the closed system.

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This type of system allows managers and organisational theorists to analyse

problems through examination of the internal structure of a business with little
influence from the external environment. It is worth noting that very few
organisations could actually be true closed systems and would almost always be
affected by external factors.

An example of this might be a department that deals with very sensitive information.
It is imperative that this information is not shared or corrupted so the department's
operations are closed off.

4. Outsourcing and offshoring

Outsourcing/externalisation
Imagine for a moment that you look down to see that your watch is broken. You
could buy the correct parts and learn how to fix your watch yourself from a video on
YouTube. However, this could take you all day, and you have a busy day at work. You
take your watch to a watchmakers down the road, they fix it for you in less than an
hour and only charge you £50 for the service and parts. Ultimately, outsourcing the
job to the skilled watchmaker has saved you time and money. You've had the job
done by an expert who is likely to have done a much better job than you could have
done yourself.

In doing this, you are “outsourcing” the job to someone else. Businesses too must
make similar decisions about what they undertake in-house and what they use
external providers for.

A formal definition of outsourcing then is:

Outsourcing is the contracting out of all or part of a business operation to an

external organisation.

Advantages of outsourcing
 Can help keep costs down and improve quality given that the external
provider will usually be an expert in the field.

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 Known fee (if agreed in advance in the contract).

 Allows the organisation’s management to focus on the core business issues.

Disadvantages of outsourcing
 Can lead to a lack of control as the organisation relies more heavily on
external providers whom they cannot directly control.

 Unlikely to gain a competitive advantage (so should not be used for core
operations) as competitors may be using the same external provider.

 Dependence on an outside organisation carries the risk of possible price

rises in the future, or even the outside organisation failing.

 Loss of internal expertise makes it hard to bring expertise back in-house,

and the company is no longer an intelligent customer when negotiating
future contracts.

 External organisations/individuals have less understanding of a business than

an internal department would.

 Loss of confidentiality as external parties are allowed to access internal

systems (e.g. an IT company maintaining systems will have access to all the
company's data).

Business process outsourcing (BPO)

One specific term that you do need to be aware of is business process outsourcing
(BPO) which is the outsourcing of a specific business process such as payroll or
HR. The advantages and disadvantages remain the same as above.

Competencies and outsourcing

Competencies are skilled processes within an organisation. Competencies can be
split into three categories: core, complementary and residual. Which category a
business process is in will affect whether it is a good candidate for outsourcing or
not.

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Core competencies - Should never be outsourced. These are competencies in

areas essential to the business maintaining its competitive advantage. Analysis of
information and producing Board reports must be core competencies of a finance
department.

Complementary competencies – Very important, but not key to competitive

advantage. These can be outsourced but only to a company that is an expert in the
field and one that the company can trust. Financial accounting and tax are often
outsourced to accounting firms due to their expertise and the importance of the
task.

Residual competencies – Areas of the organisation that can be easily outsourced,

usually via a simple “arms length” transaction. Often these are areas of businesses
not directly linked or essential to business operations, for example, payroll or
processing invoices.

Service level agreements

The service level agreement sets out the terms of the relationship between the
company used for outsourcing and the organisation. It should include:

• Descriptions of the service – Ensures both parties understand clearly service

expectations.

• Service standards – Including quality, availability, reliability, response times,

problem resolution times.

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• Measurement approach – How standards will be measured and how often.

• Penalties and dispute resolution – How disputes will be clarified, and

penalties applied.

• Duration – When the agreement begins and expires.

• Roles and responsibilities – For both parties and their staff, and how they
work together.

• Termination – Provision for how the contract will be terminated and on what
basis.

Network organisations

A network organisation depends to a large extent on the relationships it builds with

other parties. Indeed, the term “network” derives from the dependency of a company
on the networks it builds with others.

The organisation itself typically aims to keep the number of directly employed
staff to a minimum and, as far as is possible, its activities outsourced to an
external provider, with the role of the organisation to coordinate the outsourced
activities. The organisation will tend to keep the key drivers of its ability to
compete “in-house”.

They may also rely on strategic alliances with other companies in order for the
organisation to be a success. Examples include the research and development of joint
products, or agreements to sell work on to each other.

Network organisations are more flexible than traditional organisations as it is easy to

increase or reduce capacity through using the outsource company or the alliance.

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Virtual organisations
Virtual organisations are a type of network organisation with a focus on the use of
IT as the communication tool between its employees and also between
employees and contractors. This enables everyone to be located in geographically
dispersed locations yet still work together to produce the end product. An
example of this would be online marketplaces, such as eBay, where all business is
conducted on a virtual platform.

Co-creation with customers

This is the idea of something being created by both customers and a company.
This stems from a need to meet customer demands and is one way to source ideas
form outside the company. An example of this would be FedEx offering to deliver
organs for transplant by asking doctors and specialists to co-create a new system
with them.

In a network organisation, relationships with all stakeholders are developed and

encouraged to maximise the benefits to all parties.

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5. Transformation of organisational
structures
It is important to remember the types and forms of organisational structure that
we have discussed in this chapter are not static. As the internal and external
environment of an organisation changes, new structures may be adopted to
adapt to this. For example, advances in technology are changing the way business is
conducted and how people communicate with one another. These changes can affect
the structure of the organisation by changing how processes are managed and
coordinated.

For example, we are seeing parts of the organisation, such as the finance function,
being relocated to other countries or being outsourced to an external provider,
enabled by technology and driven by a desire to reduce costs further. This changes
the structure of the organisation and, generally, we are seeing organisations
becoming more flexible in their structure to adapt to change more easily.

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