Golspie High School
Business Management
Higher
Understanding Business
6 Business Structures
Higher Business Management Understanding Business
Business Structures & Groupings Page 2
Learners should be aware of business structures available to an organisation, be
able to describe these internal structures, justifications for using each one and
give any drawbacks to the structure
1. tall and flat management structures
2. centralised and decentralised management structures
3. matrix management structure
4. entrepreneurial management structure
staff groupings such as function, location, product and customer
Organisation Charts
An organisation chart shows how an organisation is structured. It shows:
Who has overall responsibility for the organisation
The levels of authority and responsibility
The lines of communication and chain of command
The span of control and different relationships between people within the
organisation
Where work can be delegated to subordinates
Term Definition
Span of
control
The number of subordinates who report to a manager
A wide span of control can be difficult to manage but a narrow
span of control can be criticised as being over controlling and
stifling initiative.
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Chain of
command
The line in which instructions are passed down in an organisation
from one level of management to another.
A long chain of command may mean communication and
decision-making takes longer, compared to a short chain of
command.
Authority This is having the power to make decisions within an organisation.
It can denote those whom you have direct management of.
Typically, the higher up the organisation chart, the more authority
an individual has.
Responsibility This is being answerable for decisions and the actions taken.
This normally refers to those whom a member of staff reports to
within an organisation.
Delegation This is one of the functions of management and takes place when
someone (typically higher up an organisation structure) request a
task to be completed by a subordinate.
This could be because the senior staff member does not have the
time, or because the subordinate is more skilled in the task.
Relationships within Organisations
Line
relationships
The relationship between a subordinate and their superior. For
example, a Marketing Manager has a line relationship with a
Marketing Supervisor.
Lateral
relationships
The relationships between people on the same level of the
organisation structure. A Human Resource manager has a lateral
relationship with the Operations manager.
Functional
relationships
Relationships which exist when one department provides support or a
service to another department. The HR dept, for eg, has a functional
relationship with other departments as they provide support during
the recruitment and selection process.
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1 Tall & Flat Management Structures
Hierarchical structures can be either tall or flat.
Both can exist successfully in large organisations.
Tall structures contain many layers of managers
whereas managers in flat structures are responsible
for more employees.
Managers on the same level will often be
responsible for the same number of delegates. This
is often linked to the pay grade they receive. The
higher up the pyramid a manager is, the more
responsibility and pay they will receive.
The number of employees in an organisation will often determine the number of levels of
management.
Tall structures
A tall structure has many distinct layers in the
hierarchy. As there are many layers the chain of
command is longer and communication between
the top of the chain and the bottom may take
longer. Decision-making is centralised and top-
down. Managers have smaller spans of control
and there is less delegation, often resulting in less
opportunity for subordinates to take on responsibly.
Decision making can often take longer in a tall hierarchical structure as more managers have
to be included in the decision making process. This can lead to a less flexible organisation that
finds it harder to react to competition.
Tall structure organisations will often be split into functional departments where employees
have clearly defined (specialised) roles and responsibilities. Employees working in the same
department usually have expertise or experience in particular areas. This means that each
worker can become very good at what they do.
Advantages
• Strong top-down leadership
• Effective strategic decision-making
• Effective top-down activity coordination
• Standardisation – can provide economies of scale
• Skilled decision-makers (through experience).
Disadvantages
• Many layers – slow reaction time/not as dynamic as others
• Defined roles may suppress talents
• Lack of control may be demotivating.
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Flat structures
A flat structure has a
wider span of control.
This means every
manager has more
responsibilities and is
responsible for a larger
number of employees. This can make the decision making easier and more timely as there are
less people to grant permission.
The workload of a manager in a flat structure can be large due to the number of employees
within their team. This wider span of control can lead to employees feeling more empowered
as subordinates take on some of the teams responsibilities. On the other hand it can lead to
demotivated employees who feel that they are being asked to do more than their job
description.
Consultation will also be quick and efficient as the owner and manager can easily meet all the
staff face-to-face to discuss any problems that may arise. Another advantage is that salaries
tend to be cheaper as the business does not have to pay a large number of expensive
management salaries.
The effects of increasing a manager’s span of control:
Will mean more empowerment is possible – can give for both employee and management
Allows for delegation to staff as they should be reasonably skilled
Managers’ time to deal with staff problems will be at a premium
Can place managers under stress
Can mean workers rarely have time to meet with their line manager to discuss ideas
Subordinates may resent having to make decisions
Managers will have less time for planning
Can result in poor decisions – both employee and organisation
Managers are in charge of more staff
Can be motivational to managers as can be seen as greater power
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2 Centralised & Decentralised Management
Structures
In a centralised organisation a few senior managers will
retain the major responsibilities and powers whereas
decentralised organisations will spread responsibility for
specific decisions across various departments and lower
level managers, including branches or units located away
from head office.
An example of a decentralised structure is Poundland.
Each store has a manager who can make certain decisions concerning their store. The store
manager is responsible to a regional manager. Promotions and stock decisions are made
centrally, but other decisions such as staff rotas and the placement of special offers is left up to
the individual stores.
Senior managers enjoy more control in a centralised structure. Decisions can be made to
benefit the whole organisation, which can result in cost savings as a standard procedure is
adopted. Where strong leadership exists, the whole organisation can benefit.
On the other hand, staff in a centralised structure do not feel empowered, as they are not
part of the decision making process. This could lead to a lack of motivation and reduced
output. Centralised structures do not take account of the skills and knowledge of staff lower
down the organisation.
Successful businesses will often use a mixture centralised and decentralised structures to ensure
a consistent strategic approach is taken across the business, but the skills and knowledge of
staff are not ignored.
Decentralised Centralised
decision making is delegated to departments decision making lies with senior
managers/head office
relieves senior managers of a lot of the daily
tasks
managers carry the whole burden of decision
making
subordinates are given responsibility to make
decisions which is motivational
subordinates are less motivated as decision
making is made only by senior managers
decision making is faster as local managers do
not have to consult national managers prior
to making a decision
decision making is slower as local managers
have to consult national managers prior to
making a decision
procedures will be decided by local managers procedures tend to be standardised
throughout the organisation
decisions take into account local
arrangements/customers
decisions are taken for the organisation as a
whole
corporate culture is harder to
impose/promote
a high degree of corporate identity exists
decentralised is often seen as being used in a
flatter structure
centralised tends to exist in hierarchical
structure
decisions can be made which only benefit
one department
decisions will be made to suit the whole
organisation
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3 Matrix Management Structure
A matrix structure contains
teams of people created
from various departments
from across the business.
These teams will be created
for the purposes of a
specific project and will be
led by a project manager.
Often the team will only
exist for the duration of the
project and matrix
structures are usually
deployed to develop new
products and services. An
example is when a business is preparing an event to launch a new product. Employees from
across the business will meet for a short period of time to plan the launch. After the event,
they will return to their original teams. As a result, matrix structures do not replace
traditional tall and short organisational structures. They can help to break down traditional
department barriers, improving communication across the entire organisation. Employees
with a variety of skills are able to work together, which increases the skills set of all
employees. This is likely to result in greater motivation amongst the team members and
encourages new ideas to be developed. This way of sharing resources across departments can
make a project more cost-effective.
Matrix structures may not always work smoothly. Members of project teams may have
divided loyalties as they report to two line managers. Equally, this scenario can put project
team members under a heavy pressure of work, especially if their usual work activity needs to
be completed. Taking employees from a range of departments can make coordinating
meetings difficult. It can also take team members time to get used to this new way of
working. A further disadvantage is the employees normal working routine may be disrupted,
meaning a loss of output.
Features of a matrix structure
• Normally set up to carry out a specific project
• Will consist of different specialists from functional areas
• Each team will have a project leader
• Can be motivational to the staff concerned
• Is a good method of solving complex problems
• Gives staff increased experience in different situations
• Is a relatively costly structure if many different teams are required
• Can be difficult to co-ordinate staff from different areas
Each staff can have two managers, the project manager and their own functional
manager which can cause confusion and conflict
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4 Entrepreneurial Management Structure
Entrepreneurial structures rely on a small number
of people making the key decisions for the
business. Although more common with small and
medium businesses, there are instances where
owners of large businesses remain in control and
do not delegate to a large number of people.
Michelle Mone is the founder and co-owner of
MJM International, a multi-million pound
lingerie company. She remains in control of the
company with a very autocratic style of
management.
Characteristics of an entrepreneurial structure:
One senior member of staff makes all the important decisions
Decisions are made quickly as a result.
Staff are very rarely consulted on decision making.
Stifles staff initiative as they are not consulted.
Is mainly used in smaller organisations.
Employees know who they are accountable to.
May place over-reliance on key members of staff.
Advantages
Decisions are made by experienced managers of the organisation.
Decisions are made quickly as managers do not need to consult staff.
In addition, there are only a few decision makers at the core of the business which
allows decisions to be made quickly.
Staff know who they are accountable to as these types of structure tend to be in a
small business.”
Disadvantages
Is difficult to use in larger businesses where many decisions have to be made.
Top managers carry a heavy workload/burden.
Can stifle other staff’s initiatives and motivations.
Demotivated staff as they are not included in decision making.
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Staff Groupings
1 Function
It is common place for medium and large
businesses to organise themselves by functional
areas (departments) which service the whole
organisation. It is used to ensure that the
business is run in the most efficient manner as
everyone is accountable. Typical functional areas include Research and Development,
Marketing, Human Resources, Finance, Operations, Customer Services and Administration.
Research and development (R&D)
The R&D department are always on the lookout for new ideas. Their remit is to come up
with new ideas, or look at ways to improve existing products. An example of this is the
squeezy bottle used by Heinz tomato ketchup. In response to customer feedback Heinz
introduced a new, more convenient bottle in an effort to prolong the life cycle of the product
and stay ahead of the competition. This functional area will work closely with the marketing
department.
Marketing
The marketing department aims to discover what customers want from the goods and
services they provide. They work closely with the R&D department to conduct market
research and use this information to develop strategies to ensure that the business can meet
the needs of customers. They are responsible for ensuring an effective marketing mix (often
referred to as the 7P's).
Product - Which products are on offer and what is the level of sales? What new products are
planned? Are products in decline? What can be done to reignite interest in products?
Price - How much should be charged? Should a high or low price be set? How can we ensure
that our product is competitively priced whilst ensuring a profit is made?
Promotion - How can people be made aware about products? What special offers should be
ran? What advertising methods will ensure the correct market segment will be aware of
products?
Place - How can we distribute products? Should products be sold directly to the customer or
through retailers? How can the Internet help to sell more?
People - How to ensure customers are always satisfied? What level of after sales service
should be given?
Process - What systems are in place to ensure customer satisfaction? How do we know these
systems are effective?
Physical evidence - What evidence does the business have that they use to verify that it keeps
its promises to customers?
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Human Resources (HRM)
The HR department deals with the recruitment, selection, retention, training and
development of employees. They are also responsible for ensuring employees are motivated
through the financial and non-financial payment systems. The human resources department
will also take account of all government legislation relevant to human resource management.
Finance
The Finance department is responsible for the payment of wages and salaries. They are also
responsible for producing financial accounts including Profit Statements and Balance Sheets.
They will set budgets for other functional areas and ensure that departments do not
overspend.
Operations
The Operations department is responsible for the purchasing or raw materials. They work
closely with the finance department to ensure that all raw materials are costed and purchased
within budget. They will also work alongside the marketing department to ensure an
appropriate selling price is decided upon. The Operations department, often referred to as
the production department, is responsible for the design and manufacturing of goods. Quality
is very important to an organisation and it is this department that ensures processes are in
place.
Customer services
With a growing quaternary sector and increased competition, the role of the customer
services department has increased in recent years. Customers have high expectations and this
department must ensure that a high level of service is maintained. This department will put
policies and procedures in place to ensure a consistent approach to customer satisfaction. A
policy for dealing with complaints must also be introduced as successful businesses rely on
returning customers to ensure continued success.
Administration
The administrative department is responsible for the organisation and dissemination of
information around the business. Today, this information is likely to be stored online.
Advantages of Functional Grouping:
• Results tend to be for the organisation as a whole
• Staff will know exactly who to turn to if they need specific expertise – allows for
specialisation in each functional area
• Employees become highly skilled in their chosen function, eg, an employee working in the
Finance department will be qualified to produce and audit financial accounts
• The organisation will have a clear structure/clear lines of authority exist
• Staff can share knowledge and learn from each other in departments
• No duplication of resources
Disadvantages of Functional Grouping:
• Departments can be more concerned with their own results than the organisation as a
whole, therefore organisational aims can be lost
• Competition can arise between departments and this can cause friction.
• The organisation can become very large and unresponsive to changes in the market.
• Can produce large and unwieldy organisations
• Businesses organised by function may find that some tasks are duplicated, leading to waste
• Communication may be poor between functions, leading to mistakes and more waste.
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2 Location/Geographical
Grouping of resources is carried out across a geographical
area, ie, Midlands, Scottish, South-East Division, etc.
Advantages
• Allows to cater closer for the needs of different areas.
• Can become familiar with local customs and cultures.
Multinational businesses will often group by
geography. This is because operating across the world can create problems with time
zones, payment rates, customer expectations, delivery times and corporate culture.
• Grouping by place also allows for a closer working relationship with local suppliers. This
ensures that the optimum quality and price can be achieved.
• Customers benefit from speaking to an employee with local knowledge. This can result in
customer loyalty being achieved.
Disadvantages
• Is expensive with regards to administration and staffing costs.
• Inevitably, this will lead to duplication of services across the company.
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3 Product/Service Grouping
• Staff are organised around a specific product or service and
will have different areas of expertise
• Each functional area will be responsible for a specific product
or service only resulting in an increase in specialist product
knowledge
• Disney is an example of a business that splits itself by product.
The board of directors ensures the overall brand continues to
grow. The business is split into divisions, and each division has
a director overseeing that area of the business. Disney is split
into Disney Media Networks, Disney Consumer Products, The
Walt Disney Studios, Disney Interactive, and Walt Disney
Parks and Resorts. Each division operates as a self contained
unit, with the board ensuring that the work of all divisions
contributes to the overall business strategy and objectives.
Advantages of product/service grouping:
• Allows for an organisation to be more responsive to changes
in customers requirements and trends in that market.
• Expertise is developed within each specialised division.
• Allows management to identify poor performing
products/areas in the organisation.
• Each division caters for different market segments and allows
staff to increase knowledge and skills to match that particular
product. This allows the business to respond to social changes
more quickly.
Disadvantages of product/service grouping:
• Departments can be more concerned with their own results
than the organisation as a whole.
• There can be duplication of resources and personnel across
groups.
• Divisions may find themselves competing against each other.
• Staff may not know exactly who to turn to for help as the
structure may be less clear and line relationships less clear.
• Duplication can occur, as each division will have it’s own functional areas, leading to an
increase in costs and a reduction in efficiency.
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4 Customer
Resources are organised around groups of customers with similar needs.
Allows for each division to offer unique services to be tailored to each
group/segment of customers or a specific customer.
Builds up strong customer loyalty due to the personal service given to each type of
customer.
There can be large staffing costs with this type of grouping.
Duplication of functional departments (eg resources in administration, finance, etc)
exists.
The financial services
business Prudential UK
is an example of a
business that does this.
They offer financial
advice on a number of
matters, such as
investments, insurance
and taxation. Each
team within the business has responsibility for dealing with customers. Customers
can be transferred from one team to another as their needs change.
The use of customer grouping for an organisation.
Marketing can be tailored to specific customers needs
Customer loyalty can be easily built up
There is a high level of customer care given
The organisation can respond to the needs of customers quickly
Can be expensive due to high staffing costs to meet customer needs
New staff are needed if there is a new customer grouping or product created
Competition between customer groupings/departments can exist
Advantages
Service and product is tailor-made to customer needs
Promotions can be directed towards specific customer groups
Customer loyalty is built up due to personal service
Quick response to change
A business grouping in this way can build up customer loyalty as they can give each
customer a personal service. This also means they can respond quickly to customer needs
or changes in taste.
Disadvantages
New staff are required if new customer group is formed
Duplication of resources
Competition between departments (either advantage or disadvantage depending on
explanation)
This personal service can be expensive due to higher staff costs.
It is also inevitable costs will increase due to a duplication of activity across the business.
The personal relationship that exists between the business and customer is lost when staff
leave or move departments.
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Management
Extraction Refinery Distribution Research &
Development
5 Technological
• Organisations group their activities according to the technological or production process
that exists.
• Only a suitable option for very large organisations with different products with similar
production processes.
• Again duplication of resources occurs.
• Specialism can occur within each process.
• Can reduce wastage and costs.
• For example, this may include an oil and gas company operating in different sectors.
Factors that influence the formal structure of an organisation:
The organisation’s type and purpose
The size of the organisation, larger organisations tend to be more formal and smaller
organisations tend to be less formal
Technology used – the impact of modern technology can influence how organisations
structure their activities, i.e. easier to communicate over larger distances
Staff knowledge and skills, if staff are highly skilled a less formal structure can exist
The views/leadership styles of staff in the organisation
The activities which the organisation undertakes
The market – the external environment of the organisation
The organisational culture
The informal organisational structure (i.e. the “grapevine”)
Products they sell – good or service being provided
Finance available
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Changing the Structure
Organisations may decide to restructure for a number of reasons, but mainly to keep
up with the changing business environment. Over recent years, there has been a
decline in manufacturing in the UK because of an increase in foreign competition,
changes in consumer demand and changes in government policies. Organisations
must respond to external factors and – where necessary – change structure to suit the
current business climate. The management of an organisation have the responsibility
to ensure that the structure of the organisation meets its purpose. Organisations can
change the structure by:
Delayering
Reducing staff levels by cutting out levels of management to flatten the structure. This
creates a smaller hierarchy where each manager has an increased span of control.
Delayering helps to:
improve communication
make decision-making quicker and more effective
empower staff
cut costs as there are fewer management salaries to pay
allow an organisation to respond more quickly to market changes.
Delayering leads to more responsibility and a wider span of control for the remaining
managers. However, delayering also causes redundancies as well as giving fewer
promotion opportunities for remaining staff.
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Downsizing
This involves removing certain areas of the organisation’s activities by closing factories
or merging divisions together. A business may downsize then outsource some
functions, eg delivery. Downsizing helps to:
cutting costs and increase profits
empower remaining staff
become more competitive and efficient
However, downsizing may lead to a company losing valuable skills, experience and
knowledge of many staff resulting in low staff morale during the downsizing process.
Outsourcing
Some activities may be outsourced to enable the organisation to concentrate on its
core activities – this could be expensive. It also means that the organisation needs to
trust the outsourced organisation to deliver on time and to the standard required.
Effective communication between the 2 organisations is crucial to the success of
outsourcing.
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Past Paper Questions
Question 1
(Source: 2014 SQA Section 2 Question 2a)
Describe the main features of a matrix structure. 3
Question 2
(Source: 2013 SQA Section 2 Question 2f)
Describe factors that influence the formal structure of an organisation. 3
Question 3
(Source: 2013 SQA Section 2 Question 4e)
Describe the effects of increasing a manager’s span of control. 5
Question 4
(Source: 2012 SQA Section 1 Question 5)
Distinguish between centralised and de-centralised decision making. 5
Question 5
(Source: 2012 SQA Section 2 Question 1b)
Discuss the use of customer grouping for an organisation. 4
Question 6
(Source: 2011 SQA Section 2 Question 3d)
(i) Describe the main characteristics of an entrepreneurial structure. 3
(ii) Distinguish between a centralised structure and a decentralised structure. 3
Question 7
(Source: 2011 SQA Section 2 Question 4a)
Compare the use of functional grouping with product grouping. 5
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Question 8
(Source: 2010 SQA Section 1 Question 3)
Discuss the advantages and disadvantages of customer grouping. 4
Question 9
(Source: 2010 SQA Section 1 Question 8)
Describe the main features of a matrix structure. 3
Question 10
(Source: 2009 SQA Section 2 Question 2a)
Most organisations group their activities by function. Describe the advantages
and disadvantages of functional grouping. 5
Question 11
(Source: 2008 SQA Section 1 Question 2)
Organisations often use an entrepreneurial structure. Explain the advantages and
disadvantages of an entrepreneurial structure. 4
Question 12
(Source: 2008 SQA Section 2 Question 1e)
Many organisations group their activities by function. Discuss other methods an
organisation could use to group their activities. 8
Question 13
(Source: 2007 SQA Section 2 Question 2a)
Organisations group their activities in a number of different ways.
Distinguish between the following 3 types of organisational groupings:
• Product/Service Grouping
• Customer Grouping
• Technological Grouping. 9
Question 14
(Source: 2006 SQA Section 2 Question 5c)
One method of grouping staff and work within an organisational structure is by
product service.
Describe the advantages and disadvantages of product/service grouping. 5
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Task 1
(Source: Activity 4)
There are several main forms of organisational structure.
Complete the table below and list the key characteristics of each type of
organisational structure/grouping and identify an organisation that uses it.
Type of
structure
Key characteristics Justification for this
type of structure
Organisation
using this type
of structure
Hierarchical
(Tall)
Flat
Matrix
Entrepreneurial
There is an entrepreneur at
the centre of the structure,
making all the decisions.
Because one manager makes all the decisions, decisions are made quickly.
Centralised
Decentralised
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Function
Areas of specialism are grouped together to provide that function for the entire business, eg sales function.
Areas of specialism will
perform their functions
so the job will be done
well/everyone is clear
about their roles and
responsibilities.
Location
Product
Customer
Technological
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Internal organisation
Internal organisation
Question Marks
1 Many organisations group their activities by function. Discuss other
methods an organisation could use to group their activities.
8
2 Most organisations group their activities by function. Describe the
advantages and disadvantages of functional grouping.
5
3 Organisations often use an entrepreneurial structure. Explain the
advantages and disadvantages of an entrepreneurial structure.
4
4 Describe the advantages and disadvantages of a centralised
organisation structure.
6
5 Companies operating in different geographical areas may choose to
group their activities by territory. Describe an advantage and a
disadvantage of doing this.
2
6 One method of grouping staff and work within an organisational
structure is by product service. Describe the advantages and
disadvantages of product/service grouping.
4
7 Explain what is meant by a ‘matrix structure’. 2
8 Distinguish between delayering and downsizing. 2
9 An organisation may choose to ‘outsource’. Describe the meaning
of this term and the consequences for an organisation.
4
10 Many organisations choose to delayer. Explain the benefits of
delayering to an organisation.
3
11 Discuss the effects of widening the span of control. 5
12 Justify the need for a strong corporate culture. 3
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The most common internal structures which most organisations tend to use are: Flat (e.g. doctors, lawyers) [modern UK] Features �Few distinct levels of authority �Flat staffing structure �Decentralised decision-making/authority. Strengths �Decentralised authority is motivating �Quick communication and decision-making �Decentralisation harnesses expertise. Weaknesses �Possibility of lack of strategic perspective �Possibility of lack of coordination.
Matrix (e.g. project-based work) [modern UK] Features �Non-hierarchical skill-based project teams �Functional responsibilities for individuals. Strengths �Maximises the skills of all involved �Quick communication and decision-making �Authority and flexibility are motivating. Weaknesses �Support can be expensive �Possibility of lack of team coordination �Economies of scale may not be achieved. Entrepreneurial (e.g. sole traders) Features �Few levels of authority, usually only one level �Centralised top-down decision-making. Strengths �Strong top-down leadership �Effective top-down activity coordination �Effective and quick decision-making. Weaknesses �“Information overload” for decision-makers.
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Important Aspects of any Internal Organisation Structure �Organisational charts �Span of control (staff are managed based on ability/task/culture) �Line relationships (between management and staff) �Functional/lateral relationships (with similar-level staff) �Staff relationships (overall support staff) �Informal relationships (e.g. communication, advice, trust).
Organisational Culture within an Overall Organisational Structure “Organisational culture is a set of behavioural and attitudal norms which most or all members of an organisation subscribe to and are influenced by when resolving problems, making decisions and carrying out everyday tasks.” Organisational culture is made up of: �Artefacts (physical aspects) �Values (principles which affect behaviour) �Assumptions (sources of values adopted). Higher Still
Notes Higher Business Management Notes Unit 2 – Business Decision Areas Page 4 www.hsn.uk.net HSN82100
For it to exist and be effective there must be consensus in the following areas: �Core mission �Goals �Method to use in the attainment of goals �The nature of feedback and monitoring �The nature of remedial or repair strategies. Despite the danger of some staff not adopting the organisational culture and therefore becoming isolated within the organisation, many believe an organisational culture is beneficial for the following reasons: �It creates a sense of belonging and purpose in staff �It improves motivation and commitment of staff �It develops positive customer perception. Examples of cultures may include: �Hierarchical – bureaucratic and centralised culture �Flat – culture of empowerment and development.
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The Changing Nature of Organisational Structure As we have already stated, organisational structure should be dynamic, and developed so that over time it can account for changes in the factors which affect organisations. Examples of the dynamic nature of organisational structures can be seen in the following examples. �Flat to hierarchical over time to account for growth (1960s) �Flat to hierarchical due to diversification (1960s) �Hierarchical to flat/matrix to improve decision-making (1990s) �Hierarchical to flat/matrix to improve dynamism (1990s) �Hierarchical to flat/matrix to improve efficiency (1990s) �Hierarchical to flat/matrix to improve competitiveness (1990s). However, despite the need for the structural dynamism shown above, the following constraints may limit the amount of structural change that is possible. �Resistance of workforce – job losses (internal) �Management resistance – changing roles (internal) �Owner resistance – investment versus profits (internal) �Lack of resources – e.g. finance, trained staff, facilities (internal) �Market structure (external) �Economic climate (external) �Competitors’ activities (external). Additionally, when structural change is required, the organisation must decide on the most suitable strategies to use to bring about such changes. These strategies will differ depending on the direction of structural change, e.g. takeovers and mergers during the growth of the 1960s, but the following strategies are seen to be very important to modern business management and structure in light of the decline of hierarchical structure in many progressive UK organisations. Higher Still
Notes Higher Business Management Notes Unit 2 – Business Decision Areas Page 5 www.hsn.uk.net HSN82100
Delayering Definition Decreasing the number of managerial layers within an organisation.
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Benefits �Speed of communication is improved �More efficient decision-making �More responsive organisation – flexible towards the market �More motivation and delegation opportunities �Motivating empowerment of staff �Lowered costs (from managerial redundancies). Drawbacks �Staff resistance and industrial action �Wider spans of control (decreased efficiency?) �Increased pressure on surviving managers �Demotivating – lack of promotional opportunities �Demotivating – concerns over job security. Downsizing Definition The removal of non-core activities within an organisation. Benefits �Speed of communication is improved �More efficient decision-making �More responsive organisation which is flexible towards the market �Motivating empowerment of staff �Lowered costs (loss of unnecessary resources). Drawbacks �Staff resistance and industrial action �Wider spans of control (decreased efficiency?) �Increased pressure on surviving managers �Demotivating – lack of promotional opportunities �Demotivating – concerns over job security. Outsourcing Definition Issuing some work to outside parties, e.g. cleaning/catering. Suitable when �The organisation is running at full capacity �Lack of necessary expertise �Lack of specialist equipment �One-off specialist job �Lower costs through using a subcontractor. Benefits �Cheap expansion of capability �Expert ability without training costs �More responsive and flexible to market. Higher Still
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Notes Higher Business Management Notes Unit 2 – Business Decision Areas Page 6 www.hsn.uk.net HSN82100
Drawbacks �Staff resistance and industrial action �Costs in the long-run may be uneconomical �Dependence on the outside party. Empowerment Definition Delegating power to employees. Strategies �Involving staff in decision-making �Recognising and praising achievement. Benefits �Responsibility motivates staff �Responsibility breeds commitment �Motivated staff are more productive �Harness employees “expert” views. Drawbacks �May be difficult to implement �Limited by employee motivation/ability.
Monitoring the Impact of Changes in Organisational Structure Like every other efficient decision, the decision to change organisational structure should be evaluated to ensure that it is productive. This evaluation can be conducted through dynamic monitoring of the following: �Production output – identifies staff motivation �Production quality – identifies staff motivation �Absenteeism/attendance – identifies staff morale �Staff turnover – identifies staff morale �Industrial action – identifies staff morale �Sales data – identifies market share �Financial data – identifies profitability �Share price – identifies organisational worth �Lower costs – identifies profitability �Better communication – for improved decision-making. This evaluation of the success of changing organisational structure is important to ensure the following:
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�The new structure has had a positive effect �The decision to change was therefore a “good” one �Any problems from the new structure are identified �Any structural problems are stopped �Action is taken to correct structural problems.
Internal Organisation Activities
Activity 1
One method of grouping staff and work within an organisation is by function.
Describe the advantages and disadvantages of this method.
Activity 2
Identify five main departments of a functional organisation. Describe the key tasks within
each department.
Activity 3
Sun Alliance chooses to group its activities around its different types of customer. Discuss
the value of this.
Activity 4
Explain why an organisation would choose to change from one type of organisational
structure to another.
Activity 5
Copy out the table below and put in two examples of organisations that group their
activities according to each method.
Grouping Example
Functional
Product/Service
Customer
Place/Territory
Technology
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Activity 6
Describe and draw appropriate diagrams for:
(a) a hierarchical structure
(b) a flat structure.
Activity 7
Compare communication, decision-making and the span of control within hierarchical and
flat structures.
Activity 8
Explain why organisations may have to change their type of structure as they grow.
Activity 9
Describe a matrix structure and its possible use within a construction company which has
projects worldwide.
Activity 10
Discuss the effects of delayering on the employees of an organisation.
Activity 11
Draw an organisation chart for an organisation that you know e.g. your school.
Clearly show the positions held by individuals within the organi sation and the links
between these individuals.
It is NOT necessary to name individuals within the organisation; you should simply use the
position or job title.
Clearly identify:
a line relationship
a staff relationship
a functional relationship
the span of control of ONE of the managers .
Identify three things that an organisation chart might be used for.
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Activity 12
Outline the advantages and disadvantages of informal structures to an organisation.
Activity 13
Explain why organisations are keen to develop a strong corporate culture.
Activity 14
Read the following article and then answer the questions below.
NISSAN
In 1999 Nissan, one of the world’s most famous
car companies from Japan, had $22bn of debt
and was close to bankruptcy. Since then it has
have been taken over by Renault, the French car
manufacturer, and made $7bn profit by the end
of March 2004. This considerable about turn in
its fortunes has resulted from a restructuring
of the company.
Complaints regarding their former management style included:
employees only concentrating on their narrow responsibilities within their own
department
managers not listening to the ideas from younger employees
lack of communication across departments and across geographical divisions
too many managers
complacent employees
many different suppliers
Car manufacturers are coming under increasing pressure to consolidate and cut
overcapacity to cut costs. The alliance between the two car companies would allow the
firms to share the development and production of car engines, chassis and other parts – this
would produce big savings and cut the risks associated with developing new technologies
The chairman of the new alliance tackled these problems with various methods such as
downsizing – cutting over 22,000 management jobs, halving the number of parts suppliers,
introducing enforced job rotation and cross-functional team working.
Source: adapted from http://www.bbc.news.co.uk
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1. Outline how restructuring to centralised decision-making could benefit an
organisation.
2. Outline the advantages of a decentralised structure.
3. Describe the benefits to employees, and the organisation, of making employees rotate
jobs.
4. Describe the following terms and justify why organisations would decide to:
downsize
delayer.
(do not repeat any reason)
5. Describe the key tasks undertaken by a Research and Development department.
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Section 4: Internal Organisation Grouping of activities
‘An organisation is the rational co-ordination of the activities of a number of
people for the achievement of some common explicit purpose or goal, through
the division of labour and a hierarchy of authority.’
Edgar Schein
Whilst Schein gives us a general definition of an organisation, he does not
tell us how that organisation is structured – what activities are grouped
together and why. In fact there are many different types of business
organisation and many different ways that organisations can be structured.
Functional grouping
This was a very common organisational structure, widely used by British
companies up to the 1960s. In recent years it has largely been replaced by
divisional grouping based on product or service (as described below). This is
where the activities in an organisation are grouped into departments based on
similar skills, expertise and resource used. The functional departments most
commonly found in modern organisations include:
• Marketing
• Human Resource Management
• Finance
• Operations
• Research and Development
• Administration.
Such organisations usually have a centralised decision-making structure that
provides a unified direction for the organisation originating from the top.
Each functional department may be large with a great many employees.
Product/service grouping
Here the grouping of activities is based around a particular product or service
and is usually described as a division. Each division is a self-contained unit.
The functional activities – marketing, finance, operations, administration,
research and development, and human resources – needed to produce the
single product or service will be grouped together and assigned to that
product. They are likely to be smaller in size than in a functionally based
structure.
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In most cases, organisations using this type of structure are very large,
producing a variety of products for different markets. They are also often
highly decentralised. Time Warner Inc. has divisions that incl ude Time
magazine, Warner Brothers record company, HBO (Home Box Office, a
leading pay cable television channel), and a book publisher called Little,
Brown.
Customer grouping
Organisations structured around customers or groups of clients are more
likely to be found in the service sector. They may exist in a private medical
practice for example, but may also be used as the structural basis for sales
teams where each representative has his/her own customer group.
Organisations like this offer a high degree of personalised service to their
customers. They are highly responsive to immediate customer needs and to
the anticipation and provision of future customer wants due to the close links
they have with their customers.
Place/territory grouping
An alternative structure can be designed around a geographical or territorial
base. The grouping of activities is organised by geographical region. For
example, an organisation might have both a North-East Scotland group and a
Midlands group. Many organisations selling to a broad customer base spread
over a large area are structured in this way. Multinational organisations, such
as Shell Exploration and Production, have a geographical base.
Organisations structured along these lines can meet the needs of customer
groups in different countries who may have language and cultural differences.
This allows specialist knowledge and specific marketing techniques to be
applied. In Britain we had the ‘Marathon’ bar, whilst everywhere else had
the ‘Snickers’ bar. This was because the bar was launched in the UK around
the time that running became the nation’s favourite sport. Everyone wanted
to complete a marathon, and the bar was named to associate an image of
fitness and fun with a type of chocolate bar.
There may be significant cost advantages in hiring a local workforce,
especially for unskilled and semi-skilled work. This can be seen in the oil
industry, for example, where Shell recruit large numbers of local workers in
Nigeria and the Middle East.
Technology grouping
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Organisations may group their activities along technological lines. This is
often because they produce diverse products that require different
technological processes. It is really only appropriate when there are obvious
stages of production, and where these stages flow naturally on from one to
the next. There are many manufacturing firms set up along these lines, but,
although it is possible, such a structure is seldom seen in the service
industries.
Organisations can achieve many benefits from grouping activities in this way.
There is scope for increased specialisation within the workforce because
training is simplified and concentrated on only one technological system.
When problems in the production process occur it is easy to pi npoint where
they have arisen.
Line/staff grouping
Line departments perform tasks that reflect the organisation’s goals or
objectives. They undertake the core operations (those that directly return
revenue to the organisation). Line authority describes the relationship
between superior and subordinate in the organisation. At the top of the line in
the typical large organisation there will be the Board of Directors. Below
them will come the management team in charge of the day-to-day running of
the organisation. Below them there will be various functional departments,
such as marketing, finance, production and human resources. There is also
likely to be a line structure within each of these departments. Starting with
the department manager the line will progress down to the most junior
worker.
Staff departments are seen as having the role of providing specialised skills
to support line departments. Staff departments do not return revenue direct to
the organisation, and will include activities such as strategic planning, human
resources, finance, and research and development. Staff authority is largely
advisory, and is often very specialised. The staff department works for the
whole organisation, not just for one department or division within it.
In recent years some organisations have out -sourced their staff activities to
allow a more concentrated approach to their own core activities. For
example, BP have out-sourced their accounting activities, and these are now
carried out for BP by Andersen Accounting.
Summary
Whilst it may seem easy to structure organisations by grouping their activities
into one or other of the examples given above, a great many organisations
have their activities arranged in a combination of ways. For example, a
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manufacturing organisation may be very largely structured along a product
basis, but may have a functional arrangement for its financial activities. A
structure based on customer grouping may have a human resources
department that serves the entire organisation – a staff relationship.
Each type of activity grouping has both advantages and disadvantages for the
organisation. Product, geographical or customer-based organisations may be
faster to respond to changes in the market place, but there may be a lot of
duplication of activities and services within the organisation. Functionally
based organisations are led from the top and may be highly structured with
long and complex decision-making processes. They may also suffer from
rivalry between functional departments. However, there is little duplication
of services and many benefits to be gained from departmental specialisation.
Functional activities of organisations
Functional relationships within organisations exist when people, who perform
similar tasks, and use similar skills or resources, are grouped into sections or
departments. These functional activities are all essential to the organisation,
each section or department contributing to the overall performance of the
organisation. Each may have its own manager or section head. Departments
can be large or small, with few or many employees. For example, in a retail
organisation such as Tesco there will be far more sales staff than
administration staff in each store, yet both are essential to the efficient
running of the store.
Grouping employees together in departments based on skills or use of similar
resources, or similarity of work has a number of advantages for the
organisation.
• There is efficient use of resources;
• Individuals develop in-depth skills in one area of work;
• Individuals have specific expertise or training in one area of work;
• Career progress is often based on functional expertise – therefore
employees are motivated to develop their skills in one particular field
(think of teachers who most often get promotion firstly to assistant
principal teacher then to head of department in their own subject);
• This structure provides a way of centralising decision-making because
there are only a few managers who between them may be responsible for a
large number of employees;
• Communication and co-ordination between members of a department are
excellent;
• The idea of working as a member of a team often motivates individuals to
work harder;
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• Individuals will be working with others who are also ‘experts’ in one
particular area of work – problem sharing and problem solving is greatly
improved.
However, having a number of functional departments within an organisation
can also lead to problems.
• There are often barriers and rivalries between departments;
• Communication between departments can be slow, resulting in poor
coordination of the organisation’s activities;
• This can also lead to a slow response time to external factors, such as
changes in customer demand;
• Decision-making can be a long and slow process as each department is
consulted and responds with information or suggestions which then have to
be passed onto other departments for consideration;
• Work in individual departments can be so specialised that it becomes
routine and meaningless. Being such a small part of the whole operation,
employees may only see departmental goals and lose sight of the
organisation’s goals;
• It may be difficult to pinpoint responsibility for problems within
departments.
In modern organisations it is likely that some or all of the following
functional departments will be found:
• Marketing
• Human Resource Management
• Finance
• Operations
• Research and Development.
Marketing
The Institute of Marketing defines ‘Marketing’ in the following way:
‘Marketing is the management process responsible for identifying,
anticipating and satisfying customer requirements profitably.’
This means that the Marketing department will put the customer first.
• It will find out what the customer wants by conducting market research.
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• It will develop and design a product that will satisfy the needs it has
identified in its customers.
• It will make sure that the product is produced in the right quantities an d at
the right quality.
• It will provide advice about the best price for the product so that it is
affordable to the target customers, but also at a level that will return
satisfactory profits to the organisation.
• It will make sure that all customers, existing or potential, know about the
product through promotion and advertising.
• It will make sure that the product is available to buy in a place that is
convenient for the customer, whether this is a shop, a discount warehouse
or by mail order.
• It will ensure that the customer continues to be satisfied with the product
after it has been purchased.
Human Resource Management
People are the most important resource in any organisation. They are the
only unique resource, and therefore the only one that can give an organisation
a truly competitive edge in the long term. Because of this, the Human
Resource function of an organisation is a very important one.
The Institute of Personnel Management defines HRM in the following way:
‘HRM is that part of management which is concerned with people at work and
with their relationships within an enterprise. It applies not only to industry
and commerce but to all fields of employment.’
Its main responsibilities include:
• Manpower planning and control,
• Recruitment,
• Selection,
• Training and development,
• Appraisal,
• Pay administration,
• Job and organisation design,
• Collective bargaining,
• Grievance and disputes procedures,
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• Employment legislation,
• Employee communications and counselling,
• Personnel information and records.
Finance
Accountants form the largest professional group in Britain. Their number is
far higher in the UK than in any of our leading competitor countries. Many
of those who qualify in accountancy work in business organisatio ns, either as
financial specialists or as general managers. Professional accountancy is
often viewed as the best training ground for senior management.
The financial function of an organisation is concerned with the management
of the financial activities of the organisation.
It covers three main areas:
• Financial accounting
• Management accounting
• Financial reporting.
Financial accounting is concerned with the management of an organisation’s
capital or funds. It will source and raise funds to finance operations. It is
responsible for ensuring that the organisation can generate enough money to
cover the cost of these funds – whether this is in the form of loan and interest
repayments payable to lenders, or in the form of dividends payable to
shareholders.
Management accounting is concerned with applying accounting techniques
that will provide the organisation’s management with sufficient financial
information to assist them in the process of decision-making. It is concerned
both with the actual use of funds within the operations of the organisation and
with predictions about their use. This part of the finance department’s
activities will be responsible for providing budgets, both as a control tool and
as a means of selecting the best alternative f rom various predicted outcomes.
Financial reporting is concerned with the collection and presentation of data
for use in both financial accounting and management accounting. The main
statements it produces are the Trading Profit and Loss Account and the
Balance Sheet. This information is of great value to the management of the
organisation. Public limited companies are legally bound to provide these
statements, along with accompanying notes and a Directors’ Report, to
Companies House each year.
Operations
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This is the function within the organisation that transforms inputs through a
process into outputs.
INPUTS PROCESS OUTPUTS
Raw Materials Using different amounts The actual goods
+ of different resources or services for
Labour in order to produce a sale
Different end product
In some instances Operations describes a production process that takes some
combination of raw materials, labour and capital equipment and processes
them into goods for sale to customers. Levi Strauss, Peugeot and Heinz are
examples of organisations that use this type of process.
In other cases the term describes the provision of an obvious service, such as
hairdressing, or a less obvious one such as the administration of local
government. In fact, the service sector has grown three times as fast as the
manufacturing sector in the North American economy, and the UK economy
is similar. Today, more than half of all organisations are service providers.
Examples include British Airways, McDonald’s and Vidal Sassoon.
Research and Development
Not all organisations have a Research and Development function. It involves
technical research, for example into a new medicine, a new car or a new
variety of breakfast cereal. In some industries, such as computers,
pharmaceuticals and motor manufacturing, Research and Development is a
vital part of any successful organisation. Modern success stories involving
Research and Development include Hewlett Packard, where innovation is part
of the culture of the organisation. Glaxo owes its current success and growth
to the commitment it has made to R & D. The Microsoft Corporation was
born from the research, development and vision of its founder, Bill Gates,
who initially developed the software for IBM. In 1994 the organisation
spending the largest amount on research and development in Br itain was ICI
– but they only ranked 35th in the world.
Such work can be very expensive, and therefore many organisations will
adapt products originally developed by other organisations, rather than
undertake new work themselves.
Forms of organisational structure
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Hierarchical structure
This is the traditional structure for many medium and large organisations. It
is also sometimes called a pyramid structure because of its shape – like a
pyramid. Decisions and instructions are passed down from the seni or staff of
the organisation to the workforce, and information passes back up the
pyramid. Position in the pyramid indicates the level of responsibility the
individual has – the higher up the pyramid the greater the responsibility.
Members of the organisation have clearly defined roles and procedures –
often laid down to define their behaviour at work. Specialisation of tasks is
very common, and this is often combined with a breaking up of the
organisation into functional departments. This specialisation allows the
organisation to benefit from economies of scale in its operations.
In recent years this type of organisation has been criticised for its inability to
respond quickly to changes in market and consumer demands. It is also often
felt that such structures suffer from time delays, both in communications
passing up and down the structure and in the decision-making process, when
many individuals on different levels are required to provide input. Some
large organisations – the Civil Service, the Armed Services, the Police, and
the National Health Service – may have a very large number of layers in the
pyramid – 20 to 30 layers is not uncommon.
Example: A school’s hierarchical structure (Christon Academy)
Rector
Classroom Teachers
Principal Teachers
Assistant Head Teachers
I N F O R M A T I O N
D E C I S I O N S
I N S T R U C T I O N S
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It is important to remember that many individual schools belong to a much
larger organisation. They are part of a local authority and the local authority
itself is part of a larger organisation. All local authorities in Scotland come
under the control of the Scottish Parliament.
Communications and operational decisions within the school are made
relatively quickly. These might include telephoning a teacher on the supply
list to come in and provide cover for an absent colleague, closing the school
because of bad weather, or deciding the date for Sports Day. The individual
school would make these decisions itself. Tactical decisions, including the
setting of local holidays, or the start date of the new academic year, or the
total number of teachers each school is entitled to, will be made by the local
authority. The Scottish Parliament will make strategic decisions, such as the
content of the curriculum and the form examinations will take.
Flat structure
The flat structure is just what it says – flat. There are very few levels in the
hierarchy. This has a number of significant benefits for the organisation.
The main one is that communications are passed quickly from one level to
another. This speeds up the processing of information and any decisi on-
making. Many small organisations, such as professional partnerships of
doctors, dentists or lawyers, use this type of structure.
Example: A doctor’s practice
Dr McCoy Dr Crusher Dr Bashir
Nurse Nurse Nurse
3 secretary/receptionists
Increasingly, large organisations are moving towards a flater structure,
largely in an attempt to overcome the problems of a hierarchical structure.
This often involves cutting out some of the layers of the hierarchy (see later
notes on ‘delayering’).
Matrix structure
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This structure emphasises getting people together who have particular
specialist skills and placing them in project teams to complete specific tasks.
Individuals have their own areas of functional responsibility within the
overall remit of the project. Many people argue that this is the best way to
organise individuals, as it is based on the expertise and skills of the people
involved.
In its favour, the matrix structure gives scope for ALL individuals to use their
talents effectively. There is no hierarchy – everyone in the project team has
the same level of responsibility and authority. It is also likely that all
individuals will get the opportunity to work in a variety of project teams over
a period of time. This variety of work promotes personal staff development,
and increases job satisfaction and motivation.
Against its use lie the arguments that it is costly in terms of support staff (for
example, secretaries and administration staff) as each project team may need
its own dedicated back-up. There are also problems with coordinating a team
made up of individuals from different functional departments.
Entrepreneurial structure
This is a common structure in many small businesses and in those
organisations where decisions have to be made quickly, such as in the
production of daily newspapers. Decisions are made centrally with very little
input from staff, and are based on the expertise of only one or two
individuals. There is a great reliance on a few key workers.
There can be problems with this structure as the organisation grows. Too
heavy a workload is placed on too few individuals who have responsibility
for decision-making. This can lead to inefficiency.
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Centralised structures
Here all of the control and decision-making lies with the most senior
directors or managers or the owners of the organisation. Subordinates have
little or no authority at all. This type of structure is often associated with a
hierarchical structure and has several key advantages:
• Organisations may benefit from strong leadership from the top;
• Senior management have control of all aspects of finance and budgeting;
• Procedures, such as ordering, purchasing and storage can be standardised –
this can lead to the organisation benefit ing from economies of scale;
• Decisions are made from the point of view of the business as a whole, not
for the particular benefit of one department or another;
• Managers are likely to be more experienced and skilled in the role of
management and the decisions they make will be of better quality;
• It is easier to promote a corporate image if the organisation adopts a
centralised approach, as all external communications can be done in a
standardised format.
Decentralised structures
In these organisations decision-making and control are delegated to and
carried out by subordinates. This relieves senior management of having to
make many of the routine operational decisions required by the organisation.
This structure is often associated with a flat structure and also has several key
advantages:
• The delegation of authority is felt by many to be a key motivator for
subordinates and allows them to be groomed for senior positions when
they become available;
• Subordinates often have better first-hand knowledge of the requirements of
their departments or customers, and can therefore make better quality
decisions based on this knowledge;
• Delegation allows a more proactive approach and much greater flexibility
of roles;
• Decision-making is quicker and more responsive to external changes.
There is no ‘right’ form of organisational structure. For each organisation the
structure it adopts must reflect its aims and objectives and be the best – at
that moment in time – to fulfil these. It may well be the case that an
organisation will change its structure as it grows and responds to changes in
its external environment.
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Aspects of organisational structure
Organisational charts
These show the structure of the organisation in diagrammatic form.
Individuals are identified in specific positions within the organisation, clearly
showing their links to others along lines of authority and responsibility.
Advantages of organisational charts:
• Each individual can be named in the position he or she holds, provid ing
clear identification;
• They identify appropriate lines of communication or where bottlenecks
occur;
• They identify the span of control or number of subordinates each
individual has (see below);
• New members of staff can learn who they are responsibl e to and for;
• They may identify areas where it would be appropriate to call in a
specialist staff member, for example a design engineer in the production
department;
• The links between individual departments can be identified;
• Functional levels in the organisation can be easily identified.
Disadvantages of organisational charts:
• They do not show how much authority each position in the chart carries;
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• They do not identify any informal relationships (see below) that occur.
The span of control
This refers to the number of workers or subordinates under a supervisor or
manager. There is no perfect size for a span of control. Henri Fayol, a writer
on management, suggested that the optimum size should be between 3 and 6
subordinates because this gives the manager a lot of control over his
subordinates. He also argued that 3–6 subordinates was all that a manager
could cope with.
In this diagram the Area Manager has a span of control of 5 sales staff.
5 x sales staff
There are, however, four important factors that should be considered when
deciding on the span of control of any manager or supervisor:
• The calibre and ability of the manager or supervisor must be considered.
Some people are better at managing and leading than others and can
therefore cope with a larger number of subordinates.
• The calibre and ability of the subordinates must be considered. Intelligent,
motivated and able subordinates will need little in the way of control, and
therefore a superior can manage a relatively large number of people. The
same will not be true if subordinates are lazy, demotivated or less able.
• The third factor that should be considered is the actual task itself. A task
of great importance to the organisation, or of a difficult nature, will be
more likely to be closely controlled by the manager, and therefore a small
number of subordinates would be more appropriate.
• Fourthly, the practices and customs of the organisation must be taken into
account. In some organisations there may be clear indicators and
guidelines as to the number of subordinates in each span of control. If this
is stuck to rigidly, some managers may struggle to cope with the number
of subordinates they have, whilst others may find that they are no t given
enough to do.
Line relationships
Area Manager
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This describes the relationship between superior and subordinate and can be
clearly identified on an organisation chart as a vertical line between
individuals.
In the diagram below the line relationship is between the Area Manager and
the five sales staff.
Area Manager
L
i
n
e
5 x sales staff
Functional relationships
These exist between individuals at the same level in the hierarchy. These
individuals have the same level of authority and responsibility, although they
may be in different departments, or even in different locations. This
relationship can be clearly identified on an organisation chart as a horizontal
line between individuals.
In the diagram below, each person on this level of the organisational chart
has a functional relationship with everyone else at this level.
Functional
Clerk Clerk Assistant Assistant Foreman Foreman Area Area
Rep Rep
Staff relationships
This is a relationship between the organisation and someone in it who acts in an
advisory capacity for the benefit of the organisation as a whole , not just for
one department. People who might be in a staff relationship include company
lawyers, taxation specialists, company secretary or company receptionist.
The staff relationship seen in this organisation chart is the company lawyer.
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MANAGING
DIRECTOR
Company Lawyer
Staff
ACCOUNTANT MARKETING PRODUCTION SALES
MANAGER MANAGER MANAGER MANAGER
Formal and informal structures
The formal structures within an organisation have been described above and
consist of the relationships between individuals within an organisation in
terms of the superior, the subordinate, level of authority and degree of
responsibility. However, there may also exist very important informal
relationships – an internal network or grapevine – that consists of
communication passed between individuals in ways that are not set down in
the formal structures.
Many people obtain a sense of security and belonging, as well as achieving
social status, by contributing to the grapevine. Information passed on in this
way is often of a confidential nature and is not usually available to members
of the group – unless they hear it ‘on-the-grapevine’.
The need for such structures may arise because the organisation’s formal
communication processes are inefficient or at least are felt to be inefficient
by some of the staff. Whilst information passed along the grapevine is likely
to be news to members of the informal group, it is not necessarily always
accurate. Because of this, managers must be aware of the informal structures
within their organisation and may even purposely feed the grapevine with
information they DO want communicated quickly to the staff.
Informal structures can be destructive to the smooth running of the
organisation. Information that is passed on incorrectly can, in s ome instances,
result in bad feeling, resentment or even hostility among the staff. Members
of staff may be excluded from the grapevine and may feel isolated, or
confused and unsure of their position. In extreme cases, the informal
structure may be opposed to the decisions taken by the formal structure (the
management team) and can sabotage management aims and objectives.
Awareness of organisational culture
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The culture of an organisation has been defined as:
‘a set of behavioural and attitudinal norms , to which most or all members of
an organisation subscribe, either consciously or subconsciously, and which
exert a strong influence on the way people resolve problems, make decisions
and carry out their everyday tasks.’
D Clutterbuck and S Crainer, Makers of Management
The culture of any organisation influences the attitudes of its staff towards
each other and towards individuals from outside the organisation who come
into contact with it. The wearing of a uniform or the type of dress adopted is
one of the most obvious ‘corporate images’. However, attitudes towards
others and business motives and philosophies can also suggest a ‘corporate
culture’ within an organisation.
For example McDonald’s Restaurant franchise has very strict rules about:
• shop layout and colour schemes,
• staff dress,
• staff attitudes towards customers,
• available food and portion size,
• quality of food.
In fact, you can walk into a McDonald’s anywhere in Britain and expect to
find everything exactly the same as you would find in your local McDonald’s.
Edgar Schein believes that this ‘corporate culture’ is made up of three main
elements, all of which go some way to instilling the sense of ‘identity’ in
individuals within the organisation.
Artefacts: Physical layout of shop/office/factory, dress code/uniform;
Values: Principles upon which people base their behaviour;
Underlying
assumptions:
The source from which all the values and behaviour spring
(such as the original or existing owners or managers).
If the culture is centralistic and bureaucratic, the likely result is a very highly
structured organisation with clearly defined roles for all individuals and a
hierarchical system of communications (for example, the Health Service). In
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such a system, job descriptions, appraisal forms, succession charts and the
like are vital in helping to analyse the needs of the organisation and in
deciding how these needs are to be met.
Where top management believe in delegation and devolution, the emphasis is
more likely to be on self-development, team working and management
support. Two-way communication links are fostered. Worker initiative and
participation in decision-making are likely to be encouraged, as, for example,
in most Japanese manufacturing firms.
Where management see themselves as an ‘elite’ group, features such as
accelerated promotion and graduate training programmes tend to
predominate. This system provides selective managerial support for the
‘right’ individuals (those from well known schools and universities, for
example) and concentrates on ‘high fliers’ – those with outstanding potential.
This corporate culture is to be found in the Police, the Army and the Civil
Service.
Anyone in an organisation who does not adopt the culture of that organi sation
is likely to feel isolated. Individuals are more likely to conform than to rebel.
However, Schein suggests that there has to be a great deal of consensus or
agreement among individuals in the organisation before there can be an
identifiable corporate culture.
He sees the five main areas of consensus as:
1. Consensus about the core mission – what business are we in and why?
2. Consensus about goals – what, specifically is everyone meant to do?
3. Consensus about the way to accomplish the goals – how should tasks be
divided up? What reward system or incentive scheme will be used?
How will the separate activities be integrated?
4. Consensus about how to measure progress – the nature of the reporting
and feedback systems.
5. Consensus about remedial or repair strategies – when and how to
intervene when things go wrong.
More and more in today’s business world corporate culture is recognised as a
positive force. It can motivate staff and lead to an organisation where
everyone understands their individual roles and obligations. It is also seen as
a major influence in external recognition – especially from consumers.
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Changes in structure
Reference has already been made to the fact that organisations can change
their structure. Ideally, the structure should reflect the purpose of the
organisation. Over the last decade or so, many UK-based organisations have
undergone structural change in an attempt to ensure that they can cope with
changing circumstances. These changes have affected all types of
organisations in all industries but have had a particular influence in
manufacturing organisations.
For more than twenty years the UK’s manufacturing industries have been in
decline. Much of this has been seen as a natural development for a mature
economy as it goes through the process of de-industrialisation.
UK industries have been subjected to fierce competition from emerging
economies such as the ‘Tiger Economies’ of South East Asia. This has led to
many of our products being too costly and of inferior quality, to compete in
international markets.
The accepted explanation has been that the cost of labour in developing
countries has been much lower than in the UK, and if we are to compete then
our wage rates need to be forced down. To an exten t this has happened. In
May 1996 a CBI report stated that the average manufacturing wage in the UK
was lower than that of an equivalent worker in Korea. Yet the trend of
decline in our manufacturing industries has continued.
Large, successful multinational companies who are based in these tiger
economies have now opened manufacturing facilities in the UK, leaving our
home-grown firms even further behind. In addition, we have been through a
recession which has forced many changes on almost every organisation in the
UK.
Recognising the problems, particularly within the traditional approaches to
management in the UK, was perhaps the hardest task facing our industries.
The traditional approach involved:
• direct lines of responsibility,
• employees doing what they are told,
• paying people for the position they hold,
• management alone making decisions,
• management having the right to manage,
• different levels of management having different levels of decision -making
power.
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This approach is not necessarily wrong in itself. However, the development
of the economies of the East is a genuine threat to the structure and methods
of management and production processes in most Western economies.
The challenge that faces modern management is that they must change in
order to survive and compete in the 21st century. Our production needs to be
revolutionised; just becoming more efficient will not be enough. To gain a
truly competitive advantage we must be innovative and imaginative in our
approach to management.
De-layering
This involves the cutting out of levels of management within the organisation
in order to ‘flatten out’ the structure and is one of the strategies used by
companies in recent years to overcome the effects of aggressive competition
in the market place.
One of the steps that businesses have been forced to take in order to become
more competitive and to survive the worst of a recession is to look at the
organisational structure and see where savings could be made.
Organisations found that some of the levels of management were not only
unnecessary, but were also hampering the lines of communication. This, in
turn delayed the process of change as information passed through too many
layers of authority, created unnecessary work and slowed down the decision-
making process.
All levels of management are dependent upon those below them to supply the
information that is required and often consult them before decisions are
made.
It became obvious that the best people to make decisions were the staff who
were directly involved, and so levels of management, especially middle
management, were removed. Staff were empowered to make their own
decisions.
Where successful, organisations became much flatter, with far fewer layers in
the hierarchy, communications improved and decisions were made more
quickly. Organisations became more responsive to changes in the market and
could adapt more quickly. One such organisation was General Acci dent, the
insurance giant, which carried out a process of de -layering in the late 1980s.
However, in some instances, too many layers were removed and the
remaining staff, managers and subordinates alike, found that the extra work
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that they had to take on was too much. A number of companies, such as
Vetco Grey, an engineering and fabrication production organisation, have
now begun to re-employ staff at middle management levels.
Down-sizing
This involves the removal of certain areas of the organisation’s activities that
are not directly linked to the core activities, thereby reducing the scale of
production to meet the actual demand for the firm’s products.
The term is used by organisations when they attempt to reduce costs by:
• reducing the scale of their operations to meet actual market demand,
• stripping out excess capacity within the organisation (at all levels and
within all functions),
• consolidating complementary operations under one function,
• reducing the resources of the organisation following increases in
productivity.
Recessions in Western economies force companies to look very closely at
ways of reducing costs in order to survive. Many find that their productive
capacity exceeds the actual or predicted demand for their product. Even af ter
a recession, the demand for their products may continue to be less than it had
been before.
For some organisations down-sizing meant the closure of factories or
production units. For others it meant the merging of two or more separate
operations under separate management functions, and bringing them together
under one management umbrella. And for some it meant the scaling down of
their production capacity.
Duplication occurs not only in production and management, but also in areas
such as sales, research and development and administration. For example,
having two separate sales forces for different product ranges is an expensive
luxury. This may be sustainable, and even necessary, during an economic
boom, such as in the mid 1980s. However, with ever increasing competition
and the lingering effects of a recession, many organisations find that the
additional cost of supporting such duplication make them uncompetitive.
A recent example of down-sizing has been seen in one of the world’s giant oil
corporations, Shell Exploration and Production. At a time when the dollar
price of oil was very low, the organisation found it had to justify and sustain
the position of four administration staff for every off -shore production
worker. Cost cutting had to take place. Shell decided to close their large
prestigious offices in London and base their European Operations
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headquarters in Aberdeen. This move meant considerable numbers of job
losses but resulted in significant savings for Shell.
The role and responsibilities of management
Overall, the role of management is to ensure that they choose a structure for
the organisation which enables it to meet its purposes in the most effective
and efficient way. They have the responsibility to ensure that all members of
the organisation are aware of the structure and how it should operate. In
choosing a structure and making it work, management need to recognise the
existence of an informal structure and of organisational culture. If at all
possible, they should try to ensure that the formal structure is consistent with
these.
Management also need to be prepared to change a structure where it has
ceased to be effective. However, this may not be easy to do, especially if the
structure has been in existence for some time as some staff may be reluctant
to move to a new and unfamiliar system. Also, constant tinkering with the
structure of an organisation may lead to confusion and resentment among the
workforce and may be counter-productive.
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Student Activities
Activity 1
There are many different ways of grouping the activities of organisations. Complete the
table below by identifying the key characteristics of each type of grouping and giving one
example of a company you have found that uses that type of grouping.
(The first one has been done for you.)
Type of grouping Key characteristics Organisation using this
type of grouping
Functional Activities are grouped into
departments based on
similar skills, expertise and
resources used.
A secondary school
Product/service
Customer
Place/territory
Technology
Line/staff
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Activity 1 Teacher Notes
Students should NOT give as examples organisations mentioned in the Student Notes, but
should research and identify other organisations to match the appropriate grouping type.
Internet www.tesco.com/
This site also provides good information on the organisational activities grouping of
Tesco.
The Times 100 Case Studies
There are a number of case studies that outline or describe the organisational
activities groupings of companies. Check the curriculum content index for details of
these.
There are also examples given of various types of grouping of organisational
activities in most of the Business Studies textbooks available.
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Activity 2
Complete the table and identify two advantages and two disadvantages of each type of
grouping of activities.
Grouping of activities Advantages Disadvantages
Functional
Product/service
Customer
Place/territory
Technology
Line/staff
Sources of information as for Activity 1
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Activity 3
This activity could be undertaken as individual work or could be used as a paired or group
exercise.
If using this as a paired or group activity it may be appropriate to copy the information
gathered by each group so that all of the students have information on all of the functional
activities.
Individual work
(a) List the five main functional activities of a modern business organisation.
(b) Outline the main activities of each function.
Paired or group work
(a) Using ONE of the main functional activities of a modern business organisation,
outline the main activities of this function.
(b) Prepare a report on this activity and present it to the class.
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Activity 4
There are several main forms of organisational structure.
Complete the table below and list the key characteristics of each type of organisational
structure and identify an organisation that uses it.
Type of structure Key characteristics Organisation using this
type of structure
Hierarchical
Flat
Matrix
Entrepreneurial
Centralised
Decentralised
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Activity 5
Invite a manager from a local business in to talk to the class about the method used in
his/her organisation to group activities in the organisational structure.
Students might be interested to find out the reasons behind the present structure –
historical, in response to competition, in response to internal changes (new technology or
working practices), in response to external factors (legislation, changing markets, etc.).
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Activity 6
Teacher Notes
(a) This could be done as a follow-on from Activity 5.
(b) If the organisation is large it may be best for the student to follow through only ONE
department, rather than create a diagram that might lose clarity in its complexity.
(c) It may be most appropriate for the students to create an organization chart for their
school or college.
Student Instructions
(a) Draw an organisation chart for an organisation that you know.
(b) Clearly show the positions held by individuals within the organization and the links
between these individuals.
(c) It is NOT necessary to name individuals within the organisation; you should simply
use the position or job title.
(d) Clearly identify (i) a line relationship
(ii) a staff relationship
(iii) a functional relationship
(iv) the span of control of ONE of the managers
(e) Identify three things that an organisation chart might be used for.
(f) Apart from the names of the individuals in each position/job, what additional
information might you add to an organisational chart that would be of particular help
to a receptionist?
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Activity 7
Teacher Notes
This activity could be carried out as individual written work, in groups, or as a whole class
discussion or debate.
Student Instructions
Read the following passage and discuss the arguments for and against the suggestion that
informal structures hinder the smooth running of an organisation.
Scene: A staff canteen, during a coffee break.
‘Did you hear what was wrong with Liz?’ asked Joe. ‘She hasn’t been in for two weeks
now, and there’s a temp sitting at her desk.’
‘Well I heard that she had been sacked – she was always in and out of the boss’s office,
asking him questions. Can’t have been up to the job,’ replied Mary. ‘Only possible reason
for her not coming back,’ she went on, ‘I know she needed the money – and she liked the
job – at least that’s what she told me.’
‘Oh, no,’ added Sheena, ‘she has looked dead worried lately. I think she wanted out.
Lately she’s been no fun – hasn’t had time to talk to any of us in the office. Not like she
used to. The way she’s been lately – all of us felt we were out of order if we chatted. She
always had her nose in some book or other. I’m sure it was stuff she shouldn’t have been at
during office time.’
‘Maybe that’s why she got sacked,’ mused Joe, ‘if she’d been moonlighting, y ou know, and
the boss found out.’
Later that week the staff newsletter contained the following article:
Staff Changes:
We are pleased to announce the promotion of Ms Elizabeth Jess to Senior
Administrator in the Clydebank Office.
Ms Jess secured this position following her success in the recent
examinations that she was undertaking.
We will be sorry to lose her from the Glasgow Office, but would like to
take this opportunity to wish her well in her new appointment.
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Activity 8
Teacher Notes
This activity could be set as homework, as it may need to be researched outside
school/college time.
Students should work in pairs or small groups.
Allocate each pair or group an organisation to visit and ask them to report back on signs of
that organisation’s culture.
The questions below might help the students with their research.
This activity could be extended if:
Students think of their own questions for the organisation and then make up a questionnaire
for the public to ask if the culture their organisation wishes to present is, in fact, what the
general public perceive them to be presenting.
Student Instructions
Describe how the organisational culture of the organisation that you are studying is put
over to the public and to the people who work in it.
You may find it helpful to break your answer down into three elements:
1. The artefacts used by the organisation
2. The values shown by the behaviour of staff to others
3. The underlying assumptions or source of this culture
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Activity 9
Teacher Notes
This activity could be set as an individual piece of written work – either at school or at
home – or used as a topic for a whole class discussion. Preparation and/or research time
would have to be allowed if the latter option was being used.
Student Instructions
New Unionism states that ‘WE ORGANISE OR FOSSILISE!’ 1
Discuss the view that organisations must change their structure in order to remain
competitive in the 21st century.
You should back up your arguments with examples of companies that have or have not
changed their organisational structure in recent years, describing those changes that have
been made
The Span of Control
This refers to the number of workers or subordinates under a
supervisor or manager. In this diagram the Area Manager has a
span of control of 5 sales staff.
Chain of Command
The way in which instructions are passed down from one level to
another in an organisation.
Line Relationship
1 From Trades Union Congress web-site at www.tuc.org.uk/newunionism
Area Manager
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These exist between line managers and the staff immediately below
them.
Lateral Relationship
These exist between employees who are on the same level and who
report to the same line manager.
Delayering
Decreasing the number of managerial layers within an organisation.
Downsizing
Reducing the number of staff employed without reducing the level of
output.
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http://www.bized.co.uk/educators/16-19/business/strategy/lesson/orgstructures.htm
http://www.bized.co.uk/educators/16-19/business/strategy/lesson/orgcomms.htm
http://www.bized.co.uk/educators/level2/busactivity/lesson/functional1.htm