2.2. Organisational Structure

Organizational Structure

Robbins (1990) describes organisation structure as being comprised of three components: complexity, formalisation and centralisation

• Complexity considers the degree of specialisation or division of labour, the number of levels in the organisation’s hierarchy and the geographical distribution of the organisation’s hierarchy
• Formalisation relates to the degree of procedures and rules on which the organisation relies in order to control and direct employees
• Centralisation considers where the focus of decision-making authority lies i.e. do problems or issues requiring decision making flow upward for senior management to decide, or are issues dealt with at a lower level with decision authority distributed downward in the organisation hierarchy?

Appropriate terminology

1: Delegation - Delegation involves the assignment to others of the authority for particular functions, tasks, and decisions.

The main advantages and disadvantages of delegation can be summarised as follows:

Task 1: YT is the Finance Manager of SBM Magazine Publishing Company. He has recently had his appraisal and was expecting that he would get a good review, since he felt that he had met all of his targets for the year, although at a personal cost of working exceptionally long hours. YT was therefore surprised when his line manager, RP, suggested to him that he was not using his staff effectively and should be delegating more work to his team. Whilst RP commented that YT had achieved the department's objectives, he suggested that delegating more would be mutually beneficial toYT and his team as well as being in the long term interests of the company.

Explain the benefits of delegation from the point of view of YT, the Finance Manager, and also his team.

2: Span of control - The span of control is the number of subordinates for whom a manager is directly responsible.

The two diagrams below illustrate two different spans of control:

Is there an ideal span of control? The answer is generally no – a suitable span of control will depend upon a number of factors:

• The experience and personality of the manager
• The nature of the business. If being a line manager requires a great deal of close supervision, then a narrower span might be appropriate
• The skills and attitudes of the employees. Highly skilled, professional employees might flourish in a business adopting wide spans of control
• The tradition and culture of the organisation. A business with a tradition of democratic management and empowered workers may operate wider spans of control

Should spans of control be wide or narrow? Here is a summary of the relative advantages and disadvantages of each:

3: Levels of hierarchy: The levels of hierarchy refer to the number of layers within an organisation. Traditional organisations were tall with many layers of hierarchy and were often authoritarian in nature.

The first organisation chart below shows a business with four levels of hierarchy – from the Managing Director at the top, to assistants and team members at the bottom.

Further below is another organisation chart, which shows a taller hierarchy.

4: Chain of Command - The order of authority and delegation within a business.

5: Bureaucracy - A bureaucratic organization is one with rigid and tight procedures, policies and constraints; and the company reacts with stringent controls as well as a reluctance to adapt or change. Bureaucracies are very organized with a high degree of formality in the way it operates. Organizational charts exist for every department, and everyone understands who is in charge and what his responsibilities are for every situation. Decisions are made through an organized process, and a strict command and control structure is present at all times.

Source - http://smallbusiness.chron.com/bureaucratic-organization-20379.html

6: Centralisation - Businesses that have a centralised structure keep decision-making firmly at the top of the hierarchy (among the most senior management).

Fast-food businesses like Burger King, Pizza Hut and McDonald's use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets. The need to ensure consistency of customer experience and quality at every location, together with a desire to exploit economies of scale, are the main reasons for this choice.

The main advantages and disadvantages of centralisation are:

7: Decentralisation - In a decentralised organisational structure, decision-making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations.

Good examples of businesses which use a decentralised structure include the major supermarket chains like WM Morrison and Tesco. Each supermarket has a store manager who can make certain decisions concerning areas like staffing, sales promotions. The store manager is responsible to a regional or area manager. Hotel chains are particularly keen on using decentralised structures so that local hotel managers are empowered to make on-the-spot decisions to handle customer problems or complaints.

The main advantages and disadvantages of this approach are:

Task 2: Create a 2-column table. The headings for the columns should be 'Hierarchical' organisation and 'non-hierarchical' organisation. Identify the characteristics of each organisation using the attributes listed above (1-7). For example, you could use the phrases 'high level of delegation' and 'low level of delegation' as a differentiating technique for attribute 1.

Types of Organizational charts

1: Tall/vertical/hierarchical organisational structure

This type of a model makes sense for linear work where no brain power is required and where the people who work there are treated like expendable cogs. However, as the war for talent continues to become more fierce, organizations around the world are quickly trying to figure out alternatives to the hierarchy. In fact, every single organization I speak with, work with, and research, is looking to flatten out their structure. Nobody ever tells me they want more bureaucracy and more layers.

There are many challenges with this model but to name a few. Communication typically flows from the top to the bottom which means innovation stagnates, engagement suffers, and collaboration is virtually non-existent. This type of environment is riddled with bureaucracy and is extremely sluggish. This is why the hierarchy is perhaps the biggest vulnerability for any organization still employing it. It opens up the doors for competitors and new incumbents to quickly take over. There is also no focus on the employee experience in this type of a structure and as organizations around the world are exploring alternative organizational models, those still stuck with the hierarchy are going to have one heck of a time trying to attract and retain top talent.

The hierarchy has permeated virtually every company around the world regardless of size, industry, or location. The greatest strength of the hierarchy used to be that it was so reliable at maintain the status quo, which was exactly what companies wanted decades ago. However what was once it's strength is now it's greatest weakness. The hierarchy is a very resilient management structure that has been so embedded in how we work that most organizations around the world are having a tedious time getting rid of it.

Source - https://www.forbes.com/sites/jacobmorgan/2015/07/06/the-5-types-of-organizational-structures-part-1-the-hierarchy/#e8c920525294

2: Flat/flatter organization

Unlike the traditional hierarchy which typically sees one way communication and everyone at the top with all the information and power; a "flatter" structure seeks to open up the lines of communication and collaboration while removing layers within the organization. As you can see there are fewer layers and that arrows point both ways. Obviously an very simplified way to look at this type of a company but hopefully it gets the point across. For larger organizations this is the most practical, scalable, and logical approach to deploy across an entire company. This is the model that most large (and many mid-size) organizations around the world are moving towards.

It's true, some form of hierarchy still does exist within this model but that isn't necessarily a bad thing in this case. In flatter companies there is still a strong focus on communication and collaboration, improving the employee experience, challenging the status quo around traditional management models, and the like. But instead of completely reinventing the entire company and introducing a radical new structure and approach to work, it achieves similar results in far shorter term and with much less effort and resource allocation.

It's important to point that this type of model cannot exist without a few crucial things. The first is a robust set of technologies that act as the central nervous system of the company. These technologies help make sure that employees can collaborate and access each other and information anywhere, anytime, and on any device. The second thing this model requires is an understanding by executives and managers that employees don't need to work at your company, they should want to work there and as a result everything should be designed around that principle. The third thing that is required is an understanding that managers exist to support the employees and not vice versa. This also means that senior leaders focus on pushing the power of authority down to others instead of pushing down information and communication messages. The fourth and final thing I'll mention about this model is that the organization must accept that the way we work is changing and must therefore be comfortable with things like flexible work arrangements, getting rid of annual employee reviews, and challenging other outdated ways of working (there is more to be said about this but that's why I wrote a whole book on the subject!)

Companies like Cisco, Whirlpool WHR -3.32%, and Pandora , and many others are actively implementing this approach. I've interviewed executives at all of these companies and with the exception of Whirlpool have been inside of their offices. At Cisco for example employees have complete freedom and flexibility to work when, where, and how they want to work. At Whirlpool they got rid of traditional job titles and instead created four types of leadership roles that every single employee fits in. Whirlpool also has a robust innovation program that lets any employee contribute. Pandora has a whole team devoted to focusing on the employee experience which takes into account the values of individuals, the ways people work, and the physical environment that people actually work in.

Source - https://www.forbes.com/sites/jacobmorgan/2015/07/08/the-5-types-of-organizational-structures-part-2-flatter-organizations/#4eac336c6dac

Task: 3: Lee International, a leading manufacturer of computer networks and associated peripheral equipment, has recently been plagued by falling quality standards, increased rejection rates and a fall-off in the level of innovation.

Following a series of top management meetings, it has been decided to change the overall organisational structure and introduce flexible working groups as a method of production. It is anticipated that a move towards a flatter organisational structure will eliminate bureaucracy, while the introduction of flexible groups will eliminate problems in the production area.

Question: In your opinion could the purported changes have negative repercussions for the organisation (in the area of HRM)

Organisation structure design alternatives

The design of the organisation structure is a key activity of management. In essence, it involves the development of a structure which is compatible with the needs of a particular business or institution. Hence, organisations differ in the way they are structured, some choosing to employ one means, others favouring a different basis.

The Functional Structure

The functional structure is one of the most frequently occurring modes of organisation structure and os one where activities are grouped together by common function, for example, finance and accounting activities are grouped to form a single function (finance). The same is true in marketing, personnel, production etc.

This form of structure is typically found in smaller to medium companies or in those companies where only one or a few products are manufactured. This structural form is seen to be most effective in a stable environment where the technology used by the organisation is of a routine nature, where there is low interdependence between departments and the organisation is controlled through the vertical hierarchy (formal authority in the organisation lies with senior managers in the functional departments).

The main concern of employees in this structure is to achieve the operational goals of their respective functional departments. Planning and budgeting is carried out by function according to the costs of the resources used in each department.

Strengths

▪ The functional structure promotes economies of scale (all employees are usually in the same place and can share facilities)

▪ It is easier for the managing director to keep in touch with all operations

▪ The structure reduces or simplifies control mechanisms as control of functional activities is centralised

▪ There is a clear definition of task and job responsibilities

▪ It promotes the concentration of skilled resources and encourages specialist skills development among employees

Weaknesses

▪ There is the danger of hierarchy overload (it may cause issues for decision to pile up to the top and lead to senior managers being overburdened with routine issues

▪ It may encourage the development of sectional interests at odds with organisational goals

▪ Problems may arise when a great deal of coordination is required between departments (when launching a new product where cooperation between different functions may be necessary)

▪ Because of low coordination, innovation may be poor

▪ The structure may not be able to cope with diversity

▪ It may lead to slow response time to changes in the environment

Divisional Structure

The main characteristic of this structural design option is that the organisation uses the products or services, product groups or projects as the basis for differentiating the company. The distinctive feature is that the divisions of the organisation are grouped according to their organisational output. Thus an organisation which manufactures seven distinct products may create a sub-division for each product. A product based structure is an example of a divisional structure.

In the product structure, each division will have its own specialist functions (production, finance, marketing and personnel) at the operational level. Each product division pursues its own objectives first, rather than the company’s corporate interests. The product divisions would usually be smaller so coordination across the functional departments is maximised.

The product structure also promotes flexibility and increases the organisation’s ability to adapt to competitive changes in the environment (where rapid changes are necessary to products from time to time as consumer tastes change). Within the product structure, decision-making is decentralised as the authority rests lower down in the organisational hierarchy.

An organisation usually begins its operations with a functional structure and may, as a result, of product diversification, move towards a product structure. In many respects the product structure emerged as a response to the sorts of problems that functional structures develop in some circumstances and because of the need to manage diversity.

Johnson and Scholes (1993) believe that this structure is the most popular structure adopted in industrial companies and retail companies such as Marks and Spencer’s.

Strengths

▪ It is suited to organisations operating in a fast changing and unstable environment

▪ It ensures that each division of the organisation concentrates on one business area so its performance can be measured as an individual business unit

▪ It involves high coordination across divisional functions

▪ Because the product units operate separately, it is easier to divest a poorly performing division and to add new products

▪ Operational decision-making is decentralised which gives senior management more time to attend to strategic issues

▪ It leads to greater general management development at a lower level (divisional managers)

Weaknesses

▪ It may lead to poor coordination and communication across product lines

▪ Conflict may emerge between the divisions for resources of the organisation

▪ Problems may arise associated with inter-trading between the product divisions

▪ Product structures may be costly as they eliminate the economies of scale found in functional departments (duplication of management functions in each division)

Geographic Structure

The division of activities on the basis of geographical location is another form of organisation structure. This is common among organisations who provide goods or services over a wide area, finding it more appropriate to organise on the basis of a number of geographic locations. Each region of a country may have distinct tastes and needs and organisations may find it appropriate to respond to these particular needs by locating in that region. Multiple corporations often create self-contained units for different countries and continents. Each geographic division includes all functions required to produce and market products in that region.

Many of the strengths and weaknesses of the product structure are reflected in the geographical structure. However, we can also add the following: The structure offers better service to customers in each location as the organisation can utilise its local knowledge of customer needs, the labour market, routes etc and widely spread markets can be catered for. The main weakness centres on the possible emergence of conflict between the geographical divisions concerning priorities for scarce resources. Most banks and building societies would be structured in this way.

Changes in organisational structures

1: The Matrix Structure (project-based organisation)

A more recent development in organisational structure is the matrix structure which is a combination of these structural forms, particularly of the functional and product structures. The matrix structure may be required by an organisation whose structure is multi-focused, needing to emphasise both product and function at the same time.

For example, if an organisation which has an increasing number of product lines wanted to retain the advantages of a functional structure and felt that there may be little benefit for the organisation in having all management functions in all product divisions, as in the product structure, then the matrix structure may best suit its needs.

The matrix structure is particularly appropriate in managing specific projects. Members of the organisation are assigned to specific projects as project managers but also the structure also allows them to remain responsible to their organisational functional or product department.

A unique aspect of matrix structures is that some employees report to two bosses which would appear to fly in the face of traditional management principles. For example, employee X in the finance department will report to project manager B and ultimately to the finance director. Employee Y will report to project manager A and also to the marketing director. This may create conflicting pressures which have to be resolved and may account for the fact that people in a matrix structure tend to spend a lot of their time in meetings.

Daft (1992) believes that the matrix structure is most appropriate when the following conditions exist:

• Where pressure exists to share scarce resources across product lines
• Where environmental pressure exists for two or more critical outputs such as for technical quality (functional structure) and frequent new products (product structure)
• Where the organisation’s environment is both complex and uncertain

Daft, R.L. (1992) Organisation Theory and Design, West, New York

Mullins (1999) suggests three situations where a matrix management structure is appropriate:

● Where there is more than one orientation to the activities of the operation, e.g. multiple customers or geographical differences in markets served

● Where there is the need to process simultaneously large amounts of information

● Where there is the need to share resources – one function or project cannot justify the expenditure on a dedicated resource.

Strengths

▪ The structure is most appropriate when environmental uncertainty is high or when the organisational goals have a dual structural requirement

▪ It allows the flexible sharing of human resources across products. This can lead to improved communication and coordination.

▪ It may improve the quality of decision-making where there is a conflict of interests and similarly, it may develop managers through their increased involvement in decision-making

▪ The structure provides employees with the opportunity for functional and general skill development

▪ The structure encourages direct contact between individuals and allows for the exchange of views across responsibility areas

▪ It increases managerial motivation because of its participative nature

▪ Market awareness: the organisation tends to become more customer/quality focused

▪ Horizontal workflow: reduced bureaucracy

Weaknesses

▪ The dual authority nature of the structure may frustrate or confuse employees

▪ It may be time consuming, particularly in decision-making, because the structure is designed to encourage debate between conflicting interest groups

▪ Job responsibilities may become unclear

▪ Similarly it may lead to unclear cost and profit responsibilities

▪ The structure risks having high degrees of conflict

▪ It may cause a dilution of priorities and a form of decision-making paralysis as the message received by members of the organisation may be that everything matters equally.

The result of research carried out by Bartlett and Ghoshal (1990), and the anecdotal evidence of Peters (1987 and 1992) is that matrix management is unwieldy and practically unworkable. This is based on the fact that in the most used version, people have to report to two bosses. This results in unproductive power struggles.

Task 4: M is a business that sells custom made computer-based information systems. Each customer order is for a unique system, which will involve experts from many functional areas within M. Each customer expects a high level of individual attention. Some systems take only four to six months to design and produce and cost less than €50,000, whereas other systems cost several million Euros and can take up to three years to complete. Projects are continually being completed and started.

A Management Consultant's review of M's organisational effectiveness has concluded that the matrix structure is the most appropriate for M

Question: Identify the characteristics of the organisation that make it appropriate for M to have a matrix structure.

2: Team-Based Structure

The team structure is a newer, less hierarchical organisational structure in which individuals are grouped into teams.

Overview of the Team-Based Structure

Organizations can be structured in various ways, and the structure of an organization determines how it operates and performs. The team structure in large organizations is considered a newer type of organization that is less hierarchical, less structured, and more fluid than traditional structures (such as functional or divisional). A team is a group of employees—ideally with complementary skills and synergistic efforts—working toward a common goal. Teams are created by grouping employees in a way that generates a variety of expertise and addresses a specific operational component of an organization. These teams can change and adapt to fulfill group and organizational objectives.

Some teams endure over time, while others—such as project teams—are disbanded at the project’s end. Teams that include members from different functions are known as cross-functional teams. Although teams are described as less hierarchical, they typically still include a management structure.

Critics argue that the use of the word “team” to describe modern organizational structures is a fad; according to them, some teams are not really teams at all but rather groups of staff. That said, team-building is now a frequent practice of many organizations and can include activities such as bonding exercises and even overnight retreats to foster team cohesion. To the extent that these exercises are meaningful to employees, they can be effective in improving employee motivation and company productivity.

Key Points

• The team structure in large organizations is a newer type of organizational structure. A team should be a group of workers, with complementary skills and synergistic efforts, all working toward a common goal.
• An organization may have several teams that can change over time. Teams that include members from different functions are known as cross- functional teams.
• Although teams are characterized as less hierarchical, they typically still include a management structure (or management team).
• Critics argue that the use of the word “team” to describe modern organizational structures is a fad—that some teams are not really teams at all but merely groups of staff.
• One aspect of team-based structures likely to persist indefinitely is the integration of team cultures within an broader structure (such as a functional structure with interspersed teams).

Source: https://courses.lumenlearning.com/boundless-management/chapter/common-organizational-structures/

Task 5: What type of organisational structure is employed at Apple Inc? Watch the video and support your opinion with valid fact (see http://panmore.com/apple-inc-organizational-structure-features-pros-cons)

Factors to be considered when choosing an appropriate structure

According to Cole (1986), before designing an appropriate structure, managers have to ask themselves a number of basic questions. For example:

▪ What is the best basis for dividing up the work? By function, by product, by geography?

▪ How much specialisation should be encouraged?

▪ How closely should individual tasks be defined in relation to other tasks?

▪ Should decision-making be centralised or decentralised?

▪ How much discretion should be permitted to individuals?

▪ How much standardisation of procedures should be encouraged?

▪ What is the best way to achieve coordination and integration across the specialisms?

Cole, G.A. (1986) Personnel Management: Theory and Practice, DPP Publications, London

The following are some specific factors which Johnson and Scholes (1993) believe influence the choice of organisational structure:

1. The influence of strategy

Studies have shown that a change in strategy is likely to lead to a change in organisational structure, for example a change in strategy may create managerial and administrative needs which the current organisation cannot cope with.

Different strategies generally tend to give rise to different forms of organisation. Chandler (1962) found that companies with limited product markets and fairly simple operations tend to adopt functional structures. He also noted that organisations seeking to develop through product differentiation gave rise to product structures.

Chandler, A.D. (1962) Strategy & Structure, MIT, Boston

2. The influence of production processes and technology

The technology an organisation uses will have an obvious effect on organisational structure. For example, if an organisation’s products are manufactured by a sequence of separate, technical processes then the organisation may find it more appropriate to create separate divisions, as in the product structure, to cope with each manufacturing process. Similarly, if the manufacturing process is highly integrated then the process may be difficult to sub-divide thereby making it difficult to employ a product structure.

3. The influence of organisational type

Another factor which needs to be considered is organisational type i.e. organisational size and culture. For example, it has been found that the larger the organisation the greater the likelihood of having a product or geographic structure. It would also be true to say that organisational structures, over tie, come to reflect the culture that persists in an organisation.

Task 6: Integrated question on Ansoff Matrix, organisational structure and managing change of organisational structure

XZY, a publicly quoted company has expanded rapidly since its formation in 2005. Its rapid growth rate, based on a broad range of well-regarded products manufactured and sold exclusively within Asia, has led to high profits and an ever increasing share price. However, in the last year, XZY has found its growth rate difficult to sustain. XZY’s core strategy has been described by its CEO as ‘selling what we know to who we know’. However, this view has been criticised by a number of financial analysts and journalists who have warned that if XZY’s growth rate is not maintained its share price will fall and the value of the company will reduce. XZY has a functional organisational structure and currently employs around 800 employees. The number of employees has grown by 20% since 2008.

The Human Resource Director of XZY has suggested that she carries out a review of XZY with the purpose of saving a significant amount of money by reorganising the company and reducing employee numbers. In this way, she considers she would be making a contribution towards maintaining XZY’s profit growth rate. The CEO is interested in this idea but he is aware that changing organisational structure can be difficult. The CEO knows from his previous experience that such reorganisations do not always achieve their intended results.

a) Advise the CEO of the difficulties which may be encountered in changing the organisational structure of XZY and reducing employee numbers.

b) Recommend how the CEO could manage the process of changing the organisational structure.

Holacracy

Holacracy started gaining lots of traction after Zappos announced that they would be shifting to this new model of working. There are actually quite a few organizations that have been experimenting with this model but the most known are of course Zappos and Medium. The basic goal with this structure is to allow for distributed decision making while giving everyone the opportunity to work on what they do best. There is still some form of structure and hierarchy but it's not based on people as much as it based on circles or what most people would think of as departments. Information is openly accessible and issues are processed within the organization during special and ongoing meetings. Now just reading those few sentences certainly makes it seem like "that's the work should be done," and I agree.

One of the things I've always said about holacracy is that I believe there are ways to achieve some of the desired effects without having to go through such a radical change. It's sort of like trying to improve the way your car runs by taking out the entire engine and rebuilding it instead of working on some of the core areas that might really drive performance. Sometimes ripping out the engine and starting from scratch isn't always as an option, especially as the car is moving, like most organizations always are.

For example decentralized decision making is something that doesn't necessarily require a whole new organizational structure to thrive in. It can just as easily happen in a "flatter structure" that can leverage some of it's existing infrastructure. It's not hard to imagine why applying holacracy to an organization of say 10,000 or 50,000 employees around the world might be a bit tricky to say the least. As far as I know Zappos is the largest organization in the world attempting to implement this and they around 1,500 people.

My opinion is that holacracy can be more viable for smaller or medium size organizations or perhaps larger organizations that have started off with holacracy as their base operating model. However, it's very hard for me to imagine a large organization with tens or hundreds of thousands of employees around the world implementing something like this. Holacracy is still very much an emerging structure with a lot of inserting concepts but we still need more case studies and examples over a longer period of time. Zappos will perhaps give us the best look at what a transformation to holacracy can look like, but I suspect we will need to wait another 2 years to really get a sense of the impact.

This doesn't mean that organizations can't apply some of the concepts from holacracy (or in fact any other organizational structure). This doesn't have to be an all or nothing approach. Brian and I agree that the way we currently work and think about work is fundamentally changing and holacracy is one of the options that companies can explore.

Source - https://www.forbes.com/sites/jacobmorgan/2015/07/20/the-5-types-of-organizational-structures-part-5-holacratic-organizations/#5cb60848a26e

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