Organisational Structure Lecture

Learning Objectives

On completion of this chapter, you will be able to

• Understand the differences between different models and how they influence the choice of organisational structure
• Understand the different concepts falling under organisational structure
• Identify the differences between different corporate structures and understand which situations they are suitable in
• Comprehend how an organisational change, such as an M&A impacts structure and how it can be managed

Introduction - What is Organisational Structure?

Organisational structure explains the way various tasks within the organisation are divided, supervised and coordinated. It determines the reporting lines in different departments and clarifies the role each individual has in the organisation. For example, a human resource trainee is typically responsible for employee management tasks, and is not expected to look into the customer services concerns. A formal structure in an organisation is needed when the scale of operations increases and a certain degree of clarity is expected in the division of tasks in various departments. Figure 1.1 is a pictorial representation of an organisational structure.

Figure 1.1: Organisational Structure of BAE Systems - [Data retrieved from Boddy (2014)].

1.0 Business Model

This section discusses the different types of business models, such as B2B and B2C, online and physical stores, chain and franchise businesses, and uses examples to compare how an organisation’s structural requirements differ with the variation in the business model.

A business model represents an organisation, highlighting the type of business it does, the value it creates for its customers, the processes it uses to do so, and the financial gains it yields. Doleski (2015, p. 5) provides a formal definition, which describes business model as “a comprehensive, schematic presentation of all of an enterprise’s value creation activities and procedures that generate customer value added and long-term revenue”. There are various types of business models having different stakeholders and dealing in different markets; some of these are discussed below.

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1.1 B2B and B2C Business Models

Many organisations deal with businesses from both ends; i.e. they buy certain products or raw materials from their suppliers (businesses) and sell them off to other businesses. Companies dealing with such transactions are considered to be operating on a Business-to-Business (B2B) model. For example, IBM is a computer manufacturer, which procures its raw materials including monitor screens, wiring, keys, processing units etc. from its suppliers and sells the assembled computers to wholesalers and retailers, who then sell them off to final customers. Therefore, the organisation seems to be operating on a B2B model.

Other type of organisations directly deal with the end consumers at one end and with businesses on the other; i.e. they buy raw materials or semi-finished goods and services from businesses and sell them off to the final consumers. Organisations involved in such transactions are said to be operating on a Business-to-Customer (B2C) model. There are numerous examples of B2C organisations, such as Unilever, GlaxoSmithKline, McDonald’s and others, which procure raw materials from their business suppliers, prepare the finished products and sell them to the end customers. Figure 1.2 is a simple graphical representation of B2B and B2C models.

Figure 1.2: B2B and B2C business models - [Data retrieved from Kotler and Armstrong (2012)]

B2B companies tend to develop long-term committed partnerships with their clients, whereas B2C businesses work on single transaction basis. B2B markets deal with sales involving much higher volume and financial value than B2C markets. A single B2B consignment consists of numerous B2C sales. Due to the difference in the way B2B and B2C business models operate, there is a potential of significant difference in their organisational structure. For example, B2B companies mostly have ‘flat’ hierarchies while B2C companies have ‘tall’ hierarchies. These concepts are well explained in the section below.

1.2 Online and Physical Business Models

The increasing use of internet in the contemporary business organisations has resulted in a higher dependability on internet. This has led to a rise in e-commerce ventures, which are equally successful as physical enterprises. Many new retailers initially open their digital stores and move towards developing physical stores based on the demand and availability of financial, physical and human resources. Physical businesses normally have more overhead expenses as compared to those operating virtually. Digital ventures can better be executed in B2C markets as they usually deal in on-spot transactions with customers, whereas B2B model is more suitable to have a physical presence, which would help in maintaining long-term relationships with clients.

The structural complexity is high in physical businesses as compared to online ventures, which normally do not even have any formal structure. The reason behind this is the greater extent of physical interaction between the employees in a physical enterprise. Unlike physical stores, online companies usually do not have properly distinguished departments, because of which reporting lines are not clear.

1.3 Chain and Franchise Business Models

A chain business operates through a single parent company, which is the sole owner of all the outlets in different national and regional locations. TESCO is an example of a chain store model and has numerous outlets throughout the UK, which are managed and operated by a single company. All the stores run on the same format, with identical store atmospherics, merchandise assortment, advertising and branding. Along with all these elements, the parent company also ensures that the stores are spread evenly in different geographic locations.

In contrast, a franchise business operates by signing franchise agreements with various independent entities, which own its business in specific national and regional locations and are responsible to run it based on the standards set by the parent company. For example, fast food franchises such as McDonald’s, KFC and Burger King have various franchisees, which are responsible to operate, manage and supervise their outlets in their respective locations. The standard, quality and recipes are provided by the parent company, with which the franchisees need to comply. Although the marketing activities are carried out separately keeping in mind the regional requirements and expectations, but all of the individual franchisees are bound by the central positioning strategy of the business.

The organisational structure of chain and franchise businesses varies because of the difference in their operating styles. Since all the stores of a chain store are owned and operated by the parent company, it has a highly complexed structure, with numerous reporting lines. On the contrary, a franchise business has a simpler structure, which includes only its own employees. The workforce of its franchisees is included in their own structure and is not seen in the payroll and organisational design of the parent company.

According to Leih, Linden and Teece (2015), a closely related concept to the business model is organisational design, which determines the extent to which the assets of the company are maintained and managed by the company. A critical decision associated with organisational design is which business functions need to be performed in-house and which need to be outsourced to third parties. 

2.0 Basic Concepts Falling under Organisational Structure

Using real and hypothetical business examples, this section defines the basic concepts and terms which are commonly used when the topic of organisational structure is discussed.

The process of creating or introducing amendments in organisational structure is called organisational design, which involves understanding of the concepts of work specialisation, departmentalisation, chain of command, span of control, centralisation versus decentralisation, and formalisation.

2.1 Work Specialisation

One of the ways to increase production output is division of labour, which is achieved through a concept known as ‘work specialisation’. This concept has been adapted from the assembly line manufacturing scheme of the Toyota Production System. In order to gain optimum benefit out of the employees’ time at work, managers oversee the overall process of production, break it up into smaller tasks and divide them among the workforce. When each worker is continuously involved in doing the same specialised task he/she is assigned, the work efficiency increases because of the best use of the diverse skills of employees.

For example, a sports goods manufacturer in Ada, Ohio produces all the footballs for the National Football League and majority of those used by students to play football in college and high school. A total of 150 workers are employed to meet the regular production targets and their tasks include moulding, stitching, sewing, lacing etc. If each of the workers aims to involve in all these processes from start to end, there will be much lesser number of footballs produced as the factory normally manufactures. The high production rate is because of the ‘work specialisation’ principle of the Toyota Production System which the factory follows; each of the workers is made responsible for a single task in the process, and the continuous execution of the same job makes the worker specialise in that task. The resultant output is thus the optimum level production the factory can achieve having the current physical, infrastructural and human resources.

2.2 Departmentalisation

Have you ever thought how organisations divide job roles among various units and subunits? When the job tasks have been divided among different members of the staff, the related job roles are grouped together to ensure meaningful integration of responsibilities throughout the organisation. This process is known as ‘departmentalisation’, which helps in coordination of interrelated tasks because employees working in the same department follow the same policies, report to the same department head and work in a joint or closely related work space.

Following are the five types of departmentalisation used in organisations for job classification:

2.2.1 Functional Departmentalisation

This type of categorisation is done based on the nature of jobs and is used in both profit-making and non-profit-making organisations.

Functional departmentalisation is the most commonly used form because employees with interrelated knowledge and skills get an opportunity to work in collaboration when grouped in the same subunit. It is beneficial from the training and development perspective, as staff members are able to learn from each other’s similar skills while working together in teams. However, this form of departmentalisation has a disadvantage of involving employees into ‘departmental ghettos’ (Kreitner, 2009, p. 248), wherein the overall strategic goals of the organisation are undermined while focussing on specific departmental objectives.

2.2.2 Geographical Departmentalisation

In some cases, the geographic location of various employees becomes a determinant of structural development of an organisation.

For example, manager of a departmental store chain in Edinburgh would be better able to understand the customer preferences in Edinburgh and it whereabouts, including Glasgow, Gretna etc. If the same manager is made responsible for the company’s stores in London, he would not be able to understand the customers’ taste in that region. In such cases, geographical departmentalisation is particularly useful. In addition, it enables multinational corporations to serve local communities in a better way. One reason behind the suitability of this form of division is the potentially limited communication, however, this shortcoming has been reduced in the contemporary internet-based operational environment.

2.2.3 Product Departmentalisation

Product departmentalisation was introduced in order to overcome the shortcoming of functional departmentalisation, wherein it prefers specialisation over coordination. According to this form, specific products or services are treated as separate businesses and are used to form the organisational structure. This is mostly common in Engineering, construction and chemical companies.

Product departmentalisation is also commonly used in salons and spas. For example, staff involved in haircare services are grouped together and need to work in collaboration as their services are interlinked. If a customer needs to get a bundled package of hair treatment, hair colour and haircut, which are all supposed to be performed by different staff members, the three employees need to coordinate well in such a way that at each level the customer does not have to wait or find any inconvenience when they change duties. This transition of moving from one service to another, becomes manageable because of product departmentalisation.

2.2.4 Process Departmentalisation

Organisations with department categorisation based on the work flow process are known as ‘horizontal organisations’ because the point of focus is to have a smooth transition between customer need identification and customer satisfaction. Although the grouping of tasks in this form of departmentalisation is also done based on interrelated tasks as in functional departmentalisation, it differs from the latter in terms of the final goal; functional departments emphasise more on financial gains, whereas process departments aim to achieve maximum customer satisfaction.

Hospitals, healthcare centres and pharmacies tend to divide tasks based on the interrelated work processes. For example, a hospital pharmacy has specific subunits for its various processes, which include order collection, filling the medicines and selling when demanded. In case of hindrances in this process, the customer (patient) will be dissatisfied, therefore they try to develop additional coordination among their departments to ensure that the customers receive their medication on time.

2.2.5 Customer Departmentalisation

Some businesses create departments based on the customer needs in order to serve them better. This is normally the case in high involvement products, such as computers, television etc. and large businesses with high volume sales dispersed in various geographical locations. An example of such departmental classification is Intel, which believes in collaborating its engineering, software writing and marketing functions in order to develop subdivisions, prioritising customers’ ease. Their subunits help customers in selecting the broad categories first and then choosing the products they wish to purchase. The resultant five departments of Intel focussed on the customer market are “corporate computing, the digital home, mobile computing, healthcare, and channel products - PCs for small manufacturers” (Kreitner, 2009, p. 250).

A common issue with customer, process and geographical departmentalisation is the duplication of infrastructural facilities and human resources. In order to overcome this shortcoming, organisations tend to opt for functional departments.

2.3 Chain of Command

The reporting lines drawn in an organisational structure depict the reporting relationships between employees. They explain who can delegate tasks to whom and how responsibility is shared by people. For example, in Figure 1.1, it is clear that the Completions Manager is responsible to delegate tasks and supervise the Area Managers, not the Principal Structures Engineer in the Production Engineering department. There is no universal rule about who has the right to make decisions within a team; it instead depends upon the discretion of the manager, who delegates responsibility based on each person’s performance and contribution to team work.

2.4 Span of Control

The number of employees working under a team leader or a manager are a representation of his/her span of control. In case of close supervision by the managers, their span of control is narrow. While undergoing the growth period, organisations experience vertical task delegation when managers share their responsibilities with their subordinates. Organisations with a narrow span of control have more levels in their hierarchy; such companies are also referred to as ‘tall organisations’.

On the contrary, when responsibilities among team members are wider, less supervision is needed, enabling more employees to report to a single manager, resulting in a ‘flat organisational structure’. In contemporary organisations, a wide span of control is preferred over a narrow span of control because it helps in reducing administrative expenses and increases self-management. However, organisations with extremely wide span of control also face certain operational issues, such as unsatisfactory supervision and limited managerial control.

Practically, there is no ideal span of control for organisations or departments. For example, in FedEx different departments have different spans of control. Departments where a lot of people are involved in identical or similar jobs, have approximately 15-20 employees reporting to a manager, while those where people perform multiple or complex jobs, have up to five employees reporting to a single manager.

2.5 Centralisation versus Decentralisation

A very important question related to structural design is “Who reserves the right to make important decisions in the organisation?” ‘Centralisation’ is the extent to which decisions are made by top management. When the right to make most of the decisions remains with the top management, with minimal involvement of other employees, the organisation is centralised. On the contrary, an organisation is ‘decentralised’ if the top management allows middle management or lower level employees to make certain decisions. The level of decentralisation increases when the significance and scope of decision making at lower level increases and managerial supervision decreases. It must be noted that the concept of centralisation and decentralisation is relative, not absolute; therefore, an organisation can never be totally centralised or decentralised. Some experts believe that managers face the challenge of finding the level in between at which they can balance the two extremes.

Research suggests that both centralisation and decentralisation have their merits and demerits, some of which include;

• Decentralisation helps in empowering the workforce, but may lead to un-standardised processes.
• Centralisation enables all the stakeholders of an organisation to abide by the set rules and policies.
• Decentralisation brings about innovation in the organisation by giving employees the opportunity to think creatively and introduce positive changes in the company.
• Centralisation is a source of maintaining discipline within the workplace, but at times makes people feel less empowered, especially those at lower level.

2.6 Formalisation

The concept of formalisation is related to the degree of job standardisation and application of set policies and practices to manage employees’ actions. A highly formalised organisation is characterised by clearly defined job roles, numerous policies and directives, and well explained guidelines for carrying out different work procedures. In such an organisation, employees have little authority over strategic planning initiatives and how they are implemented. On the contrary, employees can work more independently in less formalised organisations.

In contemporary business situations, organisations tend to be less formalised by empowering them enough to take up leadership positions in future. Despite this, basic rules, policies and practices are in place to ensure employees follow the general workplace ethics.

For example, a customer comes to a photography and film-making studio right at the time the employees are supposed to close down and gives them a film for developing on the same day. Although the salesperson is aware of the studio’s rules, he is also sure that he would be able to develop the film shortly, with no difficulty. In his enthusiasm to serve the customer, he develops the film for the customer and then closes the studio. He has violated the policy and hopes that his manager in unaware of it.

2.7 Mechanistic versus Organic Forms

Some organisations are focussed towards creating vertical hierarchy, with clearly defined job roles and a higher degree of management supervision, resulting in a central decision making culture. This type of working style ensures that the top management is aware of all the actions of the employees working under them. Such rigid bureaucratic organisations are said to have a ‘mechanistic’ structure. These organisations have a consistent image among all their stakeholders and deliver a highly standardised customer service, with minimal to no variation. Communication takes place vertically most of the times because the top management forwards the directions to the lower level, and they forward their issues to the management.

In contrast, certain other organisations are extremely adaptive, characterised by flexible job roles and structure. Such organisations have an ‘organic’ structure, which is open to any transformations as and when needed. People are authorised to make decisions based on their experience and skills, rather than their position in the organisation. Communication takes place horizontally among members who have knowledge about the relevant task and experience it as a part of their regular work practice. It is a probability for such organisations to not have not have a formal structural chart as the work is divided based on flexibility and employees work in cross-functional teams, with no rigid departmental boundaries.

3.0 Corporate Structures

This section introduces the forms of corporate structures used in most businesses, along with the discussion of their pros and cons, thus depicting which form is more suitable in which type of organisation.

Based on the different methods of work division, organisations are structured using either of the four types corporate structures explained below:

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3.1 Functional Structures

Functional Structures are formed when work division among employees of an organisation is done based on the expertise, training and qualification of staff members. This is most common type of corporate structure used in organisations with departments categorised as finance, production, marketing, human resources, IT and so forth.

In functional structures, employees working together in one department share common interests and career prospects, which leads to better learning from one another. They also help in developing positive intra-departmental relationships. However, if different departments perceive the common organisational goal differently, a functional structure might not be suitable because it may lead to conflicts between different groups. Furthermore, employees within one functional department are not aware of the challenges the organisation faces from the external environment due to limited coordination with other departments.

Figure 3.1: Corporate Structures - [Data retrieved from Boddy (2014)]

3.2 Divisional Structures

Divisional structures are formed when an organisation’s departments are divided based on the product-service elements or customer preferences. The people supervising the work activities of each unit have the right to make relevant decisions. Employees working in a single division coordinate well with one another as they are all responsible for satisfying the same customers. Even in case of bundled services, they coordinate the timing of different services.

For example, McDonald’s drive thru service is a division which involves three major functions; order taking, preparation and collection. The staff members working in the preparation function need to be conscious and start preparing as soon as the order is received. The coordination of timing within these functions is such that the order is ready to be collected when the customer’s car reaches the third stop, which is the collection point. In order to achieve high-end results, employees working within a division need to have a common goal. In this example, all the employees aim to satisfy the single customer who come to the drive thru, which is why they ensure complete coordination throughout the process.

Despite its benefits, a disadvantage associated with divisional structures is the high cost because of duplication of job roles.

3.3 Matrix Structures

Matrix structure is a combination of functional and divisional structures, where function is shown on one axis and the product, project or customer on the other. Depending upon the business requirement, functional staff members work on one or more projects. They have two reporting lines; on one hand they report to the head of department, while on the other they are supervised by the project manager(s).

Figure 3.1 explains a matrix structure properly, wherein specific teams from different functional departments are selected and are responsible to manage two projects simultaneously. They work on specific elements of each project as and when needed based on the deadlines and availability of resources. Apple and Cisco are examples of companies which use matrix structures.

3.4 Network Structures

A network structure is formed by an entrepreneur or a single business unit which collaborates with different entities to carry out its core and supporting business functions. The absence of a single headquarter, a managing director and an official annual report is the reason behind no formal reporting lines. Figure 3.1 explains how a single entrepreneur coordinates with different purchasing agencies, manufacturing companies, human resource agencies and distribution companies to run his/her business.

An advantage of such a structure is that the business has almost no overhead costs. A network structure may be incorporated in a virtual business as well, where all the business operations are managed through external vendors. However, organisations operating on such structures lack a consistent organisational culture, which may become their identity. Employees in many small and large-scale organisations consider their organisation as their identity because of the relevance they find with the company’s culture.

Linux is an example of a network structure, operating as a cooperative venture involving the staff members of about 24 companies, including IBM, Intel and HP, working collaboratively to produce Linux software. It started as university project in Finland and has also involved volunteers in its work, enhancing its structural network. The salaries to programmers are paid by the tech companies, which then generate revenues by selling products and services associated with the Linux operating system.

Umbrella companies may also be considered as examples of network structures. Being a recruiter to agency contractors, an umbrella company operates on a fixed term contract for its clients, who sign a contract of employment with them. The payroll for the contractor is prepared by the umbrella company, who makes an invoice in favour of the agency, which is then passed on to the client. The umbrella company is also responsible for preparation of the tax payments, social welfare contribution and national insurance returns for the contractor. Figure shows the flowchart of an umbrella company, explaining how it operates, and how the relationships are formed and maintained.

4.0 Mergers and Acquisitions

This section initially explains the basics of the Merger and Acquisition concept, leading to the discussion of the structural changes which occur as a result of this strategic initiative. It also highlights the differences in employees’ feelings as a result of the potential structural changes.

4.1 Understanding the Concept

Mergers are Acquisitions (M&A) are an important growth strategy used by organisations to develop and sustain their competitive advantage in the markets where they operate. M&A refer to the integration of business operations of two or more firms, either by mutual consent or otherwise, for achievement of specific strategic objective(s). This amalgamation of organisations may be on an equal shares basis or the larger organisation would have a higher share in the combined entity.

It is understood that the formation of a ‘combined entity’ as a result of an M&A would result in many changes in the structures of both the organisations. Since the two companies were operating independently before the M&A, they have different departmental heads, procedures and ways of departmentalisation. Since the integration of such organisations may have a potential of job duplication, a structural transformation is essential. In some cases, minor changes may be enough to create a workable situation, while in others, the whole structure is transformed, resulting in job cuts, departmental shifts and revision of job positions.

Employee integration is considered to be a major issue when such high level structural changes take place. The management finds it challenging to prepare the employees by communicating such changes to their subordinates. They are often anxious about demotivating the employees.

4.2 Potential Changes in Organisational Structure

4.2.1 General Structural Changes

Who will report to whom when two similar organisations merge? Whose processes will be used in carrying out day-to-day business operations; the acquirer or the acquired firm? How will the employees be trained on using work systems when the technology and IT systems of the two organisations will integrate? All these concerns are associated when major structural changes are anticipated as a result of an M&A.

The potential structural changes in organisations undergoing an M&A may vary based on the nature and scale of business operations of the organisations involved. The reporting relationships in various departments change, along with the work procedures. This results in amendments in the existing job roles of employees and co-workers. The departmental changes also have a potential of impacting the level of autonomy employees had in their jobs before the M&A; in some cases, they may get additional autonomy, with more influence on the decision-making, while on the other, they may become less independent. It depends on the organisational culture of the partnering organisation and the influence it has on the other.

For example, when GlaxoSmithKline (GSK) underwent an M&A with Stiefel, some management personnel in Stiefel benefitted by the structural changes when their positions were retained. They were much younger than their counterparts in GSK and were therefore at an advantage of leading more people in bigger departments than they did before. Although leading older employees than themselves was challenging, but they enjoyed greater autonomy as a result of structural changes.

On the contrary, some employees tend to have lower level of autonomy after an M&A. An example could be the merger proposition of Ladbrokes and Gala Coral. Being the firm being acquired, Gala Coral is supposed to be at a disadvantaged situation while considering structural transformation. Most of its employees would be reporting to their counterparts in Ladbrokes and some would be laid off in case of job duplication.

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4.2.2 Relocation

In case of cross-cultural, regional or international M&A, relocation is also a major part of the structural changes being incorporated in the combined entity. The management is faced with various challenges and needs to make appropriate decisions; for example, who will be responsible to manage the factories in China if the work operations are meant to increase there after the M&A? Will some key personnel from the UK need to be temporarily or permanently relocated to China?

In some cases, employees are happy to relocate due to structural changes, as they anticipate greater career growth and development by moving to a different geographical location, while in other situations, they are apprehended by the thought of relocation as they are unwilling to leave the place where they are settled.

Relocation of employees in M&A may be based either on geographic or functional departmentalisation. In a situation where a department head or manager in a specific location is missing, has been demoted or laid off, the relocation of another person for that position is based on geographic departmentalisation. However, if a person with specific skills and expertise is needed at a different location, the relocation is based on functional departmentalisation.

5.0 Summary

This chapter has explained various important considerations of organisational structure, enhancing understanding of the various forms of structure and the situations in which each of them is more suitable.

The different concepts falling under organisational structure have also been discussed including work specialisation, departmentalisation, chain of command, span of control, centralisation versus decentralisation, formalisation, and mechanistic versus organic forms.

The four major types of corporate structures have been discussed with their pros and cons. Since these types have not been developed recently, their use in contemporary organisations has immensely changed.

Being an important change event in two or more organisations, an M&A involves various strategic initiatives which have their implications on organisational structure. Thus, an organisation needs to plan structural changes based on the skills, expertise and goals it currently has and those that it intends to have in future.

References

Boddy, D. (2014). Management: An Introduction. 6^th ed. Harlow: Pearson Education Limited.

Doleski, O. (2015). Integrated Business Model: Applying the St. Gallen Management Concept to Business Models. Munich, Germany: Springer.

Kotler, P., and Armstrong, G. (2012). Principles of Marketing. 15^th ed. Harlow: Pearson Education Limited.

Kreitner, R. (2009). Management. 11^th ed. Boston: Houghton Mifflin Harcourt Publishing Company.

Leih, S., Linden, G., and Teece, D. (2015). Business Model Innovation and Organizational Design. In: Foss, N., and Saebi, T. (Eds.). Business Model Innovation: The Organizational Dimension. Oxford: Oxford University Press, pp. 24-39.