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. Formal structures are needed when the scale of operations increases and a certain degree of clarity is expected in the division of tasks in various departments.
A business model represents an organisation, highlighting the type of business it does, the value it creates, the processes used to do so and the resulting financial gains. A business model is a comprehensive, schematic presentation of all of an enterprise’s value creation activities and procedures generating customer value and revenue (Doleski, 2015).
Many organisations deal with business suppliers and sell their outputs to other businesses. Companies that do so are operating a Business-to-Business (B2B) model.
Other organisations deal directly with consumers at one end and with businesses at the other and in doing so are operating a Business-to-Customer (B2C) model.
B2B companies tend to develop long-term committed partnerships with their clients, whereas B2C businesses work on a single transaction basis. B2B markets deal with sales involving higher volumes and financial values than B2C markets. A single B2B consignment consists of numerous B2C sales. Due to the differences in the way B2B and B2C business models operate, there can be significant differences in their organisational structure. For example, B2B companies mostly have ‘flat’ hierarchies whilst B2C companies have ‘tall’ hierarchies.
The increasing use of the internet has led to a rise in e-commerce ventures. Many retailers initially open digital stores and subsequently develop physical stores based on demand and the availability of financial, physical and human resources. Digital ventures can better support B2C markets, whereas a physical presence for a B2B model would help maintain long-term client relationships.
Structural complexity is higher in physical businesses due to the physical interaction required between managers, employees and customers. Online companies often do not require separately distinguished departments, which can complicate reporting requirements.
A chain business operates through a single parent company, which is the sole owner of all the outlets in different locations. In contrast, a franchise business operates by signing agreements with independent entities and whilst these entities own these operations they must run them in a way that reflects the output and operating standards of the parent company. The parent company remains responsible for corporate positioning strategies, but the franchisee carries out separate marketing activities as they possess the local/regional knowledge required.
A chain operation is likely to have a relatively complex structure with numerous reporting lines given the need to directly manage a distributed physical footprint. In contrast, a franchise business has a simpler structure and local management and control is the responsibility of the franchisee.
Organisational design determines the extent to which the assets of a business are maintained and managed by the company (Leih, Linden & Teece, 2015). For example, a critical element of this is considering which business functions must be performed in-house and which can be outsourced to third parties. The process of creating or amending organisational structure is called organisational design, which requires an understanding of a range of inter-linked factors.
Outputs can be increased through effective division of labour, often implemented through work specialisation. To gain optimum benefit from their employees’ work, managers break the process of production into smaller tasks which are divided amongst the workforce. As each worker is continuously involved in doing the same specialised task, their skills and knowledge of that task increases which in turn raises outputs.
When tasks have been divided amongst staff, the related job roles are grouped together to ensure meaningful integration of responsibilities throughout the organisation. This departmentalisation helps in coordinating interrelated tasks as employees working in the same department follow the same policies, report to the same department head and work in a shared or closely related area. Departmentalisation can be taken forward on the basis of function (bringing together those with inter-related skills and knowledge to foster collaborative working, shared development and learning), although this can create an environment where departmental objectives do not necessarily reflect corporate strategy (Kreitner, 2009).
Geographic location and dispersal can also drive departmentalisation. Organisations with an extensive store footprint can create structures that support area management in an effort to balance central corporate control against more local line management requirements. Such geographic departmentalisation also helps a large (national or international) entity maintain essential local market knowledge.
Given the concern noted around functional departmentalisation, product departmentalisation seeks to introduce specialisation rather than coordination. Specific products or services are treated as separate businesses and this drives the organisational structure. An alternative is to explore process departmentalisation, where the focus is to maintain cohesion between identifying customer needs and then satisfying those needs which inevitably leads to customer departmentalisation where the customer drives organisational structure and smaller, duplicate functions and departments can result. The challenge for both process and customer departmentalisation approaches is one of balancing shared/central corporate activities against similar/duplicated activities focussed on distinct outputs or customer requirements (e.g. running two production lines that are exactly the same, but either producing slightly different products or serving different customer groups). It is the cost and challenges associated with this duplication that leads to many large business entities preferring functional departmentalisation approaches.
The reporting lines in an organisational structure determine the reporting relationships between employees, explaining who can delegate tasks to whom and how responsibility is shared by people. Within teams, these relationships are determined by managers, who delegate responsibility based upon each person’s performance and contribution.
The number of employees working under a leader or manager reflects their span of control. Close supervision generally requires a narrower span of control and in periods of growth organisations experience vertical task delegation when managers share their responsibilities with subordinates. Organisations with a narrow span of control inevitably have more hierarchical levels (‘tall’ organisations), whereas those allowing a wider range of responsibility which requires less supervision creates a ‘flatter’ structure i.e. less managers and management levels. Whilst these ‘flatter’ organisations may have lower costs, it can introduce other issues given the reduced levels of direct managerial control (e.g. output or service quality).
Centralisation is the extent to which decisions are made by top management. A decentralised organisation allows middle management and/or lower-level employees greater latitude in terms of their decisions and actions. An organisation can never be totally centralised or decentralised and the challenge is to strike an appropriate balance between the two extremes. Decentralisation can help empower the workforce, support innovation and creativity but may lead to un-standardised processes. Centralisation ensures that all abide by set rules and policies, but can make people feel less empowered and therefore could build a less agile organisation.
Formalisation considers the degree of job standardisation required, applying 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. 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.
Some organisations create vertical hierarchies with clearly defined job roles and a higher degree of management supervision, resulting in a centralised culture. Such rigid bureaucratic organisations are said to have a mechanistic structure. These organisations have a consistent image delivering a highly standardised service, with little or no variation. In contrast, other organisations can be extremely adaptive, with flexible job roles and organic structures open to transformation as and when needed. People are authorised to make decisions based on their experience and skills, rather than organisational position.
Functional Structures are formed when work division is based on the expertise, training and qualification of staff members. Departments such as finance, production, marketing, human resources and IT characterise such approaches. Employees working in each department share common interests, career prospects and shared learning approaches. However, if different departments view organisational goals differently, a functional structure may lead to conflict between different groups. Also, functional areas may not be aware of the external challenges facing the organisation due to limited coordination with other departments.
Divisional structures are formed when organisational departments are based on product/service elements or customer preferences. Employees working in a single division coordinate well with one another as they are all responsible for satisfying the same customers. However, such approaches do introduce increased costs due to job/role duplication.
Matrix approaches combine functional and divisional structures, where function is shown on one axis and the product, project or customer on the other. Functional staff members work on one or more projects and have two reporting lines - to their head of their functional department for professional standards and outputs and to the project manager for meeting client/customer requirements.
A network structure reflects collaboration with different entities to carry out core and supporting business functions. The absence of a single headquarters and associated formal reporting lines means that overhead costs are minimal and it can support virtual business approaches where all operations are managed through external vendors. However, such approaches result in the absence of a binding/shared organisational culture which can undermine corporate direction, standards and values.
An advantage of such a structure is that the business has almost no overhead costs. A network structure may be incorporated into a virtual business as well, where all the business operations are managed through external vendors. However, organisations operating such structures lack a shared corporate culture and it also introduces a potential reliance on ‘umbrella’ companies to manage work allocation, payroll structures and associated costs/activities usually associated with organisational overhead activities.
Mergers are Acquisitions (M&A) are an important growth strategy used by organisations to develop and sustain their competitive advantage. It is the integration of business operations of two or more firms (not always by mutual consent!) to achieve specific strategic objectives. This amalgamation may or may not be on an equal shares basis. Following M&A, the resulting business entity will require a new/revised integrated structure to remove unnecessary duplication. It is also considered essential to integrate employees to provide reassurance and create a shared working culture. Reporting requirements will need to be standardised, agreement reached on which of the (two) previously distinct working systems should be used (i.e. processes, technology solutions, job/role autonomy etc.) and the nature of the new corporate identity.
These challenges can be compounded if each business operated different corporate structures prior to the M&A i.e. one organised on a divisional basis, the other operating a matrix management approach. This can be further complicated by the introduction of geographic issues (such as moving staff to new/combined production facilities) and work outputs are likely to suffer if staff view the M&A as a threat (e.g. undermining job security) rather than an opportunity (e.g. broader career opportunities).
This chapter has explained the core aspects of organisational structure to provide a broader understanding of the various forms that can be applied and the operating conditions likely to suit each model. The different concepts falling under organisational structure have also been highlighted, noting the importance of a range of issues, not least the importance of staff engagement, motivation and empowerment.
Whilst the four major types of corporate structures have been outlined, the advantages and disadvantages of each will depend extensively on the nature of the operating environment for the businesses concerned. Ultimately, organisational structure must be aligned to (and support) corporate strategy if an enduring competitive position is to be maintained.
Doleski, O. (2015). Integrated Business Model: Applying the St. Gallen Management Concept to Business Models, Munich: Springer.
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Leih, S., Linden, G., Teece, D. (2015). Business Model Innovation and Organizational Design. In: Foss, N., Saebi, T. (Editors). Business Model Innovation: The Organizational Dimension, Oxford: Oxford University Press, pp. 24-39.
Boddy, D. (2014). Management: An Introduction, 6th Edition, Harlow: Pearson Education Limited.
Kotler, P., Armstrong, G. (2012). Principles of Marketing, 15th Edition, Harlow: Pearson Education Limited.
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