2.2 Organizational structure

Organizational structure by function

Most businesses are organized by function, i.e. the different operational roles within a business such as Marketing, Production, Finance and Human Resources. Some businesses will also have functional departments in charge of Administration, ICT and Research and Development (R&D).

Organizational structure by region

Multinational companies are often organized by geographical region. This allows the business to be more aware of and responsive to local cultural differences and consumer needs. Such organizational structures allow regional managers to have better overall control over staffing and training issues

Delayering

Many large businesses have opted to delayer their organizations. Delayering is the process of removing one or more levels in the hierarchy to flatten the organizational structure. This reduces the number of layers and widens the span of control in the hierarchy.

Organizational structure helps a business to function more efficiently due to:

> Accountability - shows who is help responsible for each particular job > Responsibility - shows who is in charge of whom and in what role or capacity As a business gets larger and more complex, it has to become more structured for tasks and roles to be fulfilled in a manageable and coherent way. Although businesses differ in their formal structures, the typical configuration consists of different levels of directors, managers and workers

Hierarchal organizational charts

A hierarchical structures is a traditional approach to organizing human resources in a business where emphasis is placed on subordinates reporting to their line manager. The position of workers in the hierarchy indicates their rank, status and level of authority. Those at the top of the hierarchy (the CEO and Directors) are the most vital to the organization and are remunerated with a larger salary and benefits as they carry the most responsibility. Tall hierarchical structures are bureaucratic as there are many levels in the rigid hierarchy, with work processes formally regulated by rules and procedures. Such structures promote specialization as each level has a relatively narrow focus. By contrast, a flat hierarchical structure has only a few levels between the operatives and the CEO

Centralization and Decentralization

Decision-making power can be either kept in the hands of a few people or it can be shared out among the workforce. The extent to which authority is concentrated or diluted within an organization depends on the traits and skills of managers and workers, the degree of trust and the corporate culture.

Centralized structure

In a centralized structure, decision-making is made by a very small number of people. These decision makers, usually the senior management team, simply hold onto decision-making authority and responsibility. Decisions are made through the person(s) in the centre without consultation with other members of the organization. This model was favored by scientific management practitioners (see Unit 2.4) such as Henri Fayol, Frederick Taylor and Henry Ford.

Organizational charts

a diagrammatic representation of a firms formal structure. Formal groups are set up to carry out specific functions, such as a team of finance specialists or a department of marketers Most formal groups are permanent although businesses can set up temporary groups to investigate a particular issue or problem. An organization chart shows five important features of a business: • The different functional departments within a business - In there are four functional departments shown: Marketing, Production, Finance and Human Resources. Each of these is headed by a Director. It shows how different areas of the business link to one another and verifies staff positions in the overall organization. • The chain of command- This shows the various positions of authority in the organization. In particular, it shows which people have direct line authority over others, e.g. the Production Director has line authority over ail employees in the Production Department, i.e. the Operations Manager, the Security Director, the Quality Controller, Production operatives and the Security staff. The span of control - This measures the number of staff directly accountable to a single line manager, e.g. the CEO has a direct span of control of four people (the Directors). Each Director has a direct span of control of one (their deputy manager) except the Production Director who has a span of control of two (the Security Director and the Operations Manager). It shows which people have authority and the extent of the responsibility they have for others. The official channels of communication - This is the route that messages are communicated within the organization, e.g. communications that concern only the Finance team would go through the CEO, Finance Director, Finance Manager and the Finance staff. The levels of hierarchy - also shows there are five hierarchical levels. The CEO is at the top level whereas production operatives are on the bottom (fifth) level. It shows which line manager different workers report to, so that there is formal accountability.

Tall organizational charts (or vertical organizational charts)

have many levels in the organization hierarchy. Therefore, managers tend to have a narrower span of control. Advantages: - Quicker and more effective communication within smaller teams. - Smaller teams are generally easier to control and manage - Greater specialization and division of labour can help to increase efficiency and productivity = managers do not have to spend as much time monitoring their teams - Greater opportunities for more people to be promoted as more levels exist in the organizational hierarchy = this can motivate some employees to work harder, thus improving staff retention and labour productivity

Project-based organization

human resources are organized around particular projects. Many businesses use a project-based organizational chart, such as those in construction, software engineering, entertainment, aerospace and oil exploration. Project-based structures allow such businesses increased flexibility to adjust quickly to market changes and to adopt rapid innovations. Each project is led by a project manager supported by a team of workers. For example, a construction company might have several teams working on different projects such as the building of a bridge, motorway and hospital. In many businesses, project-based is used for a temporary period to execute specific projects, with teams focusing on their assigned project rather than on their position in the firm itself. The workers are often from different functional departments but come together to focus on completing a particular project. Project managers can have several project groups reporting to them on projects such as product development or expansion in an overseas market. A common form of project-based organization is the matrix structure. This is the flexible organization of employees from different departments within an organization temporarily working together on a particular project. Functional departments still exist, although the project team has the opportunity to work with colleagues from other departments. Each member in the matrix organization is held accountable to two managers - their official department (line) manager and the project manager. Teams work better if the team members are highly skilledand experienced, so the project manager does not need to micro-manage individuals. Hence, it is the capability of team members in matrix structures that is important, rather than their formal rank in the official organizational structure. Suppose, for example, that a project team was set up to investigate the best way to launch the opening of a new store. The members of the project team might consist of one representative from each of the following departments: Board of Directors, Marketing, Finance, Human Resources, Production

Flat organizational charts (horizontal organizational charts)

there are fewer levels. This, each manager tends to have a wider span of control. Advantages: - Delegation becomes a relatively important part of managing the organization = opportunities for subordinates to take on extra responsibilities and to develop their careers - Communication should be improved overall since there are fewer layers in the hierarchy - It is cheaper to operate as there are fewer managers to be hired due to fewer levels in the hierarchy. Many of these managerial functions are either eliminated or delegated - Flat structures can help to eliminate 'a them and us' culture so workers do not feel alienated from senior management Disadvantages: - a wide span of control means the manager has to communicate with many more people

The decision depends on several factors:

> The size of the organization: the larger the firm becomes, the greater the need for decentralization. > The scale of importance of the decision: decisions that have high-cost implications and/or consequences will be centralized > The level of risk: high-risk decisions will again remain in the hands of the key decision makers > The corporate culture: organizations such as computer software companies that rely on the creative and innovative skills of employees tend to be decentralized By contrast, factory operatives in low-skilled jobs producing mass-produced goods are organized through centralization. > Management aptitudes and competencies: managers who have positive outlook towards workers' attitudes and abilities are more likely to delegate authority and responsibility. By contrast, managers who are unwilling to let go of their of control or status will centralize decision-making authority > The use of ICT - Firms that adopt up-to-date methods of ICT are able to decentralize to greater extent.

Advantages and disadvantages of project-based organization

Advantages - Flexibility - Productivity - Efficiency - Motivational Disadvantages - Discontinuity - Isolation - Inefficiencies - Conflicting interests and priorities

Advantages and disadvantages of decentralization

Advantages - Input from the workforce: firms can benefit from the skills and expertise of their employees, especially their middle managers - Speedier decision-making: planning and execution are more efficient as there is delegation of authority and responsibility - Improved morale: Empowered staff are more likely to feel valued and motivated as they have some input into decision-making - Improved accountability: Staff are held directly accountable for their input which can lead to improvements in the quality of their work. - Teamwork: A feature of decentralization is collaborative work across teams and departments. The sharing of ideas can foster harmonious relationships and generate innovative ideas. Disadvantages - Costly: Empowerment and delegation often require financial incentives - Inefficiencies: In decentralized organizations, middle managers might carry out duplicate functions as there is no overview of what everyone else is doing. - Greater chances of mistakes: Decentralizing authority and responsibility only works if the empowered are sufficiently competent. With more decision makers, it becomes more difficult to track where mistakes were made or where things went wrong. - Loss of control: By decentralizing decision-making, authority is diluted. Thus, senior managers have less direct control over the operations of the business. - Communication Issues: By decentralizing decision-making power, there is a greater need for efficient communication.This might require additional time and resources, thereby adding to overall production costs.

Advantages and disadvantages of centralization

Advantages - Rapid-decision making - Better control - Better sense of direction - Efficiency Disadvantages - Added pressure/ stress for senior staff - Inflexibility - Possible delays in decision-making - Demotivating

Advantages and disadvantages of delayering

Advantages - Reduces costs by removing levels of management: cost savings are made on the salaries and benefits previously received by middle management - Improves the speed of communication flows by flattening hierarchical structures - Encourages delegation and empowerment as wider spans of control should provide more opportunities for employees to take on wider responsibilities Disadvantages - Creates anxiety and a sense of insecurity among workers who are worried about their jobs - Overload staff as their workload increases: this can have a counter-productive effect on the quality of work and staff motivation - Managers deal with larger teams, so decision-making can take longer, it can also create problems for meeting deadlines

Delegation

As a business grows, managers need to relinquish some of their roles and responsibilities because they are not able to effectively control all aspects of the organization. This passing on of control and authority to others is called delegation. It involves the line manager entrusting and empowering staff to complete a task or project but holding them accountable for their actions. The responsibility still remains with the line manager although the actual work is done by the authorised person. The art of effective delegation is one of the most important skills of managers. Given time and other constraints, managers cannot and should not deal with every single matter themselves. Effective delegation has major benefits for both managers and employees: • The manager saves time by not having to tackle every single task, so can focus more on the strategic issues facing the organization. • Delegation can motivate and develop employees who feel that they are trusted and that their talents have been recognised. By contrast, poor delegation causes confusion and a feeling of inadequacy. This leads to demotivated staff, resulting in a failure to achieve the tasks set.

Max Weber (1864-1920)

Bureaucracy was the ideal organizational structure. He argued that bureaucracy can be synonymous with efficiency because it is simply division of labour being applied to the administrative tasks within an organization. This is why many private sector firms have dedicated administrative departments. He suggested that bureaucratic organization is governed by several principles: > Continuity: the establishment follows official rules and regulations rather than taking high risks that could jeopradise its survival and continuity > Rules and regulations: business activity is conducted in accordance with the official policies of the organization, such as clear lines of authority, responsibilities and accountability. > Hierarchical structures: authority and responsibilities are part of a formal hierarchical structure with line managers carrying out their tasks in an impersonal way > Accountability: business activity is conducted with written evidence of compliance with the firm's policies. Formality therefore makes every worker accountable for their own performance Main drawback: Parkinson's Law - "work expands so as to fill the time available for its completion". Today, people feel that bureaucracy hinders and/or prevents creativity and risk-taking. They argue that, at best, bureaucracy simply slows down decision-making becomes slow and perhaps overly cautious.

Organizational structure

Businesses organize their human resources in various ways. In a small business, such as a sole proprietorship, there may be an informal organizational structure; the owner has a range of functions including marketing, operations and finance. Roles can be changed depending on the demands of the job at a particular point in time. The owner also carries out more mundane tasks such as being a sales person and a stock controller. However, in most businesses there is a need for a more formal and organized structure.

Handy's Shamrock organization

Charles Handy believes that people are the most important resource in any organization. His ideas differed markedly from those of F. W. Taylor who believed in tall hierarchical structures with close supervision of workers. By contrast, Handy recommends that businesses ought to place greater emphasis on meeting the needs of workers through methods such as job enrichment (giving workers more interesting and challenging tasks) and flexible working practices. For example, students in part-time employment and mothers with young children would have more choice over the hours that they work. Handy believes this helps to improve the wellbeing and morale of workers. Handy also emphasised the dynamic nature of change within organizations and the external business environment, thus requiring changes in organizational structures. He did not believe in 'jobs for life' but that short-term contracts were more appropriate. He argued that non-essential work (i.e. jobs that can be done by other organizations) should be contracted out to specialists who can do the work more productively and cost efficiently. The trend in the number of businesses that subcontract business activities supports Handy's beliefs. For example, schools might subcontract their non-core services such as security, catering and buildings maintenance.

Impact of culture and ICT on communication in organizations

Communication is the transfer of information from one party to another. Managers spend a significant part of their time communicating with both internal and external stakeholders. The purposes or objectives of communication include to instruct, clarify, interpret, notify, warn, receive feedback, review and, above all, to inform. Effective communication is vital to the success of any business so that staff are aware of their roles and the expectations of them, and so that managers can gather and act upon feedback from employees, customers and other stakeholders. In other words, effective communication enables people to have a better understanding and control of what they do. However, cultural differenceshavean impact on communication in an organization. For example, language proficiency is a highly valued communication skill in todays ever-more competitive labour market. For instance, English is the official business language in much of Southeast Asia but fluency in native languages such as Mandarin, Hindi and Spanish are also vital in many occupations in that part of the world. Similarly, accents can hinder communication as different pronunciations and tone of voice can cause messages to be misinterpreted or misunderstood. Cultural ignorance can cause offense to others. For example, KFC's global slogan "We do chicken right" is literally translated into Chinese as 'Its good for us to be prostitutes' - not exactly the best slogan for a family-orientated restaurant! KFC did not take cultural factors into consideration when communicating its marketing message. They clearly did not understand that different cultures have different understandings towards the same thing. By contrast, HSBC's slogan "The world's local bank" suggests they are aware of cultural differences in the countries where they operate. One common way to deal with communication problems on an international scale is to recruit bi-lingual or multi-lingual employees. This trend has been fuelled by globalization and the huge growth in world tourism, which have led to language skills being highly demanded in many tertiary sector industries. For example, staff at Hong Kong Disneyland must be tri-lingual in English, Cantonese and Mandarin. This helps to reduce the impact that language and cultural differences can have as a barrier to effective communication. Innovation in communication technologies also has an impact on communication in organizations. Internet technologies have reduced the cost of domestic and international communications. However, strategic planners need to consider the communication problems that can still occur on an international level where language and culture (see Unit 4.7) can present barriers to effective strategic implementation. Examples ofICT-based communication systems are considered below.

Shamrock organization

Due to these structural changes, Handy coined the concept of the Shamrock organization. The model gets its name from the shamrock plant (a three-leafed clover). Handy suggested that there are three groups of workers within a Shamrock organization: • Core staff This group consists of full-time professional workers (such as managers and technicians) who handle the daily operations of the business. They are crucial to the organization's operations, survival and growth. With developments in teleworking and e-commerce (see Unit 4.8) the core staff are becoming an increasingly smaller group. This has led to downsizing and restructuring of the workforce in many businesses. • Peripheral workers Also known as the contingent workforce, this group consists of part-time, temporary and portfolio workers who are employed as and when they are needed. They tend to be paid by piece rate for short periods of employment, thus helping to reduce labour costs for the firm The peripheral group forms the flexible workforce for an organization and constitutes a greater proportion of the workforce for large businesses, e.g. supermarkets such as Walmart, Tesco and Carrefour employ far more part-time staff than full-time workers. • Outsourced workers This group consists of individuals or businesses that are not employed by the organization but are paid to complete particular and specialized tasks, such as advertising campaigns or skills training. Freelance workers, subcontractors, agencies and the self-employed are examples of outsourced workers; they are hired by an organization for their expertise. For instance, most large firms use marketing agencies to design appropriate promotional campaigns. The three parts of the Shamrock organization have their own advantages and limitations for a business. The core workers, vital to the organization, must be well paid and remunerated. They are likely to enjoy some degree of job security, be well motivated and highly productive. The peripheral workers will suffer from a lack of job security thereby negatively affecting their morale. However, they present flexibility for an organization and are easier to 'hire and fire'. The outsourced workers are experts in their field but are therefore likely to be relatively expensive. Although Handy introduced the idea of the Shamrock organization back in the early 1990s, time has shown that businesses are indeed restructuring to become more flexible in their structures, reducing the core staff and using more peripheral and outsourced workers. The trend in modern businesses that use increasingly more part-time workers and teleworkers supports Handy's foresight.

Electronic mail (email)

Electronic mall is the process of using computer wide area networks (WAN) as a mailing system. Data is electronically transmitted from one computer device to another. It is a very fast method of communication because all the data (text, graphs, charts and images) are already in electronic form. Data can also be transmitted to many different recipients at the same time. The widespread use of mobile devices such as smartphones and tablet computers has cemented the use of email for communication in businesses. However, the set-up costs can be high, such as the purchase of computer equipment and the maintenance of the system. There is also the ongoing cost of using an Internet service provider. Data transmission via email is not always secure as it can be hacked into. This is one reason why many people still shy away from using e-commerce and credit cards for online shopping (see Unit 4.8). Also, computer systems and networks can fail (or 'crash'), causing communication failure.

Organizational structure by product

Most large businesses have a broad range of products. Hence, they might choose to structure their human resources according to the various types of product, e.g. US restaurant giants Yum! Brands Incorporated uses this organizational structure for its various strategic business units (SBU) such as Pizza Hut, Taco Bell and KFC.

Chains of command

The chain of command refers to the formal line of authority through which orders are passed down in an organization. This can be seen through a firm's organization chart. Businesses that have only a few levels of hierarchy have a short chain of command. By contrast, the chain of command is long in businesses that have many levels in the hierarchical structure.

Levels of hierarchy

The hierarchy in a business refers to the organizational structure based on a ranking system. Those at the top of the hierarchy include the CEO, Chairperson and the Board of Directors. At the other extreme, the most unskilled employees in the organization appear at the bottom of the hierarchy. Each hierarchical level refers to a different rank with its associated degree of authority and responsibility. Figure 2.2.e shows an organization with 5 levels in its hierarchical structure. The person directly above an employee on the next hierarchical level is known as the line manager. For example, in Figure 2.2.e, those on level 5 of the chart report directly to their line manager on level 4. A line manager is responsible for the day to day management of the people (known as subordinates) who are directly on the next level down the hierarchy. There are two main advantages of using hierarchical structures. First, they show clear lines of communication within the organization. This can improve the coordination and productivity of workers. Second, hierarchical structures establish departments or teams to create a sense of belonging in the workplace so act as a form of motivation (see Unit 2.4). However, hierarchical structures also have their limitations. Departmentalisation can mean workers are isolated to their official teams (see below for benefits of informal structures). Hierarchical structures also tend to be rather inflexible. This might prove problematic when there are changes in the external business environment that require flexible structural changes in the organization.

Decentralized structures

The organizational alternative is to use decentralized structures, whereby decision-making authority and responsibility is shared with others. For examples, departments or regional offices might be empowered to make decisions on behalf of the overall organization. However, key strategic decisions are still concentrated in the hands of the CEO and the board of directors.

Span of control

The span of control refers to the number of people who are directly accountable to a manager. Hence, the higher up a person is in a hierarchy, the wider his/her span of control tends to be. The CEO of a company is directly responsible to the Board of Directors and is also indirectly in charge of all workers in the organization. Hence, the CEO's direct span of control is narrow, but the indirect span of control in very wide. An advantage of a wide span of control is that fewer layers are needed in the hierarchy. This helps with cost control as there are less managerial positions in the firm. The flatter structure also means that communications between the different levels of the hierarchy should be more effective (in terms of speed and accuracy). By contrast, a narrow span of control means that there are fewer subordinates who are accountable to a manager. It is therefore easier to communicate with and control the team. Smaller teams might also be more productive since there is likely to be better team spirit and cohesiveness. Larger teams tend to suffer from communication problems which may cause tension and conflict. However, due to more levels of management in the structure, this system tends to be more costly. So what is the ideal span of control for a business? Management consultants have been debating this question for decades. It stems from the works of Henri Fayol (1841-1922). It was V.A. Graicunas (1898-1947), a Lithuanian management consultant, who first used empirical evidence to address the question of the optimal span of control. Graicunas suggested that the maximum number of subordinates should be four (in most cases) or five to one manager. He argued that the span of control should be limited because "One of the surest sources of delay and confusion is to allow any superior to be directly responsible for the control of too many subordinates." However, there is no consensus on the optimal span of control. As the business environment continues to evolve, many businesses have opted for wider spans of control. In essence, the decision is judgmental. The degree of control granted to a manager depends on several factors, which can be remembered by the acronym MOST: Manager- The more skilled and experienced the manager is more likely to have a wider span of control. By contrast, junior managers have a narrower span of control. Organizational culture - Narrower spans of control may be required in cultures that require managers to closely monitor and control their subordinates. By contrast, managers in democratic cultures tend to delegate and empower their subordinates, thereby allowing for a wider span of control. Such cultures prefer the term 'span of support'. Subordinates - Highly skilled staff are more likely to work in smaller, dynamic teams with their line manager having a relatively wider span of control. Google uses an innovative approach, with a 60:1 span of control. Task - Complex, urgent and important tasks tend to require a narrower span of control as communication will be more important, i.e. it is often more effective to have smaller teams where both accountability and responsibility can be clearly identified. By contrast, products that can be mass-produced means that less supervision is needed. Hence, the span of control can be widened as workers have relatively simple tasks that can be done with minimal supervision.

Mobile devices

The traditional telephone is still immensely popular as a means of communication in organizations, but smartphones and tablet devices such as the iPad are becoming ever more popular for business use. The top four mobile phone producers surpassed one billion units in a year for the first time in 2007; the average Finnish person owns more than two mobile phones; whilst the average Japanese person has a replacement mobile phone every nine months. Mobile devices are used by managers and employees who are 'on the go', such as real estate agents, sales representatives, insurance brokers, teleworkers (see Unit 2.1) and those travelling abroad for business. Technological progress, such as Wi-Fi and digital camera technology, has also further popularised the use of mobile devices as a form of information communication technology.

Video-conferencing

Video-conferencing uses a combination of telephone, computer and video technology. It allows meetings to take place when staff are in different locations, thereby cutting out travel time and costs. Video-conferencing allows people to talk to each other and see each other as they are being filmed (rather similar to an online conversation using a webcam). More and more multinational companies are using this method for interviewing overseas recruits. Once the initial start-up costs have been paid for, video conferencing has the advantage of being much quicker and cheaper than bringing people together in one location. An added advantage over ordinary face-to-face meetings is that video recordings can be made for future reference. However, a major disadvantage is that video-conferencing systems are expensive. Meetings can also be more difficult to conduct due to time zone differences and the over-reliance on technology. Due to possible time lags between sending and receiving messages, large meetings involving many people from numerous locations may have a slightly different 'feel'.

Bureaucracy

is the execution of tasks that are governed by official administrative and formal rules of an organization. Bureaucratic organizations are characterised by prescribed rules and policies, standardised procedures, and formal hierarchical structures. Bureaucracy is often associated with excessive administration, paperwork and formalities. Within an organization, this might include: • the frequent requirement to fillout unnecessary or tedious paperwork • staff working in multiple departments and therefore having to report to several managers • too many committees set up to investigate issues of concern to the organization • long, official chains of command • managers with duplicate or overlapping roles and responsibilities.