Business Steve Notes People and Organisations

Emma Rudd BMA

Organisational Structures What is an Organisational Structure? An organisational structure is the way in which a business is arranged to carry out its activities. It may be shown in an organisational chart that sets out; The routes by which communication passes through the business Who has authority, power and responsibility within the organisation The roles and titles of individuals within the organisation The people to whom individual employees are accountable and those for whom they are responsible. Businesses change the structure of their organisation rapidly and regularly; some entrepreneurs believe they should be continually reorganising their firms to meet the demand of a dynamic market place. A principle reason for the regular change in organisational structures is the pace of external change. All businesses have to ensure that they are able to compete with rival firms. Keeping costs to a minimum is an important part of competing successfully and is a common factor causing businesses to change their organisational structures. Key issues in Organisational Structures. Factors determining the structure adopted by an organisation include the number of levels or layers of hierarchy used and the extent of the span of control. Levels of Hierarchy Organisations with a large number of layers (or levels) of hierarchy are referred to as tall. That is, there are a substantial number of people between the person at the top of the organisation and those at the bottom. Traditionally, UK businesses have tended to be tall. Such businesses have long chains of command from those at the top of the organisation to those at the bottom. Businesses with many layers of hierarchy frequently experience communication problems as messages moving up and down the organisation pass through many people. This may be a key factor of why businesses in the UK have now moved to more flatter organisational structures. This process of flattening structures (commonly termed delayering) has led to businesses operating with significantly wider spans of control. Spans of Control A narrow span of control allows supervisors and managers to keep close control over the activities of the employees for whom they are responsible. As the span of control widens, the subordinate is likely to be able to operate with a greater degree independence. This is because it is impossible for an individual to monitor closely the work of a large number of subordinates. A traditional view is that a span of control should not exceed 6, if close supervision is to be maintained. However where subordinates are carrying out similar duties, a span of control of 10 or even 12 is not unusual. It is normal for a span of control to be less at the top of an organisation. This is because senior employees have more complex and diverse duties and are, therefore, difficult to supervise. Delayering Delayering occurs when businesses remove one or more layers of hierarchy from the organisation. A number of businesses have implemented large scale delayering programmes over recent years. Many businesses have removed middle managers from their organisational structures.

Business Steve Notes

Emma Rudd BMA

The increasing level of competition in international markets, has forced UK firms to reduce their costs. Delayering the organisational structure is one way in which costs have been lowered. Delayering has been encouraged further by the acceptance of management theories emphasising the benefits that may result from having fewer layers of hierarchy. Modern business writers have identified significant competitive benefits to be gained from giving relatively junior employees greater authority and control over their working lives. This combination of a need to reduce costs and the move to enhance the role of shop floor employees has led to cuts in middle managers jobs. Delayering creates flatter organisations which some describe as leaner and more responsive. Advantages Delayering reduces costs by removing a number of expensive middle managers. Delayering can improve responsiveness by bring senior managers and customers closer together. Delayering can motivate employees lower down in organisations by giving them greater authority and control over their working lives. Communication may improve as a consequence of delayering since there are less levels of hierarchy for a message to pass through. It can produce good ideas from a new perspective as shop floor employees take some decisions. Disadvantages Delayering can lessen organisational performance as valuable knowledge and experience may be lost. Morale and motivation may suffer because employees may feel insecure. Some businesses may merely use the excuse of delayering for making a large number of employees redundant. Because delayering means employees have to take on new roles within the organisation, expensive and extensive retraining may be required. Delayering can lead to intolerable workloads and high levels of stress amongst employees.

Centralisation and Decentralisation Centralisation and decentralisation are opposites. A centralised organisation is one where the majority of the decisions are taken by senior managers at the top or centre of the business. Centralisation can provide rapid decision making as fewer people are likely to be consulted. It should also ensure that the business pursues the objectives set by senior managers. A decentralisation gives greater authority to employees lower down the organisational structure. Decentralisation provides subordinates with the opportunity to fulfil needs such as achievement and recognition by working on delegated tasks. This should improve motivation and reduce the businesses costs by, for example reducing the rate of labour turnover. It is doubly beneficial to management. It reduces workload on senior managers allowing them to focus on strategic (rather than operational) issues. At the same time it offers junior managers an opportunity to develop their skills in preparation for a more senior position. Organisational Structures Businesses can adopt a number of structures according to the size of the organisation, the environment it operates in and the personal preferences of the owners and senior managers. 2

Business Steve Notes

Emma Rudd BMA

Formal or Traditional Hierarchy This structure gives all employees a clearly defined role, as well as establishing their relationships with other employees in the business. It is common for this type of organisational structure to be based on departments and, because of the dependence upon agreed procedures, it can be bureaucratic. This type of structure normally has a number of other associated features; It is a relatively tall hierarchy with narrow spans of control. The organisation will be centralised with the most important decisions taken by senior managers. Hierarchy is important and senior managers expect to be treated with respect. Tradition id important and change is often implemented slowly. Communication in formal organisations is principally downwards and uses established routes moving down from senior to junior employees. Traditional hierarchies allow specialists to operate within their area of expertise. They can generate new and very innovative ideas, but other areas of the business may be unaware of such developments. Employees understand lines of command and communication, and the position of their department or unit within the organisation. All employees appreciate the possibilities for promotion existing within the business. The disadvantage of this structure can become more apparent as the organisation grows in size. Departments may bid for resources in an attempt to increase their prestige within the business, rather then because it will benefit the organisation. Furthermore, as the business becomes larger, decision-making can become slower as communication has to pass through many layers. Co-ordinating the businesss attempts to achieve its objectives become difficult. Senior managers become remote and may take decisions inappropriate to local situations or to the need of a particular group of customers. Traditional organisational structures can be found in the following types of businesses; Long-established businesses, such as merchant banks in the City of London Family businesses operating on a relatively small scale. Matrix Structures This type of organisational structure is task orientated and is intended to overcome many of the problems associated with the traditional or hierarchy structure. It is a combination of a vertical chain of command operated through department or units and horizontal organisation of project or product teams. Businesses using matrix structures develop teams of individuals with the specialist skills necessary to complete a given project. Each individual within the project team brings a particular skill and carries appropriate responsibilities. The aim is to allow all individuals to use their talents effectively, irrespective of their position within the organisation. So, a project manager looking to develop a new product may be able to call on IT and design skills from relatively junior employees elsewhere in the organisation. Matrix structures focus on the task in hand. Launching a new product, opening new retail outlets, closing down factories or entering overseas markets are examples of projects. Project groups often have a strong sense of identity, despite being drawn from various areas of the business. This is because they are pursuing a clearly defined objective, which provides team members with a sense of purpose and responsibility. 3

Business Steve Notes

Emma Rudd BMA

Matrix structures are often used by businesses such as advertising agencies who manage a number of customer projects simultaneously. Advantages Authority and responsibility are clearly established Specialist managers can be used effectively The promotion path is clearly signposted Employees frequently very loyal to their department within the business Focuses on tasks necessary for business success Encourages organisations to be flexible and responsive to customers needs. Motivates and develops employees by providing varied and challenging tasks Disadvantages The organisation can be slow to respond to customer needs Communication, and especially horizontal communication, can be poor Employees can have divided responsibilities Inter-departmental rivalry may occur at the expense of performance of a business as a whole. Conflict can occur between project and departmental managers, reducing the performance of the organisation Heavy expenditure on support staff may be required.

Entrepreneurial Structures These are frequently found in businesses operating in competitive markets and particularly in those where rapid decisions are essential. News organisations, for example Sky News, often operate with an entrepreneurial structure. A few key workers at the core of the organisation frequently the owners in the case of a small business make all the major decisions. The business is heavily dependent upon the knowledge and skills of these key workers. Power radiates from the center of this structure. Entrepreneurial structures are suited to markets where rapid decisions are essential and where organisations are small enough to be controlled effectively by a few trusted employees. It is a structure frequently used by charismatic and dynamic leaders: Alan Sugar used this approach to manage his electronics company Amstrad during the early years of the business. Because all-important decisions are taken at the center, little use is made of hierarchies and the organisation it relatively flat. However there are distinct drawbacks to the entrepreneurial structure. Its effectiveness depends on two factors; The quality of management and decision making by the core employees. If decisions are delayed or if the workers lose touch with the market, the business is unlikely to perform effectively. As the business grows the core employees experience increasing difficulty in managing the business. The work may overwhelm then and the quality (and speed) of decisions may suffer. At this point the business may adopt another structure. Informal Structures This type of structure exists where the organisation does not have an obvious structure. This is common in the case of professional practices (lawyers for example) where members operate as a team. The professionals normally receive administrative support from others within the organisation.

Business Steve Notes

Emma Rudd BMA

This form of organisational structure allows highly trained and motivated employees to organise their working lives and to take decisions with a high degree of independence. However it is less appropriate for many businesses as it lacks co-ordination and control by senior managers. Factors Determining Organisational Structures When deciding upon an organisational structure a business will be subject to both internal and external influences. Internal Factors The following internal factors all influence the organisational structure to some extent. The Size of the Business As the scale of the business increases, an entrepreneurial structure, for example, becomes unsuitable. As the business grows further, the chain of command is likely to be lengthened, encouraging the removal of some layers of hierarchy and broader spans of control. The Nature of the Product If the firm supplies a diverse range of products it may organise itself traditionally perhaps in the form of divisions reporting to the board of directors. The Rank Organisation operates in this way with key areas of the business, such as film services and leisure activities such as the Hard Rock Cafes, having some degree of independence. The Skills of the Workforce The higher the level of skill the typical employee has, the more likely it is that businesses will organise along matrix or informal lines. A small group of professionals may simply carry out their professional duties with administrative support from the organisation. Less skilled employees may respond better to a more formal structure with more authority retained further up the hierarchy. The Culture of the Organisation This is a major influence on the structure the firm adopts. If a business has a highly innovative culture whereby it wishes to be a market leader selling advanced products, it may adopt a matrix structure to minimise bureaucracy and to allow teams to carry out the necessary research and development, and market research. On the other hand, an organisation which places importance on tradition (and wants to appear conventional) may be best suited to a formal, hierarchical structure. The structure places emphasis on positions rather than people and this factor encourages the continuance of existing policies and practices. Some high-class hotels may fall into this category. The Strategic Objectives of the Business An innovative and highly competitive organisation may opt for a matrix structure in order to complete tasks effectively. On the other hand, a business focusing on quality of design and production (as opposed to growth) may suit an entrepreneurial structure. The latter structure may be appropriate for businesses in a craft industry. External Factors The environment in which the business is operating is important. Fierce competitive pressures may encourage delayering in an effort to reduce costs, whilst rapid change may require a matrix structure to ensure that the organisation can remain competitive. The matrix structure would also eliminate the possibility of inflexible hierarchies getting in the way of rapid decision-making.