Ch1 business organisation

and structure

Study guide(+P48-49)

Identify the different types of organisation

Describe the different ways that an organisation can be structured
Explain the characteristics of the strategic, tactical and operational
levels in the organisation
Describe the roles and functions of main departments in a business
organisation
Explain centralisation and decentralisation
Understand committees in an org.
Explain the role of marketing in an org.
Explain the accounting function in an org.
Explain basic organizational structure concepts

1 Types of Organizations

An organization is a social arrangement which

pursues collective goals , which controls its own
performances and which has a boundary
separating it from its environment.

Examples:
car manufacturers
accountancy firms
trade unions
charities
local authorities
the army, navy and air force
schools

1.1Common features of organizations

They pursue a variety of objectives and

goals.
Preoccupied with performance,and meeting
or improving their standards
made up of individuals, specialising in
certain activities, doing different things
Obtain inputs and process them into outputs
Contain formal systems and procedures
which enable them to control what whey do

The organization processes

Environment - everything outside the organization,
which either affects, or is affected by, its activities

Inputs
e.g. raw materials
machinery
human resources
money
information

Organization
processes

Outputs
e.g. goods or services

1.2 Why do organisations exist?

Enable people to be more productive:

Overcome peoples individual limitations

Enable people to specialise

Save time

Individual worker concentrates on a limited

type of activity, more efficiently
a group can accomplish a task more quickly
than one individuals

Accumulate and share knowledge

Enable synergy

the whole is greater than the sum of the parts

Synergy (1+1>2)
Separate entities are combined together so that it has
a great effect than the sum of the activities of each
entity working alone.
Synergy operates, not just by reducing the time
taken to carry out the task in proportion to the
number of people working on it, but has the effect of
improving the quality of the work of the participants
by better organization and a more fertile flow of
ideas.
*synergy can be positive or negative.

1.3 How organisations differ

Different ownership(public vs. private)

Different control(by owners vs. by agents)
Different activity (industry)
Profit or non-profit orientation
Different legal status(limited company vs.
partnership)
Different size(small vs. large)
Different sources of finance(borrowing,
government funding vs. share issues)
Different technology(high tech. vs. low
tech.)

1.4 What the organisation does

Agriculture
Manufacturing
Extractive
Energy
Retailing
Intellectual production
Service industries

1.5 Profit vs. non-profit orientation

Primary
goal

Profit
orientated

Non-profit
orientated

Maximise
profit

Provision of
goods/services

Secondary
Output of
goods/services
goal

Minimise
cost

1.6 Private vs. public sector

Private sector: organisations not owned or

run by central or local government, or
government agencies.
Public sector: organisations owned or run
by central or local government, or
government agencies.

1.7 Private sector business

A business organisation exists to make a

profit.
Legal status

Sole trader: go into business alone

Partnership: go into business with one or
more partners to share the profit and risk
Limited company: has a separate legal
personality from its owners

Degree of
regulation

Formation
&
dissolution

Ownership
liability

Ownership and
management
relationship

Accountabili
ty of policy
makers

Raising capital

Profit
distribution

Taxation of
profits

No
formalities

Unlimited

Frequently but
not necessarily
the same person

Accountable
to self only

Limited to the
resources
available to the
single owner

All profits
go to the
owner

Personal
taxation of
owners
income

By
agreement
amongst
partners

Unlimited

Customarily the
same persons

All
accountable
to each other

Current and
additional
partners may
provide capital

Profits
distributed
according to
partnership
agreement

Personal
taxation of
each
partners
income

Considerable,
especially for
quoted
companies

Detailed
onerous
compliance
with
company
legislation

Limited

Often the same

in small private
companies. In
larger companies
different people

Accountable
to the
shareholders

For large
quoted
companies it
may be easy to
make a new
share issue

Directors
decide about
dividends
paid to
shareholders

Corporation
tax on the
companys
profits

Sole trader

Partnership

Limited
company

Characteristics of limited companies

Ownership and control are legally separate.

Shareholders are the owners:

Directors are appointed by shareholders to run the

company

have limited liability

Have limited rights over the daily running of the
company
Provide capital and receive a return

Executive directors
Non-executive directors

Operational management operates the business

and is accountable to the board of directors

Types of limited company

Listing
Number of
shareholders

Private limited
company(Ltd)

Public limited
company(plc)

smaller

larger

Transferability of Rarely transferable

shares

Shares offered
to public

Directors as
shareholders

Directors more
likely to hold
shares

Directors less
likely to hold
shares

Source of capital

Founders, business
associates, venture
capitalists

+ Public ,
institutional
investors

Adv. and disadv. of limited company

Advantages:

More money available for investment

Reduces risk (limited liability)
Separate legal personality
Separation of ownership and control
No restriction on size
Flexibility

Disadvantages:

Compliance costs are high

Shareholders have little power

Co-operative and mutual associations

Co-operatives are businesses owned by

their workers or customers, who share the
profits.

E.g. Co-operative Retail Store network; Cooperative Wholesale Society; Co-operative

Bank

Mutual association are owned by their

members rather than outside investors

E.g. some financial companies and some

insurance companies

1.8 the public sector

Public sector comprises all organisations

owned and run by the government and
local government.
Examples:

some hospitals
some publicly funded agencies
armed forces
most schools and universities
government departments

Characteristics of public sector

Accountability (to parliament)

Funding from:

Raising taxes
Making charges
Borrowing

Limitless demand for services

Limited resources

Adv. and disadv. of public sector

Advantages:

Fairness
Providing public goods
Satisfying public interest
Cheaper finance
Sometimes economies of scale and efficiency
can be achieved

Disadvantages:

Accountability
Interference
Cost

Classification by Ownership
(private vs. public)
sector

owned and
financed by

main aim

example

Private

individual

of a commercial
nature (e.g. profit)

most business

government

To provide goods
and services which
address the wellbeing of the
community

most schools and

universities, stateowned banks,
hospitals,CCTV,
etc.

Public

Non-governmental organisations

NGO is an independent voluntary

association of people acting together for
some common purpose.
Organisational features of NGO:

Staffing by some volunteers

Finance from grants or contracts
Skills in advertising and media relations
Some kind of national headquarters
Planning and budgeting expertise

NGO also need to possess an efficient level

of organisation structure.

2. Organisational structure

Mintzbergs 5 components of the organization

Strategic apex

Techno-

Middle

structure

line

Operating core

Support
staff

The importance and relative size of these blocks will

vary across organizations.

Strategic apexrefers to the higher levels of

management, ensures the organization follows its mission,

managers the organizations relationship with the
environment.

Middle linethe intermediate levels of management,

converts the desires of the strategic apex into the work
done by the operating core.

Operating core represents the basic productive

work of the organization, i.e. people directly involved in

the process of obtaining inputs, and converting them into
outputs.

Technostructurerefers to staff who provide a technical input

without being directly engaged in core activities, but involves

standardisation of work processes or outputs.
Analyzers determine the best way of doing a job
Planners determine outputs
Personnel analysts standardize skills

Support staff provide services ancillary to the core operations

of the organization. They do not plan of standardize
production.Independent of the operating core.

Q: Where is the accounting function located in the

organisational structure?
*(R-163:2; P561:2)

Departmentation

Grouping tasks and people together in

some rational way
Different patterns of departmentation can
be selected depending on the individual
circumstances of the organisation

Functional departmentation
Geographic departmentation
Product/brand departmentation
Customer departmentation

Functional departmentation
Setting up departments for people who do similar jobs,
primarily production, sales, finance and general
admin.
Managing director
Production
manager
PR

Marketing
manager
Advertising

Engineering

manager
Market
research

Accounting
manager

Financial
accountant

Personnel
manager

Management
accountant

Advantages:
SpecialisationExpertise is pooled and
employees
work can be coordinated
Avoiding duplication enables economies of
scale
facilitates the recruitment, management and
development of functional specialists
Suits centralised business

Disadvantages:
Lack of customer orientation: focuses on internal
processes and inputs, rather than customer and
outputs
Communication problems between different
functions
poor co-ordination: decisions by on function
involving another might have to be dealt with at a
higher level
Create vertical barriers to information and work
flow

Geographic departmentation
Divides the enterprise into regions or countries
according to geographic area.
Board of directors

Southern
region
board
Accounts
Dept.

Northern
region
board

Midlands

region
board
Personnel
Dept.

Production

Dept.

Sales
Dept.

Advantages:
Local decision-making: respond quickly to local
needs
Cheaper sometimes to establish area offices

Disadvantages:
Duplication of some functional department and
possible loss of economies of scale.
Inconsistency in standards or methods

Product/Brand departmentation
Specialists and activities are grouped on the basis of
product or product line.
Board of directors

Divisional
manager
(product A)
Production

Divisional
manager
(product B)
Accounting

Divisional
manager
(product C)
Sales

Personnel
Dept.
R&D
Dept.
Finance
Dept.

AdvantageProduct-oriented
Focus on the product performance and profitability
Specialisation on specific product achieved
different functional activities required to make and
sell each product can be co-ordinated and integrated

Disadvantages:
Increases overhead costs and managerial
complexity
Different products may fail to share resources and
customers

Brand-oriented structure
Brand is the name or design which identifies the products or
services of a manufacturer or provider and distinguishes
them from those of competitors.
Creates brand recognition, differentiation and loyalty.
Brand departmentation has similar adv. And disadv. to
product departmentation.

Activities
are grouped on the
basis of types of
Customer-oriented
structure
customers, or market segment. (usually between
business and household)

Divisionalisation
The division of a business into autonomous regions or
product businesses, each with its own profit and loss
responsibility.
Division of the organisation might be:
Subsidiary company
Profit centre or investment centre
Strategic business unit(SBU)
*R-30:8

Advantages:
Focuses the attentions of divisional management on
business performance.

Encourages a greater attention to efficiency,

lower costs and higher profits.
Reduce the likelihood of unprofitable products
and activities being continued.
Gives more authority to junior managers.
Reduces the number of levels of management.

Disadvantages:
In some business, it is impossible to set up separate
divisions.

Only possible at a fairly senior management

level.
Divisions may compete each other in getting
resources from head office.

Key conditions for successful divisionalisation:

Each division must have properly delegated authority
Each division must be large enough to support the
management, not rely on head office
Each division must have a potential for growth.
There should be scope and challenge in the job for the
management of each division.
The deal between divisions should be arms length
transaction.

Matrix structure(p63)

Crosses functional and product/project/customer organisation.

Board of directors
Product A
coordinator

Product B
coordinator

Product C
coordinator

Service

Marketing

Manufacturing

Design

R&D

Production

= points of interaction

Advantages:

People
Workflow & decision making
Greater flexibility
Tasks and structure
Mix strength of functional and project teams
improved communication, coordination and cooperation of people
Team members become customer oriented or
product focused.
Motivational in that it requires greater employee
participation and control.
Bureaucratic obstacles are removed, and horizontal
workflow is available.

Disadvantages:
conflicts between functional managers and
product/project/area managers.
Too many bosses, conflicting demands and roles
More complex, more costly
Slower decision making

Hybrid structures
Involve a mix of functional departmentation with
elements of :
Product organisation
Customer organisation
Territorial organisation
*R-71:1(note the difference between matrix
structure and hybrid structure)

Organization structure
To achieve the organizational goal, the interaction patterns
of organization members need formal coordination.

Definition
Organization structure is the grouping of people into
departments or sections and the allocation of
responsibility and authority.
Organization Structure defines how tasks are to be allocated,
who reports to whom, and the formal coordination
mechanisms and interaction patterns that will be followed.

Fundamentals of structuring
Integration

Differentiation

co-ordination
control
verticalhierarchy
horizontaldepartment

The combination of span of control and scalar chain

determines the overall pyramid shape of the
organization and whether the hierarchical structure
is flat or tall.

Span of control
Span of control refers to the number of
subordinates responsible to a superior.
Too wide a span of control means too much
of the managers time will be taken up with
routine problems and supervision, leaving
less time for planning.
Too narrow a span of control means the
manager may fail to delegate, keeping too
much routine work to himself and
depriving subordinates of decision-making
authority and responsibility .
*pilot paper #1

Solitary work
Entrepreneurial
activities
Managers
work

Interaction with
superiors and
colleagues
Supervision

Non-supervisory
work

Span of control

Narrow

Wide
Delegate

Advantage

Close supervision and

control
Fail to delegate, keeping too
much routine work and
depriving subordinates
decision-making authority.
High costs due to numerous
levels and undue delays of
information.
Subordinates dissatisfied,
having little challenge and
responsibility

Too much time taken up with

routine problems and
supervision, leaving less time
for planning.
Possible loss of control
Managers workload so high
that bottlenecks may occur.

Disadvantage

Factors to influence the span of control

Managers capabilities
Nature of mangers workload

The more non-supervisory work, the greater

the delegation,the narrower the span of control

Subordinates work
Nature of the problems
Interaction between subordinates
Geographical dispersion
Support that supervisors receive from other
parts of the organisation

Tall and flat organisations

Scalar chain: the chain of command from

the most senior to the most junior.
Tall organisation has a large number of
levels of management hierarchy and
implies a narrow span of control.
Flat organisation has a small number of
levels of management hierarchy and
implies a wide span of control.

MD
Divisional
managers

Department
managers
Section
managers
Assistant
managers

Chief
executive

Senior
management

Middle
management

Department
managers

Supervisors

Charger hands/
Team leaders
Workers

MD

Supervisory
management

Supervisors
Workers

Organization

Advantage
Narrow control spans
Small groups

Disadvantage

Tall

Assists management
training

Inhibits delegation
Rigid supervision blocking
initiative
Same work passes too
many layersincreases
administration and
overhead costs
Communication problems

Flat

More opportunities for

delegation
Low administration cost
Speed up
communication

Managers may only get a

superficial idea
Sacrifice control
More pressure on the
middle manager layer

Tall and narrow span of control:

Close control and supervision

High administration costs; low delegation
(low motivation); communication problem;
rigid

Flat and wide span of control

Delegation; fast communication (vertical);

cheap; flexible
Loss of control; too much workload in
supervision

Delayering

There is a trend of delayer: reducing the

number of management levels from the
bottom to top.
Possiblities:

Information technology
Empowerment to front-line workers

Advantages:

Economy: reduce managerial/supervisory

costs
Fashion

5. Centralisation vs. Decentralisation(P89)

Centralisationthe practice of minimal delegation
of authority outside senior management

Centralisted organisation one in which authority

is concentrated in one place.

Decentralisationincreased delegation,
empowerment and autonomy at lower levels of the
organisation.

Centralisaiton

Decentralisation

Planning: management can balance

the interests of different functions

Planning: greater awareness of

local problems

Decision-making: higher quality

due to senior managerss abilities

Decision-making: quick response

to changing events

Greater and easier Control

Separate spheres of responsibility

identified: Performance
measurement and accountability
are better

Standardization

Localisation

Greater Coordination

Lowering workload of top

managers

Wider view of senior management

Motivation of junior managers

Lower ohead cost by reducing

number of managers

Greater flexibility

simple structure (entrepreneurial structure)

(P63)
Strategic apex (a single entrepreneur or
management team)retains control over decisionmaking and exercises a pull to centralise.
Wide span of control; direct supervision; no
middle line; minimal hierarchy; no technostructure;
little standardisation.
Suitable for small and young organisations, to
handle an environment that is relatively simple but
fast moving.
Risky as it depends on the expertise of one or few
persons, prone to succession crises.

The new organisation(p64)

Focuses on flexibility as a key organisational value.
Flat structures: shorten lines of communication
and decision-making; more responsive.
Horizontal structures: functional versatility.
Chunked and unglued structures: teamwork and
decentralisation
Output-focused structures: focus on results and
customers
Jobless structures: employees become seller of
skills

The shamrock organisation (flexible

Core of essential executives and workers supported
firm)
by
outside
contractors
and
part-time
help.
(p65)
Professional core
Self-employed professionals or technicians or specialised
organisations
Contingent work force
Consumers

Flexibility:
Personnel costs
Personnel numbers
Skills

*pilot paper #42

3.Levels of strategy in the organisation

The strategic management process is multilayered.

Levels of strategy:

Corporate
General direction of the whole organisation
Decide what types of business the organisation is in

Business
Determines how an organisation approaches a
particular product market area.
Because of development of divisionalised
organisation with SBUs.

Operational/functional

Deal with specialised areas of activity

Anthony hierarchy

Strategic management

Tactical management

Carried out by senior management

Direction setting, policy making, crisis
handling
Carried out by middle management
Establish ways to achieve corporate strategies

Operational management

Carried out by supervisors or operatives

Routine activities to carry out tactical plans

Exam focus point

One of the basic opganisational structure

concepts is that the separation between
direction-setting for the business, and dayto-day management processes.

4. Organisational departments
and functions

Research and development (R&D)

Purchasing
Production
Service operations
Marketing
Administration
Finance
Human resources

4.1 R&D

Pure research: research with no obvious

commercial end
Applied research: research with specific
practical aim
Development: use of knowledge to produce
new products or systems

R&D

Product research:

Process research:

Create new products and develop existing

products.
Improve the way or efficiency in which the
products or services are made or delivered

R&D should support the organistions

strategy and be closely co-ordinated with
marketing.

4.2 Purchasing

The acquisition of material resources and

business services for the use of organisation.
Purchasing mix:

Quantity
quality
price
delivery

Meeting quality targets, minimising

inventory holding cost and getting
the best value for money

Link with the rest of organisation

R&D
Production
Finance

4.3 Production

Plan, organise, direct and control the

activities to provide products and services.
Production manager:

How to add value during the process of

production (converting inputs to outputs)
Long-term and short-term decisions

Integrated with other functions:

R&D
Human resources
Sales
Finance

4.4 Service operations

Any activity of benefit that one party can

offer to another that is essentially
intangible and does not result in the
ownership transfer.
Nature of services

Intangibility
Inseparability
Variability
Do not result in the transfer of ownership

Dimensions of service operations

4.5 Marketing

The management process which identifies,

anticipates and satisfies customer needs
profitably.
4 roles

Sales support: essentially reactive

Marketing communications: more proactive
Operational marketing: broad range of
marketing activities
Strategic marketing: creation of competitive
strategy
*Pilot paper #2

Marketing strategy and

Marketing planning is subordinate to
corporate
strategy
corporate planning but makes a significant

contribution to it.
Specific marketing strategies will be
determined within the overall corporate
strategy, and these will be interdependent
with those for other functions of the
organisation.

Marketing orientation
Marketing
orientation
Determine customer needs
Invest resources

Sales/production/product
orientation
Determine whether
product can be made
Invest resources

Make product/service
Make product/service
Market the product/service
Sell the product/service
Market feedback

*The key task of marketing orientation is to determine the needs of

the customers and profit via customer satisfaction.

Marketing mix

The set of controllable variables and their

levels that an organisation uses to influence
the target market.
4Ps:

Customer
buys
satisfaction

Product

Price

Place

Promotion

organisation
sells
product

*Pilot paper #46

4Psproduct

What is being sold (could be a service).

Implication of the marketing orientation:

Marketing managers distinguish:

Not a thing with features

A package of benefits, which meets a need or
provides a solution for the customer
Product class
Product form
Brand or make

A different marketing approach is appropriate to

each stage of the product life cycle.

4Psplace

Outlets: where products are sold

Direct distribution
Through one or more intermediaries

Logistics: the management of how to

warehouse, storage and transportation.

4Pspromotion

Includes all marketing communications, by

which the public knows about the product
or service.
Types of promotion:

Advertising
Sales promotion
Direct selling
Public relations

4 behavioural stages of customer:

Awareness, interest, desire, action

4Psprice

Includes basic price, discounts, credit terms

and interest free credit.
Influenced by demand and products stage
in its life cycle.

Penetration: low price is charged in early

stages of the product.
Skimming: high price is charged to cream off
the highest level of profits.

Price is also part of image of the product.

Price is a weapon against competitors.

Service marketing

People
Processes
Physical evidence

The ideal marketing mix

Holds a proper balance between the

elements

Proper attention should be given to all the

activities
Should not place too much emphasis on one
aspect of the marketing mix

4.6 Administration

Centralised administration is to carry out

administrative functions at head office as much as
possible.
Advantages

consistency
Better security/control
Head office knows better whats going on
Economies of scale
Staffs in a single location

Disadvantages

Time-consuming
Reliance on head office
System fault easy to spread across the organisation

4.7 Finance function

Roles

Raising money
Recording and controlling
Providing information to managers
Reporting to stakeholders

Finance function

Financial management
Treasury management
Working capital management
Financial accounting
Management accounting

Financial management

Investment decisions
Financing decisions

Retained earnings
Capital markets
Money markets
Bank borrowings
Government sources
Venture capital
International money and capital markets

Dividend decisions
Operating decisions

Treasury management

Plan and control the sources and uses of

funds by the organisations.

Cash budgeting
Arrange bank overdraft
raise funds in money market and capital
market
repay loans when they mature
Carry out cashiers duties
Manage foreign currency dealings

Working capital management

Receivables management: credit control

Poor credit control will lead to irrecoverable

debts and overdraft finance.

Payables management
Inventory management
Payroll management

Financial & management accounting

Financial accounting

Recording financial transactions

Reporting to shareholders

Management accounting provides

information to management and assist in:

Planning
Decision making
controlling

Coordination with other functions

As information providers to other

managers in other departments,
accountants cannot be fully effective unless
they work in co-operation with other
managers.

Purchasing department
Sales department
Credit control and debt collection
Financial accounting
Management accounting
cashier

Strategic contributions

Ensure that resources of finance are

available
Integrate the strategy into budgets
Establish the necessary performance
measures
Establish priorities
Assist in the modeling process

4.8 Human resource management

HRM is concerned with the most effective

use of human resources.
Objectives

Develop an effective human component for

the organisation
Obtain and develop the human resources, and
use and motivate them effectively
Create and maintain a co-operative climate of
relationships
Meet the organisations social and legal
responsibilities relating to HR

Human resource cycle

rewards
selection

performance

appraisal
Training and
development

Effective HRM can:

Increase productivity
Enhance group learning
Encourage initiative
Reduce staff turnover

HR planning

Concerns the acquisition, utilisation,

improvement and return of human resources.
Should be based on:

Strategic analysis
Environment
SWOT
Use of employees
Organisations objectives

Forecast
Internal demand and supply
External supply

should be regularly controlled.

6. committees

Consist entirely of executives or be instruments

for joint consultation between employers and
employees.

Committee chair(6.1.1)
Committee secretary(6.1.2)

Purposes:

Creating new ideas

Means of communication
Allow for greater participation in the decisionmaking and problem-solving process
Combining abilities
Co-ordinating
Representation
recommendations

*P561:4

Types of committee

Executive committees
Standing committees: permanent basis
Ad hoc committees: ad hoc basis
Sub-committees
Joint committees
Management committees

Adv. and disadv. of committee

Advantages:

Consolidation of power and authority

Delegation of power and authority
Blurring responsibility
Gain time

Disadvantages:

Too large for constructive action

Time-consuming and expensive
Delays may occur
Operations may be jeopardised
Incorrect or ineffective decisions may be made
May invite compromise in the decision-making

Using committees successfully

Well defined authority, timescale and

purposes
Good chair
Good secretary
Members with necessary skills
Not too large to manage
Cost kept low
Allowed enough time to reach decisions