Businesses - Structure

Division

Breaks a complex activity into manageable tasks, roles, and units.

Coordination

Align the separate tasks so the firm delivers one coherent output

Specialisation

Focusing people or units on a narrower set of tasks, creating task-specific expertise, but also boundaries

How does marginal cost change as you increase output

It tends to decrease until it plateaus

What is silos?

Isolated departments that operate independently and refuse or fail to share information, resources, and goals with the rest of the organisation.

What are tools used as coordination mechanisms?

Authority: hierarchy, escalation rules

Formalisation: routines, plans, targets

Collaboration: teams, shared data

Shared understanding: culture and norms

Functional areas

Clusters of similar skills, knowledge and responsibility that is given a formal place in the organisation via a department

Core operations

Departments directly involved in creating and delivering the product or the service

Examples of core operations departments

R&D, Operations, Marketing, Sales, Logistics, Procurement

Support functions

Departments that enable, coordinate, protect, and control the organisation

Examples of support functions

Finance, HR, IT, Legal and Compliance

Does support functions mean that their task is secondary to the firm?

No, weak support functions often create strategic failures such as bad controls, wrong incentives, talent gaps, data failures, or legal exposure

What is departmentalisation?

Grouping by function, product, region, customer, or project

What does departmentalisation affect?

Specialisation, focus, risk of duplication, silos, improve or worsen responsiveness to markets or customers

What is centralisation vs decentralisation?

It is about where authority in a business lies. Centralisation: senior management makes most decisions. Decentralisation: lower-level managers or employees can make more decisions themselves.

What does (de}centralisation affect?

Speed (no need for approval), consistency, autonomy, accountability, escalation to top management

How is work coordinated?

Through coordination mechanisms, hierarchy, routines, formalisation, teams, shared data, and culture

What does coordination affect?

Information flow, cross-unit integration, managerial workload, flexibility, coordination costs

How does hierarchy help coordination?

A manager directs work and resolves disagreements.

How do routines and formalisation aid coordination?

Standard procedures and written rules specify what to do.

How do teams aid coordination?

People from different departments work together

How does shared data aid coordination?

Everyone uses the same information (prevents silos and duplication and improves speed).

What does improved coordination affect?

Information flow, cross-unit integration (how departments fit together), managerial workload, flexibility (difficult with strict rules and little coordination), coordination costs (not too much time and resources on meetings)

How is performance evaluated?

Accountability and control systems, KPIs (Key Performance Indicators), budget targets, P&Ls (financial statement about profit and loss), responsibility, property milestones

What does performance evaluation affect?

Incentives, priorities, local vs firm-level optimisation, responsibility for results.

Local vs Firm-level optimisation

• Local optimisation: improving one department’s results.

• Firm-level optimisation: improving results for the company as a whole.

Structures of departments

Functional, Matrix, Divisional, Project-based

Functional structure

Grouped by specialised expertise, grouping by task homogeneity (sales, marketing, etc.)

Advantages of the functional structure

CEO(s) in charge and then all specialised departments underneath, can be very efficient, works well when firms need specialisation, professional expertise, and efficiency

Problems with functional structure

Each department creates its own cost specific to the function, not all the functions have a profit generating activity, the overall company is the profit centre, challenge to have a good coordinating system that allows you to move from single cost centres to overall profit centres, requires a very effective CEO for good coordination

What is needed for functional structure to work?

Good coordination

Strengths with functional structure

Deep expertise, economies of scale, clear career paths, efficient resource use

Risks with functional structure

Silos, slow product decisions, functional priorities dominate customer priorities, escalation to the top

Divisional structure

People are grouped around products, regions, or customer segments

When is the divisional structure a good fit?

Diversified firms where each product, region, or customer segment needs responsiveness and accountability

Easy to compare products / regions at the end of the year

Strengths of divisional structure

Each subunit is a cost centre and a profit centre, clear responsibility of product of region, faster local decisions, closer to the customers, and better profit accountability

Risks of divisional structure

Duplicated resources, less knowledge sharing, internal competition, harder corporate control (several divisions, less centralised)

Matrix structure

Combines two dimensions, usually functions and project/products

Tries to keep functional expertise while improving cross-functional integration

Lots of managers matrix structure

Super division means we have a top functional manager and a top product/regional manager, basically divisional and functional structure at the same time. You need a LOT of managers - costly organisational structure.

When does matrix structure work best?

Works best with global and lots of product diversity companies

Who can fix conflicts between bosses in the matrix structure?

Super-powerful CEO

Strengths of the matrix structure

Better cross-functional collaboration, shared resources, knowledge transfer, useful for complex businesses

Risks of matrix structure

Dual reporting confusion, conflicts between bosses, more meetings, slow decisions if authority is unclear

Matrix structure

Employees may be unsure whose instructions to follow or who evaluates their performance.

Matrix Conflicts between bosses

Managers may disagree over priorities, staff time or resources.

More meetings Matrix

The two managers and their teams need to coordinate schedules, agree on priorities and resolve disagreements. This takes time away from other work.

Project-based structures

Group people around a specific project, deliverable, or work-stream, rather than around permanent departments

One multidisciplinary team works towards one things

Specialists coordinate continuously around the same deliverable

Example of project-based structures

Pixar, movies

What is needed for successful project-based structures?

A lot of delegation and autonomy

When do project-based structures work best?

Best fit temporary work, unique deliverable, high uncertainty, intensive collaboration

Why do project-based structures have high uncertainty?

Requirements or solutions may change as work progresses. Bringing the relevant people together under a project manager helps the team adapt and resolve unexpected problems.

What are unique deliverables?

When the intended result is a specific, often customised output, such as a building designed for one client. A dedicated team can organise its work around those requirements.

Main risks of project-based structures?

Unclear priorities, reporting lines, and resource allocation, when many projects run at the same time.

Unclear priorities project-based structures

Employees do not know which project should come first. If two projects have urgent deadlines, which should they focus on?

Unclear reporting lines Project Based structure

Someone working across projects may receive instructions from several project managers and be unsure who has the final say?

Unclear resource allocation - project-based structure

Project managers may compete for the same resources, with no clear rule for distributing them. For example, two projects both need the company’s only specialist engineer.

On what does a structure depend?

The company and what it needs

Are structures permanent in the long-run?

No, they can change, but must be consistent with strategy.

When is functional structure best? and what is the main risk?

Best for expertise and efficiency. Main risk = silos

What is divisional structure best for?

Best for responsiveness and accountability. Main risk = duplication

What is matrix structure best for?

Best for two dimensions at once. Main risk = ambiguity.

What is project-based structure best for?

Best for speed around a deliverable. Main risk = resource conflicts.

Problems due to coordination issues

Decisions slow down. teams blame each other, work is duplicated, customers get inconsistent answers, roles are unclear, founders or managers become bottlenecks.

Culture

Coordinates behaviour: shared norms and routines guide action when formal structure is incomplete

When should structure evolve?

When size, strategy, uncertainty, or interdependence changes.