5. business models and structures of organisations

The purpose of organisation structures

An organisation’s structure is a strategic management system designed to help it achieve its goals as efficiently and effectively as possible.

It defines how activities are allocated and supervised in terms of roles, responsibilities and regulations.

Structures will vary between different organisations to meet their specific needs.

As an organisation grows and develops, it may move from an informal to a more formal structure as it manages changes in the way it works.

types of organisational structures

There are five main types of organisational structures used by most businesses:

hierarchical.
flat.
matrix.
functional.
divisional.

Each business will use the one that best suits its needs.

Hierarchical organisation structure

A linear, organisation structure with a clear chain of command.

Pyramid shaped organisation.
CEO/board of directors – top strategic level.
Middle/operational management levels.
Workers levels – task and operations based.
Every employee has a supervisor to report to.

The most common type of organisation structure.

Works well for large corporations to ensure objectives are met, customers are served and the organisation remains profitable and competitive

	Advantages Disadvantages
Clear and strong chain of command –everyone knows who to report to.	Costs may be higher, with higher salaries at more management levels.
Clear lines of communication – everyone knows how to report data.	Heavy bureaucracy may slow down innovation/decision-making.
Employees develop high level specialist skills – more efficient at tasks.	Demotivates employees who think they’re just a number/not valued.
Motivates employees looking for chance of promotion.	Employees only concerned with own tasks/department not company goals.

Flat organisation structure

Sometimes referred to as self-managed or horizontal organisations. Key factors of a flat organisation structure are:

democratic management style.
employees at same level as management.
everyone involved in planning and decisions.
high levels of trust between owners/staff.

The gaming industry often offers examples of flat organisation structures.

There may be no job titles. Employees select which project they want to work on. Or start their own projects – taking responsibility to source funding and build a team with the right skills. Exciting or scary?

	Advantages Disadvantages
Gives employees more responsibility and opportunities to develop additional skills.	Everyone may need to a generalist – no special skill development.
Less onerous for owners/managers to supervise carefully.	Can be confusing for employees to know who to ask for help or answer to.
Promotes open communications styles to keep projects on track.	Who takes over if project starts to go wrong or off track?
Co-ordination of activities improved, as everyone aware of what’s going on.	Difficult to maintain if company grows beyond a few projects and clients.

Matrix organisation structure

Groups its employees by skills, functions and/or products.

Uses cross-functional teams.
Works on a project-by-project basis.
Employees may have several managers.
Uses a grid approach to planning.

Engineering or production companies may use a matrix approach.

A production designer may work mostly in the research and development department. Then work with engineers to create a working prototype of a new product.

	Advantages Disadvantages
Allows managers to choose the best skills for each project.	Can create conflict between project managers if need same skills.
Motivates employees to use their skills in other roles.	Employees may become overwhelmed if too much demand on their skills/time.
Uses employees’ skills and talents across the whole organization.	Highly skilled employees may be poached by competitors.
Offers more flexibility when making project decisions.	Project managers acting as line managers may change matrix structure approach.

Functional organisation structure

Organises employees into specific departments.

Each department has a specific purpose.
Each team works for a functional area.
There is a hierarchy in each department.
Every team member has specific tasks.

The business will be organised according to function areas such as administration, finance, sales and marketing, production, human resources.

The most easily recognised type of functional structure is a department store in the retail industry

	Advantages Disadvantages
Allows employees to focus and become knowledgeable about their role.	Can create silos between departments that have their own goals to achieve.
Encourages specialisation in specific functional areas (eg finance).	Inter-departmental communications may not be very effective.
It is scalable – anyone can be trained to take on specific departmental tasks.	Transferable skills – can easily find another job in similar organisation.
Helps to build strong teams with own identity.	Some employees may feel trapped in a department they don’t want to work.

Divisional organisation structure

Especially suited to large organisations and MNCs.

There are THREE types of divisional organisation structures:

market (or customer) based.
product based.
geographically based.

Groups employees into large departments called divisions. Each division has its own functional team. Every division operates autonomously like a separate business but always remains answerable to its Head Office/HQ.

Market-based divisional organisation structure

Divisions are organised according to their industry, customer types and markets.

Works in segmented markets.
High levels of market research.
High awareness of changes in demand.

Strong on market research, customer buying habits, trends and preferences are monitored closely and constantly. The organisation is able to respond to these demands quickly.

Product-based divisional organisation structure

Divisions within the organisation are dedicated to a specific product.

This works well for businesses with large product portfolios.

Reduce product development time.
Faster entry to market.
Support multiple products at any one time.

This structure is useful for research and development (R&D) business to support the launch of new products on a regular basis.

Geographically-based divisional organisation structure

Divisions are organised according to their location.

Regions.
Districts.
Territories.

Larger organisations like national companies, MNCs and franchises may set up satellite offices near specific centres of operation to offer functional department support. This will help respond to local market needs and more efficient logistics.

	Advantages Disadvantages
Allows the business to be flexible – respond to market needs & trends.	Duplication of resources which is costly.
Promotes autonomy – every division has its key performance indicators.	May be competing with itself in terms of market, products, geography.
Ensures the business can respond to customer demands and needs.	Can become unwieldy and difficult to manage if divisions also grow large.
Helps to build strong teams with own identity.

impact of organisational structure on ways of working

How businesses are impacted by organisation structure

The impacts organisation structures can have on any business many be positive or negative. It depends on how ‘fit for purpose’ the created structure is.

The whole point of setting up an organisation structure is to offer a framework for success.

The measure of its effectiveness will be in the ways of working in the business and the results it produces.

The organisation structure is designed to reduce problems, create fewer issues – or enable easier ways to solve them.

Ultimately, the impact of organisation structure should lead to happy customers, demanding fewer refunds, which means healthy profits at optimum costs.

			Management decisions People Tasks Communications
Clear overview of organisation	Tasks assigned to right people	All necessary tasks are delegated	Clear lines of comms – all directions
Better decision- making	Employees know their role/ responsibilities	Increased productivity due to specialism	Clarity in reporting requirements
Responsibility for decisions	Deliver results to several managers	Consistency in operations	Know who to report to, how & why
Delegation processes	Improved teamwork/ relationships	Organised workflows	Standardised documents and processes
Manage expectations	Higher motivation/ incentives to work	Resources organised and assigned	Company-wide branding style

formal and informal networks in organisational structure
- Formal networks establish official management channels and ways of working.
- Informal networks within a formal structure may still develop built-on relationships.
Informal networks:
- are developed by employees.
- foster co-operation between teams.
- build the culture of the organization.
- don’t rely on written rules and regulations.
Informal networks are unique to every business because they are based on organisational culture, management styles and the personalities of employees.
Advantages and disadvantages of informal networks
Advantages:
- Adaptable to change.
- Responsive to external influences.
Disadvantages:
- Too informal can be confusing.
- Operational tasks may be disorganised.
- Some employees may take advantage.

I should be able to:

Describe a range of different business models of organisational structure.
Compare the advantages and disadvantages of different business models and structures.
Discuss how organisation structures impact on the ways businesses work.
Review the types of informal networks within organisation structures.