Chapter 2

Organizational structure
 The objectives of this chapter

 Analyze the main characteristics of different organizational structures

including hierarchical level, chain of command, span of control, horizontal and
vertical organizations
 Identify why businesses need to organize employees and analyze the means by
which this is done
 Analyze delegation and responsibility
 Understanding the Meaning of Bureaucracy
 Understand the difference between centralized and decentralized structures
and understand the factors that influence the degree of centralization and
decentralization
 Analyze the matrix form of an organization
 Introduction

A sole trader without employees does not need an

organizational structure. But if this sole trader works with an
employee or partner, the need for a formal structure arises.
Who will do what work? Who is responsible for making
decisions?

And when the company grows to include more employees

(supervisors, administration, different departments or
divisions…) then the need for structure will be even greater.
 Introduction

This will allow the division of labor and responsibilities to

become clearer for everyone.

So what do we mean by organizational structure? What will

happen if this concept is misunderstood or confused?
How can a structure impact workers and managers?
What are the main keys to building and analyzing an
organizational structure?

These are the main points that we will develop in this course.
 What is an organizational structure?

An organizational structure is an
internal structure of a company
which shows how the management
of the company is organized, the
connections between the structures
and how authority is transmitted
throughout the organization.
 Formal structure AO2
A typical formal business structure is
one that relies most heavily on
departmental functions. It states:

 Who has the greatest decision-making

responsibility?
 The formal relationship between
people and departments. Employees
can clearly see their position in the
company and know who their manager
is in the line
 The chain of command: how
responsibilities and authorities are
transmitted within the company
 Formal structure AO2

 Span of control: The number of

subordinates who must report
to each senior

 Formal channels of
communication both
horizontal and vertical

 Clearly identify the supervisor

or director to whom each
subordinate should report
Example of formal structure
The key principles of an organizational
structure

1- levels of Hierarchy

The level of hierarchy is the level of the organizational

structure where personnel who are at that level have
status and authority equivalent to that level.

Each level of hierarchy represents a grade or rank for

staff. Lower ranks are subordinate to higher ranks. The
more hierarchical level there is, the more rank there will
be in the organization.
 The key principles of an organizational
structure
2 - The chain of command

The chain of command is the path by which

authority passes through the organization (from
the General Manager to the senior managers…)

Instructions flow from top to bottom while

information (on sales, for example) flows from
bottom to top.

The more vertical and higher the structure of the

company, the longer the chain of command and
the slower the communication will be.
The key principles of an organizational
structure

3- span of control

This is the number of subordinates who report directly to

the director or his superior.

The span of responsibility can be broad when the manager

is responsible for many people directly under him; or
narrow when he has few people directly under him
 Delegations and responsibility

Delegation empowers employees to make decisions; it

shifts the decision-making authority from one level to a
lower one. This is how responsibility is transferred from
top to bottom in the chain of command.

However, the person who delegates the work is still

accountable for the outcome of the work

Responsibility is the obligation of an individual to account

for his or her activities in a transparent manner
 Delegations and responsibility

The principles of delegation and responsibility are very

important and can have effects on the organizational
structure and on the level of motivation of
subordinates.

According to researchers, the process of delegation,

which requires employees to be truly responsible for
their work, can be an advantage for their motivation.
The greater the scope of responsibility, the greater the
delegation will also be.
 Delegations and responsibility

The advantages of delegation

 Gives senior managers will have more time to focus on

strategic and more important roles
 Shows more confidence to subordinates, which can motivate
them even more
 Develop and train subordinates for more senior positions
 Helps staff achieve an accomplishment
 Encourages staff to be more responsible for their core
activities
 Delegations and responsibility

The disadvantages of delegation

 If the work to be done is not well defined or adequate

training has not been given, the delegation will not be
successful.
 Delegation will not be successful if full authority or power
has not been granted to the subordinate to do the work
 Managers can just delegate boring work, which will not
encourage subordinates at all
 Delayering in the organizational structure
This involves the removal of one or more
hierarchical levels in the organizational
structure.

The objective is to obtain a more or less

horizontal organizational structure in order to
reduce fixed costs in terms of salaries.

It often leads to a broader span of responsibility

and increases delegation to subordinates. This
change is often assisted by the development of
new IT technologies making it possible to easily
help senior directors by easily eliminating the
positions of middle managers.
 Delayering in the organizational structure

Benefits:

 Reduce costs for the business

 Shortens the chain of command and improves
communication across the organization
 Increases span of control and delegation opportunities
 Can increase staff motivation due to the reduced gap
between top management and the increased chance of
having more responsibility
Delayering in the organizational structure

Disadvantages:

 Cost of compensation for outgoing managers

 Increases the job specifications for the remaining managers.

Which can lead to overload and stress at work

 Fear that compensation can be used to reduce costs. This

can lead to a feeling of insecurity among all staff
 Bureaucracy
Bureaucracy is a system of
administration with clear hierarchical
structure in which people are expected
to follow precisely defined rules and
procedures

This system is often known in

government organizations. It discourages
initiatives and companies since
decisions are centralized and must be
followed to the letter by following
procedures and protocols
 Centralization and decentralization

Centralization means keeping all the

powers that are important for decision-
making within the general management or
at the center of the organization

It is a situation where only one individual

or small group of top managers makes
decisions about the company’s direction.

This structure is often used by small

companies where the owner is responsible
for all business activities.
 Centralization and decentralization

Decentralization means transferring

decision-making power across the
company in order to give more power to
subordinates, regional directors and
product managers.

It relies on a team environment at

different levels to achieve the company’s
goals. This means that many decisions
are not taken at the center of the
business; instead they are delegated to a
lower level of management.
 Centralization and decentralization

Most decentralized structures are multinationals which

accept that regional directors make necessary
modifications and which are adapted to local culture and
realities.

But centralized companies will do everything to keep the

same images and the same procedures throughout the
world to create an identity in all markets.
 Centralization and decentralization

The advantages of centralization

 Setting rules and procedures to follow across the entire

company can reduce discussion times and lead to rapid
decision-making.
 The company has consistent policies throughout the
organization. Which can help avoid conflicts between
divisions and departments
 Senior managers make decisions in the interest of the
whole company, not just in the interest of a division
 Centralization and decentralization

 Centralized purchasing can promote economies of scale

 Senior directors in general management will be very
experienced in decision-making
 Centralization and decentralization

The advantages of decentralization

 More local decision-making may reflect different working

conditions...managers making local decisions will have
more experiences to be much closer to customers

 Many junior managers can develop more qualities

preparing them for big roles in the future
 Centralization and decentralization

 Delegation and impact become easier. This will have a

positive effect on the motivation of the staff

 Decision making in response to change. Local

management can make quick decisions to respond to
market conditions without senior management
interfering
 Types of organization charts AO2 – AO4
1- Tall or Vertical organizational structure

A vertical organizational structure has

many number of hierarchical levels. Which
leads to 3 problems for vertical structures:

 Communication across the enterprise is

getting slower and slower with messages
becoming increasingly filtered or twisted
 The scope of responsibility becomes
increasingly narrow
 There is more and more too much gap
between the low level and those who are
at the top
 Types of organization charts AO2 – AO4

2- Flat or horizontal organizational structure

A horizontal organizational structure has few layers of hierarchy, a

short chain of command and wide span of control.

This type of structure is often suitable for small companies or

startups, but may also work in larger organizations in some
situations.

In this type of organizational structure, employees have more

authority to make decisions independently; they are empowered.
The employees still have supervisors, but the sharing of decision-
making power improves motivation
Types of organization charts AO2 – AO4
 Types of organization charts AO2 – AO4

3- Organizational structure by product

With an organizational structure by product, the business is

organized into departments or divisions. Each department focuses
on a different product. Employees are assigned to the product or
customer to which their work relates. Employees are focused on
the specific market segment related to their product and, as a
result, meet the customer needs more effectively.
Types of organization charts AO2 – AO4

Such a structure can encourage competition between

departments to produce a more viable product. However
there can be drawbacks; functions may be duplicated (for
example there may be a different sales force in each
department) and there is no central control over each
separate division.
Types of organization charts AO2 – AO4

4- Organizational structure by function

It is a common type of organizational structure in which

the organization is divided into smaller groups based on
specialized functional areas, such as marketing,
production, finance and IT.
Types of organization charts AO2 – AO4

In such organizations, employees are grouped according

to a specialized set of roles or tasks.

Businesses that are structured in this way operate well in

stable environments where changes to business
strategies do not happen often.

The level of bureaucracy in this organizational structure

makes it difficult for organizations to respond to changes
in the market quickly.
 Types of organization charts AO2 – AO4
5- Organizational structure by region

Organizational structure by region is a type of organizational

structure used by organizations with operations in different
geographical locations. It is also called a ‘geographical organizational
structure’.
Multinational companies in industries such as retail, manufacturing,
hospitality, and transportation may use this type of organizational
structure.
 Types of organization charts AO2 – AO4

The organization's offices in each region can operate individually

while following company policies and values. Offices can be
found in local, national or international locations.

Each location is overseen and directed by one or several

managers. They take responsibility for the operation and its
finances, and often work to tailor the business strategy to the
local conditions.

Each regional location may report to an executive responsible for

overseeing the operations of several locations, or it may report
directly to the top management in the headquarters of the
organization.
Appropriateness of different organizational structures
given changes in external factors AO3

The organizational structures of businesses change in

response to the dynamic global business environment.

Factors such as economic recession, changes in the

marketplace, and changes in technology can impact
businesses, causing them to rethink how they organize
themselves.

A number of those factors are highlighted below, along

with their implications for business structure
Appropriateness of different organizational structures
given changes in external factors AO3

1- Economic changes

Changes in economic growth, particularly recession can

impact business organizations.

 When sales revenue decreases, businesses may reduce

staffing. Entire layers of hierarchy may be cut, called
delayering, and roles may be eliminated. The business
may decide to decentralize decision-making in order
to be more responsive to markets and customers, or
it may decide to centralize in order to increase
control over the business.
Appropriateness of different organizational structures
given changes in external factors AO3

 In periods of economic
growth, when business sales
revenues and profits are
increasing, a business may
add specialists to improve
efficiency.

This would support managerial

economies of scale
Appropriateness of different organizational structures
given changes in external factors AO3

 Globalization can also impact business

organizational structures. As multinationals grow
beyond their national borders in search of higher
revenues and lower costs, they need to establish new
organizational units.

 Offshoring when a business moves some or all of its

operations to another country, also requires
reorganization of people and production
Appropriateness of different organizational structures
given changes in external factors AO3

 The growth of specialist businesses in an economy may

also cause more outsourcing of work. Some businesses
may find it more efficient to have other companies
perform non-core activities, such as preparing taxes,
running the canteen, or maintaining the building.

 Finally, competition can cause a business to change its

organizational structure.

For example, a consumer products business may need to

give more autonomy to innovative teams in order to
better meet consumer needs as competition increases.
Appropriateness of different organizational structures
given changes in external factors AO3

2- Technological changes

 The introduction of new technology

in a business can lead to changes in
its structure.

For instance, a new manufacturing

system or new machinery may
remove the need for a quality control
department in the business.
Appropriateness of different organizational structures
given changes in external factors AO3

 However, new technologies can also create new

positions for skilled workers, and the need for new
departments such as IT.

These new roles and departments may require changes to

the entire organizational structure of the business.

 Technology can also enable businesses and workers who

are a long way from each other geographically to work
together, which can also require changes to
organizational structures.
Appropriateness of different organizational structures
given changes in external factors AO3
3- Sociocultural changes

Globalization also increases the number of workers who

decide to work in other countries. These workers are looking
for new professional opportunities. Some are skilled; others
are not. Some of these employees may also be willing to work
freelance or part-time.

Whatever the situation, the increased availability of labour

enables businesses to adopt more flexible organizational
structures. These employees can often also bring new ways of
thinking and new practices, which may influence business
organizations.
Appropriateness of different organizational structures
given changes in external factors AO3

As understanding of human motivation improves, businesses

are changing their organizational structures to be more in
tune with human needs. Unresponsive, rigid hierarchical
structures are no longer considered optimal for the business
or for employees.

The social norm is to build more distributed leadership,

autonomy, collaboration and flexibility into business
organization. This enables businesses to respond more
quickly to external changes, while improving job satisfaction
among employees.
Changes in organizational structures (HL) AO3

It is now more widely understood that businesses

need to be flexible in order to be resilient. It is also
understood that workers usually appreciate greater
flexibility in business organization, because flexibility
can mean more varied and interesting work, greater
autonomy and a higher level of motivation. As a
result, several alternative organizational systems and
structures have emerged, including:

 project-based (matrix) structure

 shamrock structure
 holacracy
Changes in organizational structures (HL) AO3

1- Project-based (matrix) structure

The matrix structure is an organizational structure that

creates project teams and eliminates traditional
department functions.

This approach aims to eliminate many of the problems

associated with a hierarchical structure.

It is a method that focuses much more on the task at hand

rather than focusing on the individual work of everyone.
Changes in organizational structures (HL) AO3
Changes in organizational structures (HL) AO3

Advantage:

 Allows full communication between team members

 Eliminates traditional barriers between departments and
hierarchical barriers between seniors and subordinates
 Less luck for those who only focus on what is good for
their department. What is replaced by the feeling of what
is good for the project and for the team
 the exchange of ideas between the best of each
department creates better solutions
Changes in organizational structures (HL) AO3

Disadvantages:

 Less direct control from above as teams may have the

authority to start and finish a project
 Transferring more power to junior directors on teams can
be difficult for some senior directors to bear.
 Making quick decisions on projects can reduce
bureaucratic control and this can lead to resistance from
senior managers.
Changes in organizational structures (HL) AO3

2- Shamrock structure

Shamrock structure is an organizational model with three

groups of personnel in the shape of a clover, the three groups
are connected to each other and form a whole.

It's a model that was developed by a business management

author named Charles Handy in 1989 in his book "The Age of
Unreason ."

Handy believes that most jobs are contract or short-term. He

therefore suggests sharing the organization between three
categories of employees:
Changes in organizational structures (HL) AO3

 Core employees

 Contract employees

 Temporary workers

These 3 categories of employees

also have different expectations
and are paid differently.
Changes in organizational structures (HL) AO3

 Core employees. These are permanent employees who

fulfil the core mission of the business.

 Contract employees. These are workers who are

subcontracted to complete specialised tasks. Many
businesses will subcontract payroll or tax work to third
parties, for example.

 Temporary workers. These are workers who are hired

only as needed as the business expands or contracts.
They constitute a flexible workforce composed of part-
time, temporary and seasonal workers.
Changes in organizational structures (HL) AO3

Advantages:

 Cost reduction
 Placement and payment of staff in relation to their role
and contribution

The inconvenients:
 Organizing and grouping work can sometimes be
problematic
 Low motivation of some staff since they are only
contract workers or part-time workers