Chapter 5 - Organizational Structure - Overview PDF

## Chapter 5 - Organizational Structure - Overview This chapter introduces the concept of organizational structure and its effects on decision-making in an organization. ### Lessons - Lesson 1: Introduction to Organizational Structure - Lesson 2: Organizational Structure - Overview - Summary Prob...

## Chapter 5 - Organizational Structure - Overview This chapter introduces the concept of organizational structure and its effects on decision-making in an organization. ### Lessons - Lesson 1: Introduction to Organizational Structure - Lesson 2: Organizational Structure - Overview - Summary Problem ### Organizational Structure - Overview #### Functional organizational structure - Chief Executive Officer or President - Production manager - Marketing manager - Sales manager - HR manager - Accounting manager - Lower-level managers, operating personnel and specialists #### Divisional organizational structure - Chief Executive Officer or President - Corporate staff - Division A manager - Production manager - Marketing manager - Sales manager - HR manager - Accounting manager - Division B manager - Similar to Division A - Division C manager - Similar to Division A - Lower-level managers, operating personnel and specialists #### Matrix organizational structure - Chief Executive Officer - Production manager - Marketing manager - R&D manager - Engineering manager - Accounting manager - Product Division A - Product Division B - Product Division C ### Introduction to organizational structure - The organizational structure is the framework into which a group is organized. - It determines how decision-making authority and responsibility are delegated and specifies the formal lines of communication and reporting within an organization. - Putting a strategy into action requires working within or, in some cases, adjusting the existing organizational structure. - An effective organizational structure is designed to facilitate the successful implementations of the organization’s strategy, but no single organizational structure is optimal for every situation or for every strategy. - The goal is to align the strategy and the organizational structure as much as possible. - Because there is no “one size fits all” when it comes to organizational structures, they vary, sometimes greatly, from organization to organization. - After analyzing its needs and options, an organization will adopt an appropriate framework in order to execute its strategic objectives. - CPAs are required to observe, critique, and recommend appropriate structures to meet their users’ needs. ### Most effective organizational structures create discrete subunits with authority over their own decisions. - These subunits are usually divided by function, business, or geography. - Structures based on business units are most effective when critical resources are located and important integration needs can be met within the business units themselves. - This creates a structure of autonomous and discrete product divisions. - When the resources with the most intense interdependencies are contained within a function or geographic region, a structure built on functional or geographic divisions is generally the most effective. ### The choice of which structure to adopt is usually determined by the need to align authority with responsibility and the need to combine the activities that are most interdependent, so as to minimize the number of informational linkages across units. ### There are three main types of business ownership: - Sole proprietorships - Partnerships - Corporations ### The following are the most frequent organizational structures, each with its own advantages and disadvantages: #### Functional structure - A functional structure divides employees along task lines or functions. - Typical functional areas within an organization include production, sales, marketing, human resources, and finance/accounting. - Chief Executive Officer or President - Production manager - Marketing manager - Sales manager - HR manager - Accounting manager - Lower-level managers, operating personnel, and specialists - This allows employees to specialize in their functional areas, thus providing operational efficiencies within each function. - One of the disadvantages of a functional structure is the tendency of functional areas to develop into silos—isolated units with limited communication between or across functions - Because of their different specialized functional focuses, employees within different functions can become disconnected from those within other functions, for example, engineers involved in the design of a new product cannot relate to employees involved in marketing the new product, and thus these two groups can become isolated from each other. - This can make division-level strategy formulation and implementation more challenging because the strategy must apply to all the functional teams. #### Divisional structure - An organizational structure that is divisional in nature is designed to create autonomous units that are separated along product or division lines. - Each unit contains its own set of functional-area employees devoted to the particular product. - The units can then be further subdivided into geographical areas. - Chief Executive Officer or President - Corporate Staff - Division A manager - The advantage of this type of design is that it allows employees to focus on one product/service and to develop their own culture. A singular focus allows employees to accept and participate in the division’s strategy with a higher probability of success. As well, a stronger internal culture will reduce the amount of employee turnover and can, in turn, increase efficiencies and divisional profits. - Division B manager - Similar to Division A - Division C manager - Similar to Division A - Production manger - Marketing manager - Sales manager - HR manager - Accounting manager - Lower-level managers, operating personnel, and specialists - However, the disadvantage of a design with multiple divisions is that it can create a culture of competition, with a focus on outdoing other divisions, instead of the competition. - Also, between the different divisions, incompatibilities between the products and services of the different divisions can occur as they were created without the consultation of the other divisions. - Making decisions at the divisional level can also lead to inefficiencies and increased costs, as without proper communication divisions could end up duplicating efforts. - Decisions made at the divisional level have the potential of not being in the best interest of the organization as a whole #### Matrix structure - A matrix structure groups employees both by function and by product or division. - An organization with a matrix design typically uses teams of employees from multiple functional areas, who collaborate and focus on a specific product. - Chief Executive Officer - Production manager - Marketing manager - R&D manager - Engineering manager - Accounting manager - Product Division A - Product Division B - Product Division C - This structure promotes input from multiple employees, regardless of their position or rank, resulting in empowered employees and higher employee morale. - Employees from various business disciplines can freely communicate with one another, which can result in a quicker response time when resolving problems and implementing solutions. - The greatest disadvantage of the matrix structure is the complexity of reporting lines. - Employees who often find themselves reporting to a functional manager and to a divisional manager sometimes receive mixed messages and face conflicting priorities. ### Centralized and decentralized designs #### Centralized structures - In centralized organizations, often called command and control organizations, major decisions are made at the top of the organizational hierarchy. - Centralized organizations can be extremely efficient. - Business owners develop the organization’s mission and vision and set the strategic objectives for managers and employees to follow. - The central decision maker also has the ability to have a much greater impact (for better or worse) on an organization’s culture. - As organizations grow, information gathering, information processing, and decision-making tasks required to make all decisions centrally become more difficult. - Advantages - Decisions tend to be quick and efficient because there is only one layer of management to finalize the decision. - This structure is typically cheaper to implement due to its fewer layers of management. - Disadvantages - The centralized nature of an organization can lead to “group think,” potentially creating an environment of complacency that stunts the future growth and innovation of an organization. - Employees who voice an opinion other than that of the leader’s can feel a negative impact, become frustrated, and eventually leave the organization. #### Decentralized structures - In decentralized organizations, decision-making is delegated down the organizational hierarchy. - This puts lower-level managers in a better position than their superiors to take the appropriate course of action. - Objective and consequence of decentralization create a fundamental problem in control - The senior manager is not in a position to adequately judge the lower-level manager’s performance. - This is because of the lower-level manager’s greater knowledge and specialization. - Whereas the centralized system is based on telling people what to do, the decentralized organization is based on telling people to do what they think is best to promote the interests of the overall organization. - Decentralization should be accompanied by a system of accountability and control for lower-level managers, in order to promote the organization’s best interests. - The key is whether the overall objectives in a complex organization can be factored into a set of individual objectives that each unit can pursue. - The most common accountability approach is responsibility accounting. - With this approach, senior executives evaluate the performance of each responsibility centre using performance metrics that reflect the centre’s accountability relationship with senior management. - Advantages - By empowering employees, a decentralized structure can result in greater job satisfaction and reduced turnover. - It can also reduce the burden placed on senior management and owners. - This allows them to focus their time on strategic (as opposed to operational) issues. - Disadvantages - Managers of individual groups can become competitive with one another, to the detriment of the organization as a whole. - Bonus metrics must be created to motivate each group’s leaders while maintaining the organization’s objectives for the greatest profit. ### Broad and narrow spans of control - A broad span of control is generally associated with a flat or horizontal organizational structure, while a narrow span of control is associated with a tall organizational structure. - Broad spans of control or horizontal organizational structures have few or no levels of middle management, so managers often have a greater level of autonomy in decision-making. - In these organizations, decision makers have a broad area of responsibility and a significant number of direct reports. - This has the advantage of providing decision makers with greater and faster access to operational on-the-ground information. - Nonetheless, decision makers in a flat organization must be accomplished generalists, which means that they have little opportunity to develop specialized knowledge. - One disadvantage of this structure is that it offers fewer opportunities for promotion. - Organizations with narrow spans of control have tall organizational structures with a multilevel hierarchy. - Decision makers have fewer direct reports. This allows them the opportunity to develop more specialized knowledge. - Organizations with narrow spans of control tend to be more bureaucratic, that is, they have a greater number of management personnel, which entails increased cost. - Employees at the bottom of the hierarchy can feel frustrated because of the greater number of management levels through which they must navigate before reaching anyone with the authority to deal with an issue. ### Lesson 2: Organizational Structure - Overview - Summary Problem #### Technical competency: - Analyzes the key operational issues including the use of information assets and their alignment with strategy #### Learning outcome: - Describe the types of organizational structures #### Summary Problem - Bahinca Products Ltd. - manufactures and markets a broad range of fast-moving consumer goods. - Its product lines feature mostly household cleaning and laundry products, personal hygiene products (soaps, shampoos, and toothpastes) and non-prescription healthcare products. - The company's operations are organized around its product lines and further subdivided into regional (provincial) sales areas by product. - Bahinca’s executive management works at the head office, where there is a minimal number of employees, as the regional managers are left to make most major decisions. - With many of its product lines competing on very thin margins in highly competitive markets, the company is looking to gain efficiencies through internal restructuring. - Identify Bahinca’s current organizational structure as a functional, divisional, or matrix structure. - Discuss two advantages and two disadvantages of Bahinca’s current organizational structure. - Explain whether Bahinca is designed as a centralized or decentralized operation. #### Solution - Bahinca currently operates under a divisional organizational structure. - Its operations are organized around its product lines (but not limited to): - Expertise for a particular product in a particular area is concentrated to that division, leading to high levels of employee knowledge and excellence. - Employees are able to focus on a single product and the organization’s strategy in this area. - This can increase the quality of Bahinca’s products, and lead to a stronger company culture - Decisions are made by those with the required expertise in both product and region—the regional divisional managers. - This often leads to decision-making that is timely and in the best interest of each division. - However, the divisional structure also has several disadvantages including (but not limited to): - Divisions can become competitive with each other, rather than with outside competitors, especially between regional divisions of the same product. - This situation does not increase the organization’s overall sales, and it could lead to Bahinca not reaching its objectives, as divisions are spending time competing internally. - Products could become incompatible because divisions are not working together. - Decisions made at the divisional level risk not being advantageous for the company overall. - Bahinca has a decentralized design. - Regional product managers (who are at a lower level) make most major decisions. - Head office is minimally staffed. - This indicates that Bahinca does not have the resources to make decisions at the top of its organizational hierarchy. ### END-OF-CHAPTER PRACTICE #### PRACTICE PROBLEMS - Practice Problem 1 - Protection Alarm and Fire Security Corp. (PAFS) is a large international company that was established in Toronto 20 years ago. - PAFS began by selling home alarm security systems in the Toronto area. - Within the first three years of operations, PAFS became successful. It proceeded to open sales offices in all major cities in Canada over the following five years. - PAFS became the leader in Canada in providing home alarm security systems. - All major strategic decisions are made by the PAFS board and top management in Toronto. - Over the last 12 years, PAFS expanded into new markets such as commercial alarm security systems and fire protection systems, manufacturing of all its own systems. - PAFS also opened offices in the United States, South America, Europe, and Asia, and currently has more than 140,000 employees in over 90 countries. - The growth has been accompanied by challenges relating to coordinating with managers operating in various countries. Some high-performing managers have resigned to start their own businesses or moved to competitors. - The legal team is also under a lot of pressure, as it has to deal with different legal requirements in various countries. - The PAFS board wonders whether the time has come for the company to adopt a decentralized structure. - Provide three arguments in support of a decentralized structure for PAFS. Support your response with case facts wherever applicable. - What is the main risk that must be managed when decentralizing the organizational structure? - Suggest one way for PAFS to mitigate this risk. - Describe a matrix structure and explain how PAFS could benefit from it. - Practice Problem 2 - Nooz Feed is a digital media company that focuses on tracking viral content related to politics, business, and entertainment. It was founded seven years ago by three doctoral students with initial funding from a research grant. - The friends developed an algorithm to identify stories from news websites that appeared to be going viral in terms of reader interest. - Users were then sent out links to these news stories. - Nooz Feed operates in a highly competitive marketplace with established players that offer similar services. - Despite this, the company has seen a sustained growth in advertising revenue and currently has 86 employees. - Initially, the company was managed by the founders, who were primarily focused on the technical side of the business. - They empowered all staff members with considerable autonomy in decision making and believe this contributes to the success of Nooz Feed as these staff members can now respond quickly to the fast changes in consumer interests. - The founders now wish to pursue other academic interests and have recently appointed Janice Kingsley as CEO. Janice is a CPA with an MBA in Finance and Strategy. She is reviewing the organizational structure of the company and is unsure whether any changes should be made. - Nooz Feed currently has a broad span of control. - First describe this organizational structure and then identify one advantage and one disadvantage for Nooz to consider. - Nooz Feed is considering separating its news and entertainment contents into separate divisions. - Describe a divisional structure and discuss an advantage and a disadvantage of adopting a divisional structure. #### SOLUTIONS - Solution to Practice Problem 1 - Competency: Analyzes the key operational issues including the use of information assets and their alignment with strategy - Knowledge Item: Strategy implementation - Advantages and disadvantages of organizational structures for a strategy (simple, divisional, and matrix designs; centralized and decentralized designs; narrow and broad span of control) - A decentralized organizational structure could be appropriate for PAFS for the following reasons: - PAFS operates in more than 90 countries and has over 140,000 employees. It is impossible for such a large organization to effectively and efficiently operate from a centralized location. - Once an organization becomes larger, more knowledge, expertise, and time are needed to manage the decision-making in the different countries PAFS operates in. - Decentralization will allow local management from each country to respond to the changing demands in each country much faster to better meet the needs of the customers. - For PAFS, each country has different business conditions, rules, regulations, legal requirements, cultures, and norms. - It will be challenging to have the expertise in legal requirements for all these countries in one centralized location. - For PAFS, decentralized organizational structures have several areas of responsibility for decision-making and rely on a team environment at different levels in the business and different countries. - Individuals at each level in the business may have some level of autonomy to make decisions and this structure could improve morale and reduce turnover. - Decentralization will also allow PAFS to free up the time for senior management in the corporate office so that they can better focus on the key strategic issues facing the company. - Decentralization will better position PAFS for further growth into the future. - This provides a great training ground for the management team and allows them the opportunity to develop proper management skills to support the future growth for the company. - A major risk of a decentralized structure is that managers can become competitive with one another and could take actions that are contrary to the overall organization’s objectives. - An accountability and control system can assist in establishing performance metrics that reflect the centre’s accountability relationship with senior management which can be used to evaluate the performance of lower-level managers, to ensure their goals are in congruence with the organization as a whole. - Another example of a major risk of the decentralized structure is that local management may lack the experience and knowledge to make proper decisions. - It is critical that PAFS provides ongoing training to management to ensure that they have the proper tools and resources to make sound decisions. - During the recruitment process, PAFS needs to ensure that the candidate has the proper technical and management expertise required for the management role. - A matrix structure groups employees both by function and by product or division. - PAFS has multiple areas in terms of different products and services offered, as well as operations in different countries. - By employing a matrix structure, PAFS can enable its employees from different functional areas to collaborate and focus on a specific product (for example, fire alarms) to ensure that the product is produced with the best specifications and in the most efficient manner. - Using the matrix structure will allow PAFS employees to communicate freely with one another, resulting in a sense of empowerment and higher morale within the organization. - Solution to Practice Problem 2 - Competency: Analyzes the key operational issues including the use of information assets their alignment with strategy - Knowledge Item: Strategy implementation - Advantages and disadvantages of organizational structures for a strategy (simple, divisional, and matrix designs; centralized and decentralized designs; narrow and broad span of control) - A broad span of control is an organizational structure with few or no levels of middle management, so managers often have a greater level of autonomy in decision-making. - This has the advantage of providing decision makers with greater and faster access to operational on-the-ground information, which is key for a competitive landscape. - One disadvantage of this structure is that it offers fewer opportunities to managers for promotion. - A divisional structure is an organizational structure in which organizations are divided into divisions, and each division has its own resources and is managed as a separate business. - The advantage of this type of design is that it allows employees to focus on one product/service and to develop their own culture. - This increases the probability of success, reduces employee turnover, and potentially increases efficiencies and divisional profits. - A disadvantage of this design is that it can create a culture of competition and discourage collaboration among divisions as each division will now compete for limited company resources. - Each division may also focus on outdoing other divisions, driven by the design of the incentive program to reward the best-performing division. - Further, it could result in duplication of efforts, inefficiencies and increased costs due to a lack of communication among divisions, and the loss of synergism in sharing common administrative support.