Chapter 6 Organizational Structure - In-Depth PDF

# Chapter 6 Organizational Structure - In-Depth ## Chapter 6 Organizational Structure - In-Depth This chapter discusses organizational structure, including advantages and disadvantages of different types of organizational structure, including centralized and decentralized structures. This chapter is a continuation of the Organizational Structure - Overview chapter. ### Lessons: - Lesson 1: Types of Organizational Structures - Lesson 2: Organizational Structure - In-Depth - Summary Problem ## Organizational Structure - In-Depth ### Influences on Organizational Structure: - Economic environment - Competition/industry - Products/services - Regulatory environment ## Types of Organizational Structures | Type | Advantages | Disadvantages | |---|---|---| | Simple structure | - Decisions can be made quickly. - Decisions are likely to be consistent and in line with the strategic objectives. | - Employees could potentially not feel empowered, leading to job dissatisfaction and increased employee turnover. - Structure could potentially not be able to adapt as the organization grows, thus decreasing efficiencies.| | Functional structure | - Structure promotes learning and facilitates economies of scale. - Structure allows for specialization within the sub-structure such that entry-level staff can progress as they develop their skills and knowledge. | - Interdepartmental communication can become limited. - Top management of each functional group will have difficulty supervising their group as the organization grows. | | Divisional structure | - Structure allows employees to focus on one product/service and to develop their own culture. - Leads to a stronger internal culture. | - Structure can create a culture of competition, with a focus on outdoing other divisions instead of beating the competition. - Structure can cause incompatibilities between the products and services of the different divisions. | | Matrix structure | - Structure promotes input from multiple employees. - Employees can freely communicate and collaborate with one another. - Structure results in decreased overhead expenses. | - Structure creates potential for multiple lines of communication and an unclear chain of command for leadership. - Internet connectivity disruptions or network issues can impede progress.| | Network structure | - Can attract top talent for the same – and sometimes less money than competing organizations that do not use a network structure. | - Can lead to an imbalance of work if workload is not appropriately managed. - Employees can feel frustrated and burnt out, while others feel underutilized, unmotivated, and dissatisfied.| ## Centralized Structures vs. Decentralized Structures | Structure | Advantages | Disadvantages | |---|---|---| | Centralized structure | - Appropriate when there are few leaders. - Decisions tend to be quick and efficient. - Structure is cheaper to implement. | - Several individuals responsible for an organization’s decision-making. - Results in team environments throughout the various levels of an organization, with each team having its own leader. - Can result in greater job satisfaction and reduced turnover. | | Decentralized structure | - Managers of individual groups can become competitive with one another, to the detriment of the organization as a whole. | | ## Influences on Organizational Structure An organization’s structure is influenced by the following factors: - Economic environment: Some organizations can be under pressure to cut costs in a declining economy. - Competition/industry: Some organizations will look to align themselves to address the competition. - Products/services: Some products or services require special alignment to support their products or services, such as aftermarket service, financing, or highly reliable information systems. - Regulatory environment: Regulators can dictate that certain departments or positions are required for a business to continue operating. In order for an organization’s strategies to be successfully executed, the organizational structure in place must support the strategy. When an organizational strategy changes, the organization’s structures, roles, and functions should be realigned with the new objectives. In order for an organization to be successful, it must have a formal organizational structure so it can: - Effectively implement its strategies. - Allow for timely decisions. - Create clarity in roles and responsibilities. ## Types of Organizational Structures ### 6.2 Simple Structure The greatest advantage of a simple structure is that with decisions being centralized, they can be made quickly. This allows the organization to be very responsive and to adapt to changes in a timely manner. Additionally, when decisions are made by one person, usually the owner, they are likely to be consistent and in line with the strategic objectives. Employees who could otherwise feel engaged in their jobs often do not feel empowered in their roles, and this can lead to job dissatisfaction and increased employee turnover. As an organization grows, it is possible that this structure will not be able to adapt. The organization will run less efficiently as a result - which can lead to reduced profits and the potential for subsequent reorganization. This is a common structure in small businesses, but as small organizations grow, they will usually need to make the transition to one of the more complex structures discussed below. ### 6.2.2 Functional Structure In a functional structure, specialized departments are defined by their purpose and are staffed accordingly - for example, accounting, human resources, processing, and sales. This structure allows the functional managers to oversee their area of responsibility and the CEO to provide general direction and to ensure the integration of organizational activities. Decision-making is still relatively centralized, but executives or senior managers in each department have some latitude. The advantage of this structure is that it promotes learning and facilitates economies of scale. It also allows for specialization within the sub-structure such that entry-level staff can progress as they develop their skills and knowledge. This provides a clear path for individuals to advance their careers, as a logical progression will be in place for highly motivated individuals. The downside of a functional structure is that interdepartmental communication can become limited. This can be remedied in part by cross-functional work teams. As an organization grows, top management of each functional group will have increasing difficulty with supervising their group. Further delegation is required to help mitigate this loss of oversight. ### 6.2.3 Divisional Structure In a divisional structure, an organization is divided into divisions. Each division has its own resources and is managed as a separate business. Decision-making is more decentralized, allowing each division to operate autonomously. This type of structure is often the choice of an organization that has a variety of products or operates in different locations. With a divisional structure, business-level strategies are the domain of the divisional managers, while the corporate strategy is managed by the executive team. Using a divisional structure allows an organization to compare and measure performance of different product areas and geographical regions. As each division keeps detailed production, accounting, and financial records, a base for relevant comparisons between divisions is created. Under this structure, specialization is more easily achieved, and employees tend to align themselves with their division rather than with the organization. Decisions can be made at the product level or the geographic level. A disadvantage of a divisional structure lies in the duplication of functional-area activities over several divisions. For example, the payroll function could be handled more efficiently at the organizational level, rather than by duplicating the work at the divisional level. A divisional structure can also foster unproductive rivalries between divisions and an overemphasis on divisional performance, sometimes at the cost of overall organizational performance. This conflict is especially relevant to competition for limited funds in budgeting. Divisions requiring the same raw material, for example, could fight over the price and quantity of that raw material, in order to be the first division to provide the final product. That behavior could end up raising the price of that raw material, to the organization's detriment. Finally, divisional structures can make functional-level strategy formulation and implementation more difficult when the function is divided between divisions with different needs. ### 6.2.4 Matrix Structure In a matrix structure, functional and business unit structures are combined at the same level of the organization. That is, employees report to two superiors: a functional manager (for example, the finance manager) as well as a business line manager (the general manager of the business unit). This type of structure combines the stability of the functional structure with the flexibility of a divisional structure. It is best used when the external environment is complex and changing. Using a matrix structure allows an organization to take advantage of the strengths and compensate for the weaknesses of either a functional or a divisional organizational structure. The matrix structure has the benefit of facilitating information flow across both functional and product areas, minimizing the problems associated with the silo effect. This structure also promotes organizational learning and provides employees with opportunities to develop a greater breadth of knowledge and to choose projects that allow them to work to develop their strengths. The open exchange of information can create multiple lines of communication and an uncertain chain of command for leadership. Employees could be unclear as to who their direct supervisor is, especially when faced with conflicting instructions. This can lead to poor employee morale. A typical matrix structure has more managers than the other organizational structures do and, as a result, is more expensive than the other options. Managers can also find themselves competing with one another over employees and wasting organization resources as a result. ### 6.2.5 Network Structure The network structure is a type of matrix structure that is virtually based, with no need for formal offices. Most of the activities are outsourced to strategic partners, so the organizational structure is "virtual." This structure is best used when the environment is unstable, with constantly changing conditions that require innovation and quick response times. This structure provides flexibility to cope with change and shifting patterns of trade and competition while allowing the organization to concentrate on its distinctive competencies. This structure is also becoming more common in the public sector. In addition to all the advantages and disadvantages of a matrix structure, the network structure has its own unique benefits and challenges. In a network structure, a lack of formal offices results in decreased overhead expenses for the organization. Also, offering a flexible work arrangement is a recruiting technique that can attract top talent for the same – and sometimes less money than comparable competing organizations that do not use a network structure. This structure is reliant on technology, so any internet connectivity disruptions or network issues can impede progress. If the workload is not managed appropriately, it can lead to an imbalance of work. This can result in some employees feeling frustrated and burned out, while others feel underutilized, unmotivated, and dissatisfied. It is important that the organization has oversight related to information systems reliability in order to achieve its strategic objectives. ## Centralized vs. Decentralized Structures Some large organizations are highly centralized, with all major decisions made at the corporate level. Other large organizations are more decentralized, allowing considerable flexibility for individual business and functional managers. Regardless of the degree of flexibility allowed, successful strategy implementation requires clarity about who is responsible for which aspects of the strategy and who has authority over the resources. ### 6.3.1 Centralized Structures A centralized structure is most appropriate when there are few leaders (usually just one). A small business with one owner who is also the leader for business operations is an example of a centralized organization. The impact of a centralized structure on management is the feeling among many managers that their compensation is based on arbitrary metrics because these managers are not empowered to make changes that could have an impact on the future of the organization or their remuneration. This structure does not typically reward innovation and has no formal process for communicating and rewarding employee input, which can lead to friction between the decision-maker and the employee. ### 6.3.2 Decentralized Structures A decentralized structure is used when several individuals are responsible for an organization’s decision-making. This typically results in team environments throughout the various levels of an organization, with each team having its own leader. Each team can react to environmental changes and implement a solution specific to that group’s problem without having to go through a formal decision-making process. A decentralized organization facilitates growth because, when a group becomes too big, another sub-group can spin off and create a larger, decentralized organization. This is especially helpful when an organization wishes to expand quickly, be geographically dispersed, or both. The impact on the management of a decentralized structure is greater empowerment, as there is a formal structure in place to acknowledge and facilitate individual contribution. This creates an appropriate challenge for motivated employees and management, leading to greater job satisfaction and reduced employee turnover. Bonus structures can be created for each sub-group in order to motivate desired outcomes for each group. ### 6.3.3 The Advantages & Disadvantages of Decentralization | Advantages | Disadvantages | |---|---|---| | - Faster recognition and response to changes in the organization’s external environment. - Opportunity for decision makers to develop better information by locating them closer to customers - Opportunity for decision makers to develop specialized skills - Opportunity to partition decision-making responsibilities, resulting in better decision-making focus - Tighter system of accountability by narrowing the scope of decision-making responsibilities. - Increased motivation by giving employees decision-making responsibilities. | - Opportunity costs are created when decentralized decisions are not in the organization’s best interest. - Suboptimization, when lower-level managers sacrifice corporate-level results to improve unit-level results. - Inappropriate risk taking - Support costs can increase: - Increased need for control increases control-related data-processing costs. - Redundant support departments created. - Loss of economies of scale related to centralized support services. | ### 6.3a Let’s Look at an Example Corbetta Industries is a stable family-owned business that provides residential and commercial plumbing services. The business, founded by Jack Corbetta, has three divisions: single residential, multi-unit residential, and commercial. Each division is managed by one of Jack’s adult children, who are in their mid-to-late thirties and are all experienced plumbers. The divisional managers have complete autonomy in ordering their own supplies and booking their own jobs, although some resources, such as specialty plumbing technicians and diagnostic equipment, are shared between divisions. Staff reporting to the managers frequently complain that they never really know who is in charge, as Jack has been known to reschedule jobs, giving higher priority to some long-term customers. The divisional managers have recently been disagreeing about whose division is performing better, as the controller compiles the financial information using a common set of revenue and expense accounts. To facilitate discussion, the controller has been asked to determine whether Corbetta is centralized or decentralized in its structure. The controller has also been asked to consider what structure the organization should use to avoid the issues noted, and what the keys are to implementing this new structure. ### Current Structure Corbetta currently uses a mix of centralized and decentralized decision-making. The divisional managers have autonomy, which is a characteristic of decentralization, but Jack sometimes overrules their decisions, which shows centralized characteristics. The common set of financial information is also characteristic of centralized structures. ### Recommended Structure In order to avoid the issues noted, Corbetta could choose either structure: the key is not so much the structure chosen but the implementation of the structure. In owner-managed businesses, it can be hard for the owner to truly delegate authority, but effective delegation is necessary if decision-making is to be decentralized effectively. In some businesses, success is built around a central strong figure, such as Jack, and decentralizing can actually be harmful if Jack is the reason for the business’s success. On the other hand, it seems likely that alone, Jack cannot effectively manage decision-making for all three divisions by himself. The managers are likely better able to stay on top of external environmental changes that have an impact on their areas and to identify risks and opportunities. As plumbers themselves, the divisional managers each have the ability to develop specialized knowledge that pertains to their own area of concentration. If this is true, then a decentralized structure can improve overall results and facilitate growth. Decentralization would require separating the performance-measurement systems and allocating costs as appropriate, so that the managers have the information that they need to make decisions, accordingly and Jack can evaluate each division on its own merits. If decentralization is pursued, however, it will be important to ensure that the divisional managers continue to cooperate and watch for opportunities to gain economies of scale. Jack must examine his role to ensure that he helps to foster the success of the organization, as he has traditionally been the backbone of the organization's success. The interest of the organization overall must come before the interest of any one division. ### Lesson 2: Organizational Structure - In-Depth - Summary Problem #### Technical competency: Analyzes the key operational issues, including the use of information assets and their alignment with strategy. #### Learning outcome: Differentiate between different types of organizational structure, including the advantages and disadvantages. #### Summary problem: Beef on the Way Inc. (Beef) is a private company owned 100% by Brian Swinson. Brian’s parents, Jan and Charlie, started Beef over 20 years ago with a single store in Prince George, B.C. Five years ago, Brian bought the business and took over as CEO. Within two years, Brian had successfully franchised Beef all over Western Canada. Today, Beef has five corporate stores, 20 franchised stores, and a head office in Calgary that oversees operations. Head office is responsible for all decision-making, and communicates directives to the stores as needed. Brian has come to you, CPA, at a boutique consulting firm, Nobu Chartered Professional Accountants, for your help. Brian: Thank you for meeting with me, CPA, let’s get down to business. We have encountered much success at Beef, and I am very excited about the growth! Our business has really accelerated ever since we started franchising locations, I am looking to franchise an additional five locations this year and 10 more next year. Last week, Lou Black, my office manager, requested a meeting. Lou was quite concerned about how Beef’s current growth has affected our employees and is worried that continued growth will result in losing some of our key staff members - many of them have been with us for over five years. Here are some notes I took from my meeting with Lou: - Lately, staff have expressed frustration because policies tend to change on a whim, without warning, and then change back. Staff want to be able to do a good job but do not always know how to do this and hate putting in a lot of effort only to have to go back and redo their work. - All vacation time, expense reports, office supply requisitions – everything must be approved by me. This means that when I am on vacation or outside of Calgary, the office can feel like it is at a virtual standstill. - Several times over the last couple of months, Beef franchises have run out of beef! The store managers blamed the fact that they are located far away from the Calgary head office so they do not hear about supply issues with vendors until it is too late. You return to the office and discuss your meeting with Brian with Nobu’s partner, Alexis Nobu. Alexis: Thank you for meeting with Brian, a long-time friend of mine whose business could prove to be very lucrative in the future. We need to get this right. Please write a memo to Brian outlining at least two options for an organizational structure that could be appropriate for Beef. This is not a sales pitch – ensure that you discuss both advantages and disadvantages of each option, as Brian likes to make informed decisions. #### Required: Using the CPA Way, write a memo to Brian and recommend an organizational structure for Beef. #### Solution TO: Brian Swinson FROM: CPA RE: Organizational structure options for Beef Please see below for my discussion on organizational structures for your company. #### Assess the situation Beef on the Way Inc. (Beef) is a profitable and growing organization. To maximize those profits, I suggest implementing a formal organizational structure. #### Analyze Major Issues Organizational structures can either be centralized, with all major decisions made at the corporate level, or decentralized, which would allow for greater flexibility for functional matters. I am providing you with a balanced analysis of the advantages and disadvantages of one organizational structure that is centralized (the simple structure) and one that is decentralized (the divisional structure). #### Simple structure In this structure, the CEO makes all the decisions and communicates those decisions to everyone. Beef is currently operating informally and uses this structure. Beef is struggling to communicate those decisions with everyone, and this has caused frustration and could lead to employee turnover. #### Advantages: - By formalizing this structure, you can develop a plan to provide timely communication, perhaps on a weekly basis, to all your employees about policy updates, new locations, and any vendor supply issues. This will help your employees know the specifics of the business operations and will lead to a reduced amount of re-work, which will then reduce both employee frustration and potential employee turnover. - This is the easiest and therefore most cost-efficient option as you are already operating in an informal simple structure. Because of this, Beef can implement this option formally in the least amount of time and make the least amount of disruption, which should reduce both employee frustration and potential employee turnover. #### Disadvantages: - Beef has already been operating in an informal simple structure. By formally implementing it, employees could be slow to accept the perceived lack of change, so this option might not reduce employee frustration or turnover. - All decisions would still be made by you, so employees could still have an issue with the timeliness of approvals. #### Divisional structure In this structure, is where organizations are divided into divisions and each division manages its own resources. #### Advantages: - Formally appointing division managers to oversee a group of geographically dispersed franchises should improve communication and thus reduce the frequency of Beef franchisees running out of beef due to vendor shortages. This will result in more profitable franchisees, which will in turn increase corporate profits. - Division managers (instead of the CEO) would be able to make certain operating decisions, and therefore this can reduce your employees’ issue with timely approvals. #### Disadvantages: - A new organizational structure will take time and money. Employees could be frustrated, feeling that their issues are not being resolved in a timely manner, and so they could leave Beef. - Divisional managers will need to be appointed or hired. Appointing from within could create issues among existing staff who feel that they were looked over for the promotion. Also, hiring externally could bring in perceived “outsiders” who are not knowledgeable about Beef’s operations and could potentially create more work for existing employees. This could lead to increased employee dissatisfaction and turnover. #### Conclude and Advise Based on the quick implementation and low cost, and the fact the organization is already operating this way, I recommend that Beef formalizes the simple structure. I suggest that, in order to do so, you create an internal team to meet weekly and act as a steering committee for this change. This committee can communicate to you, Brian, how the rest of the organization feels. You can adjust your communications accordingly. 1. To help facilitate weekly communications, I suggest creating an internal website for all employees. That way, you can post updates and employees can respond in a timely manner. It is possible that some employees will not feel that this is enough of a change or that it will result in increased communications. To address these concerns, I suggest that you do the following: - Create a monthly draw for employees who post questions on Beef’s internal website and for anyone who answers those questions. Make sure that you monitor these questions and answers because this is way to help employees feel engaged with you and Beef. - Encourage employees to monitor your weekly updates. If any employee notices that you have not provided a weekly update, the first one to notify the steering committee could receive a $500 bonus on their next paycheque. This will motivate employees to monitor the page and will help to hold you accountable for weekly postings. As your business expands, it is important to revisit your organizational structure. You want to ensure that your organizational structure supports Beef’s strategic objectives such that Beef can effectively act on these objectives in a timely manner that is clear for all employees to follow.

Chapter 6 Organizational Structure - In-Depth PDF

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