learning resources

Evaluating different types of organisational structure part one - traditional structures

Overview

Whilst it might not strike you as the most interesting aspect of organisational life, the structure an organisation takes can impact many things, not least its ability to achieve its goals, strategy, mission and vision. These learning resources (the first of two) explore different forms of what are regarded traditional organisation structures and their respective advantages and disadvantages. In the audio clip (right) your HR tutor Andrew gives an overview of the purpose and content of this learning, and below is a summary of how this fits with the CIPD unit.

Version 1.0 – published January 2024.

Listen to "Evaluating different types of organisational structures part one - introduction" on Spreaker.

Associate (level 5)

This learning relates to unit 5CO01 – Organisational performance and culture in practice.

LO1 – Understand the connections between organisational structure, strategy and the business operating environment.

AC 1.1 – Evaluate the advantages and disadvantages of different types of organisational structures, including the reasons underpinning them.

An introduction to organisational structures

According to Farnham (2009, p244) “Building appropriate organisational designs and structures is an important response to strategic implementation, if organisations are to deliver their missions and objectives effectively”. On a more practical day-to-day level, structure is designed to illustrate the roles and relationships of the different positions and employees within the organisation. It should show the logic behind the division of the organisation’s expertise and how functions are positioned to work in a co-ordinated way.

Farnham goes on to outline some of the factors that are taken into account when developing appropriate organisational designs, including the age of the organisation, its size, the degree of centralisation or decentralisation, the technical content of the work, the different tasks in different parts of the organisation, leadership style and its dominant culture.

Farnham, D (2009) Managing in a Strategic Business Context, Chartered Institute of Personnel and Development, London.

Features of structure

There is no one size fits all structure that works for all organisations. Organisation structures need to reflect how the business operates, so the best structure is one that is appropriate for the size of the organisation, the type of product or service that is produced, and the work processes involved.  

Span of control is the term for the number of employees directly supervised by a manager or supervisor. The larger the number of employees a manager controls the wider is their span of control. 

Factors likely to influence the size of the span of control include (McKenna and Beech, 2008):

  • Job complexity
  • Physical proximity of subordinate employees
  • Extent of formalisation and standardisation
  • Preferred managerial style.

Centralisation and decentralisation

Decision-making is about authority. A key question is whether authority should rest with senior management at the centre of a business (centralised), or whether it should be delegated further down the hierarchy, away from the centre (decentralised)

The choice between centralised or decentralised is not an either/or choice.  Most large businesses necessarily involve a degree of decentralisation when it starts to operate from several locations or it adds new business units and markets.  The issue is really how much independence do business units or groups within a business have when it comes to the key decisions?

Organisations that have a centralised structure keep decision-making firmly at the top of the hierarchy (amongst the most senior management). Fast-food businesses like Burger King and McDonalds use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets.  The need to ensure consistency of customer experience and quality at every location is the main reason.

In a decentralised structure, decision-making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations. Good examples of businesses which use a decentralised structure include the major supermarket chains like WM Morrison and Tesco. Each supermarket has a store manager who can make certain decisions concerning areas like staffing, sales promotions. The store manager is responsible to a regional or area manager. Hotel chains are particularly keen on using decentralised structures so that local hotel managers are empowered to make on-the-spot decisions to handle customer problems or complaints. 

Formalisation

Formalisation is the degree to which organisations standardise behaviour through rules, procedures, formal training, and related mechanisms. Formalisation increases as firms get older, larger, and more regulated. Potential problems with formalisation include (Robbins et al., 2010):

  • Reduces organisational flexibility
  • Discourages organisational learning/creativity
  • Reduces work efficiency
  • Increases job dissatisfaction and work stress.

McKenna, E & Beech, N (2008) Human Resource Management: A concise analysis, Prentice Hall Pearson, London.

Robbins, S.P., Judge, T.A., and Campbell, T.T. (2010) Organizational Behavior, Harlow, Pearson Prentice Hall.

Traditional structures

The section that follows outlines the main features, effective use and advantages and disadvantages of a number of traditional organisational structures. The content has been adapted from Naomi Stanford’s book Designing Organisations: Why it matters and ways to do it well (reference details below), which is a great source for anyone looking for further information on organisational design.

Stanford, N (2022) Designing Organisations: Why it matters and ways to do it well, Economist Books, London.

Functional structure

A functional structure with functions/divisions such as sales, marketing, production, operations and finance all report to head office is highly traditional, deriving from the Taylorism view, and is often found in strong command-and-control organisations. The main strategy of functionally focused organisations is to maximise margins through leveraging economies of scale and functional expertise. Functional structures are effective when:

    • There are stable and undifferentiated markets with well understood customer requirements
    • There is a successful, control-focused enterprise culture
    • There is a small, single product line
    • There is scale or expertise within each function
    • The organisation works to common standards.

Advantages

  • Clarity regarding roles and responsibilities
  • Minimised costs due to common standards and functions carrying specified tasks
  • Specialisation encourages departmental competence

  • Clear structure can set out career development routes.

Disadvantages

  • Slow decision-making
  • Hard to determine accountability and judge performance
  • Functional loyalty rather than company loyalty makes cooperation difficult
  • Does not respond well to rapid change situations.

Divisional/product structure

Typically, in a divisional/product structure each division runs as an independent business unit. It is therefore is most appropriate where there are low synergies between the buyers and the distribution channels of the different divisions. Divisional/product structures are effective when:

    • Stakeholders perceive low synergies between products
    • There are different purchasing process/distribution channels
    • There are different operating requirements for success
    • There is a different competitive environment
    • There is a minimum efficiency of scale for functions or outsourcing.

Examples of such structures see organisations structured into clearly defined divisions, with little commonalities to link them.

Advantages

 

  • Allows organisation to compete effectively on products
  • Enables competitive advantage on product lines with each pursuing high profit margins
  • Flexibility of each division to respond to product market changes.

Disadvantages

  • High cost, loss of economies of scale
  • Difficulty of co-ordinating geographic areas
  • Lack responsiveness to local conditions
  • New product development falls between the gaps.

Divisional/geographic structure

As organisations expand domestically and internationally, the tendency is to organise by geographic markets, enabling recognition of local cultures and operating conditions. Such structures are effective when:

    • The business environment varies by geography – different customer needs, different competitive environments, different external constraints
    • The products produced have a low value-to-transport cost ratio (where the product value is considered in relation to the cost of transporting it). For example, selling fresh produce close to where it is grown is more cost effective
    • The organisation is close to customers for delivery support
    • The organisation wishes to be perceived as local.

An example of this is the Coca-Cola Company, which operates with eight geographical divisions, supported by a common platform services group. This structure aims to put execution close to customers and consumers and to drive more growth by offering a tailored collection of global, regional and local brands.

Advantages

  • Consumers provided with products that satisfy their needs, helping increase customer loyalty
  • Closeness to customer for delivery or support
  • Perception of the organisation as local
  • Friendly competition between geographic units.

Disadvantages

  • Conflict between regions and HQ
  • Implementing new product lines or changes slow and difficult
  • Difficult to apply global strategy
  • Difficult to develop consistency and transfer learning.

Divisional/process structure

In this structure the focus is on processes where common core services such as customer and distribution services cut across the divisions. Internal support services, for example HR, are frequently organised in this way but customer-facing services are equally well served by this structure, which is a good alternative to the functional structure. Process-focused structures work well when:

    • There are well-defined processes serving different internal and external customers
    • There is potential for new processes and/or radical change to processes
    • There is little interdependency between core processes
    • There are different cultures/workforces between core processes.

Advantages

  • Performance increases from clear set goals, utilising specialisation while minimising overlap and duplication
  • Potential for new processes and a radical change to processes
  • Divisional focus can allow building of a common culture and higher morale.

Disadvantages

  • Challenge to implement: need to redefine the operating culture of the business
  • Clashes occur between HQ and divisions
  • Increased likelihood of process overlap and duplication.

Divisional/customer structure

Structures around customer segments are successful where there are obvious segments defined by need, economics, distribution and other key attributes. Such structures are effective:

    • Where all-defined customer segments have been identified
    • When selling products/services unique to segment
    • When using buyer strength
    • When leveraging customer knowledge advantage
    • When perceiving minimum efficiencies of scale in functions or outsourcing
    • When promoting a strong marketing/customer-focused culture.

Commonly telecoms companies, such as Vodaphone are structured around customers and business as two distinct customer segments.

Advantages

  • Specialising in service a specific customer group develops skills
  • Customer satisfaction leading to loyalty
  • Organisation able to be more responsive to changing customer needs and wants
  • Customer knowledge advantage over competitors.

Disadvantages

  • High costs, loss of economies of scale
  • Difficulty co-ordinating geographical areas
  • May lack responsiveness to local conditions.

Matrix structure

Matrix structures are usually one of three types:

  1. Functional matrix, where the functional leader has prime accountability
  2. Balanced matrix, where people in the organisation have two bosses and/or there is joint leadership accountability
  3. Project matrix, where project leads call on resources from functional leads.

Matrix structures can work well in dealing with increasingly complex challenges that modern organisations face but can increase ambiguity, slow decision-making and blur accountabilities. Having managers who are collaborators rather than command and control types ease some of the downsides of the matrix structure.

Matrix structures are most effective in conditions where:

    • There are global or regional customers who want a consistent international agreement and/or point of contact
    • There is a requirement for co-operational and communication across the functional and geographic silo
    • There is a need to build rather broader people capabilities – as businesses become more integrated they need to develop people who can think beyond their own functions or locations.

Advantages

  • Flexible: teams may dissolve after task completion
  • Specialist skills brought to bear where needed
  • Employees develop new skills and gain experience
  • Attention paid to product/geography.

Disadvantages

  • Difficult to apply
  • Supervisor power struggles/overlapping responsibilities
  • Need for a lot of co-ordination
  • Greater transaction costs.

Reflective activity

This is in two parts:

  1. Identify which organisational structure represents your organisation. Have you experienced different types? What are/were the pros and cons of the structure as you saw it?
  2. Consider the impact of the different structures on the people function. How is the role and day-to-day operations of the people function affected? Consider this in relation to policies and procedures, engagement, recruitment, selection and induction.

Your HR tutor summarises the main points.

Listen to "Reflective activity debrief" on Spreaker.