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Organizational Structures

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Types of Organizational Structure

ORGANIZATION STRUCTURE

The 'division of labour' referred to in unit 17 creates a structure of relationships between management functions and also, since people undertake the tasks of an organization, a structure of relationships between the people doing these tasks. The organization structure is therefore a social structure. This is usually a hierarchical structure and should be related to the hierarchy of objectives stated in a corporate plan. The structure can be viewed as a pyramid with one person at the top and an increasing number of people at each level below the top.

Every organization will have an organization structure of some kind. Less often will it be recognised that the organization structure is a management system; one that has to be properly designed if it is to be effective. Clearly the organization structure must match the organization and its activities. In many organizations the structure is static and was probably imposed a decade or so earlier to suit the whim of the then managing director. It probably showed people rather than job titles and usually adorns the board room or the foyer. Organizations that fail to adapt their organization structures to changing needs will find themselves becoming increasingly ineffective.

An appropriate organization structure will enable effective and speedy communication between different parts of the organization. It is both the cement, which holds an organization together, and the lubricant, which enables it to operate flexibly and effectively. A poor organization structure will prevent communication, interaction and involvement. It will prevent an organization from being effective and from achieving its objectives. An organization structure for a typical manufacturing organization is shown in Figure 18.1 but would be similar for non-manufacturing organizations. An organization structure chart shows the job titles within an organization and how they relate to each other. Job titles are used rather than peoples’ names since people can change. The relationships are between people holding those jobs. This structure is a process or functional structure because the different departments are responsible for the different processes or functions of management.

Figure 18.1

This diagram shows only the top-level functions. The vertical arrows indicate more people, that is job titles, beneath a given job title but not shown on this diagram due to space limitations. These people form the department managed by the jobholder for the job title shown. The function of the departments that are not shown in detail in figure 18.1 are shown in table 18.1 below. A more detailed structure for the manufacturing function is given in unit 52.

Table 18.1

Finance

Purchasing/Logistics

Quality

Financial strategy

Purchasing strategy

Quality strategy

Finance sourcing

Material sourcing

Quality control

Cost records

Vendor rating

Quality assurance

Financial accounts

Supply contracts

Quality procedures

Performance ratios

Distribution strategy

Quality organization

Profit distribution

Distribution

Quality management

     

R & D and Design

Personnel

Marketing

Design strategy

Personnel strategy

Marketing strategy

Product strategy

Employment contracts

Market research

Product development

Recruitment, Training

Advertising

Product liability

Manpower planning

Product launch

Design for market

Payment systems

Sales administration

and manufacture

Industrial relations

Customer services

There are several different ways of structuring an organization, rather than the functional organization structure shown above. Some alternative structures are considered below.

A large organization may operate on many different sites, perhaps in different countries and in different markets. Whilst such an organization could be organized as a single company with operating divisions, it is more likely to comprise a group of separate subsidiary operating companies in which all the shares are held by a single 'holding' company. The structure of such a holding company is shown in Figure 18.2. The holding company is likely to be a public company (plc.) but the subsidiaries would be private companies (Ltd.). This structure can arise as organizations take-over other organizations but retain the original names. Complex structures are created when organizations buy shares in other organizations, which buy shares in other organizations. Companies may be internally split into divisions, which may be based on different sites or produce different products. Divisions are convenient business units for effective management but are not legally registered as separate organizations and do not have to publish their accounts. They may have considerable autonomy within the organization and will produce accounts internally for management decisions. Such units may be referred to as Strategic Business Units. (see later in this unit)

A different structure is created when two or more organizations set up joint-venture company in which they own the shares between them. Joint-venture companies are set up by organizations hitherto separate in which they wish to co-operate for example on a new product or in a new market. Each relies on the other and usually complements the skills of the other. Working together may be necessary for success and shares the risk when developing new products or markets.

Figure 18.2

TYPES OF ORGANIZATION STRUCTURE

The shape of organizations

There is no one correct type of structure for an organization. The managers in the organization must design a structure that is appropriate. This is likely to have several layers or levels of management - but how many are needed ? The larger the organization the more managers and levels are likely to be needed. More managers means more costs, so a balance is needed. A 'tall' organization would have many levels relative to the number of operators. In this type of organization planning and decisions are centralised and the jobs of operators reduced to the minimal manual or clerical tasks. In some organizations the number of people reporting to a manger is as low or 2 or even 1. This would result in a tall and top-heavy organization. Such organizations need more managers and more levels of management. It was not uncommon in the past to find public sector organizations with 10, 20 or even 30 levels of management. This is an example of Parkinson's second law referred to in unit 17.

From 1988 to 1992 the number of managers in Britain's National Health Service increased about twenty-fold in four years, a remarkable rate of growth, especially as the number of nurses and hospital beds fell. All of these managers are busy, sitting on committees or telling other people what to do, but they are only busy because they are there and the organization structure has been designed to create these jobs. The objective is to reduce costs but the cost of doing so is often greater than the cost saved.

A modern approach would change the jobs that people do and delegate decision making responsibility. This structure requires far less managers. Some organizations are now changing their organization structure in this way. The process is known as 'de-layering' and the result is a 'lean' organization. A 'shallow' or 'lean' organization would have relatively less levels of managers. In lean organizations each manager would have more people reporting directly from one level below. The number of such people is called the 'span of control' of the manager. It is usually considered that a span of control of a senior manager should be between 3 and 6, although at the supervisory level managers often manage groups of 15 to 30. In this type of organization decision making is delegated. Fewer levels of management and less managers are needed since the operators are to some extent self-managing. Clearly, a lean organization is more effective than a tall one so a modern approach to the design of organization structures is based on this. Some of the largest organizations in the world have only 8 levels of management so smaller organizations should need less than this !

Position in the organization structure

The location of a particular function in an organization structure is significant to its power, authority and success. The level of a function and the other functions with which it relates, horizontally, under a common manager determine the importance of a function and level at which decisions about that function are taken and grouped with other functions. In the past, Personnel and Quality management were seen as simple tasks requiring only modest skills. These functions were often placed towards the bottom of the structure. The people in charge did not usually have the title of manager.

In such a position these functions were seen as not important, and in any conflict with, for example manufacturing, the views of personnel and quality were overridden. With the increasing importance now being seen as necessary for these functions, their position is now much higher within the organization. This gives a voice and authority for these functions since they report at a higher level. It also ensures that conflicts are not swept under the carpet but are discussed and resolved to the benefit of the organization.

Process or functional organization

In organizations there are two basic ways in which the total set of tasks can be divided to form the organization structure. Managers can have responsibility for a process or function. The structure shown in figure 18.1 is functionally split. In functional organization each department is responsible for a single function, a set of similar tasks using the same processes. People employed in a department are skilled in that function but often understand little about the rest of the organization. Often they do not see how their function relates to other functions. They are responsible only for one function or process they do not see how work is progressing through the organization as a whole. This leads to organizational fragmentation, prevents interaction and synergy and holds down productivity. This is made worse by educational specialisation since it narrows the skill base of employees to their own specialism. They know more and more about less and less !

In process or functional organizations problems of lack of communication and understanding arise. The organization is usually inefficient and everyone blames everyone else for the problems. They do their own bit then push the work 'over the wall' to the next department. The walls between departments are not only physical they are psychological. Additional people are employed to improve communication but the if the basic structure is inefficient the appointment of more people will not make it more effective.

Product organization

The alternative is for the split to be based on products. In this case departments are responsible for all functions of management associated with a given product. The support functions are placed in product departments. Each department sees progress at all stages of work form input to output, from the materials coming in to the goods going out of the organization. Employees in a department interact with other employees in the same department doing different functions, they learn from each other and see how each contributes to the overall productivity of the department. A symbiotic relationship develops leading to individual and organizational learning. Figure 18.3 shows a product organization structure.

Figure 18.3

The placing of every function in every department would require more staff so in practice some functions will remain centrally and organized functionally. A suitable balance must be determined. The financial function is likely to remain centralized, since it has a corporate wide role, but some detailed accounting functions can be decentralized. The concept of processes and products is valid in non-manufacturing organizations; in a university for example a lecture in a subject is a process and a degree programme is a product, a student is the material brought in and converted into a graduate.

If organization is based on processes a manager would have responsibility for a process and all products which required that process would pass through the department. If the structure is based on products, a manager would have responsibility for several if not all processes involved in the manufacture of the product. There are advantages and disadvantages of both of these approaches. These forms of organization must match the physical layout of equipment. These aspects are expanded in units 52 and 57. A structure must be chosen that best enables the success of the organization.

Matrix organization

A third variant is a 'matrix' structure which combines both process and product management and has both process and product managers. This requires more managers but is justified on the grounds that it results in improved communication and better control. Each employee below the level of process and product managers has two managers, a process manager and a product manager. Each manager can issue work instructions to an employee and dictate when the work is to be done. This can lead to conflicts when an employee is required to do two tasks at the same time. Instead of introducing more managers, a modern approach would improve communication in other ways and create self-managing work groups.

Figure 18.4

Figure 18.4 shows how managerial responsibilities are grouped in a matrix organization structure. It is a three dimensional structure which is not easy to show on two-dimensional paper. This figure is an attempt to show both horizontal and vertical links. The figure shows 9 departments, 3 functions for each of three products. 3 grey boxes represent functional managers since they are responsible for a function across all 3 products. 3 black boxes represent product managers since they are responsible for all functions for a single product. This structure therefore requires 6 managers at this level rather than the 3 required for either functional or product management. The managing director, MD, manages the 6 managers.

In a matrix structure, employees report to 2 managers: one for their function and one for their product. A matrix structure is said to offer better control for managing the complexity of multi-product manufacturing organizations. This however comes with the extra cost of the additional managers required. There can also be conflicts between managers and confusion for employees if they receive different instructions from the 2 managers to whom they are accountable.

Project organization

Another type of structure is used for project management. A project is a set of activities done once only rather than repetitively. The introduction of change, such as the setting up of a new factory of manufacturing system, is a one-off activity organized as a project. The organization of projects is explained in part 7 of this website. In an organization in which doing projects is the main activity project organization is similar to product organization (see figure 18.3 above but substitute 'project' for 'product'). In a manufacturing organization projects will be done by a team brought together to manage the project. In this case matrix organization is likely to be used (see figure 18.4 above). In this form of organization an employee will have two managers, one functional and one for the project. Employees are seconded, full-time or part-time, from their normal job to a project team for the duration of a project. A project manager leads a multi-disciplinary project team which has the range of skills needed to implement a project. In manufacturing, project management is used when needed for managing a change. The functions of innovation and design are such that their normal activities are sets of one-off activities. Marketing activities are of this type. They are therefore usually organized as projects (see part 7, unit 72 for more on project organization)

The Upside-down organization

This is not a formal organization structure but a concept of the role of management. The traditional organization structure is a pyramid, this concept turns the pyramid upside down. Instead of managers being at the top issuing orders to the operators, they are at the bottom. This perspective sees the role of management as being supportive of the operators doing the primary task of the organization. Managers are seen as facilitators and problem solvers, enabling the operators to be effective. This concept was developed by Robert Townsend. Figure 18.5 shows this concept.

Figure 18.5

THE DECISION STRUCTURE

In designing an organization structure, a decision structure is also being designed, since the latter are an inherent part of the former. Decisions are made by people in the organization, so the structure of decisions relates to the organization structure. Similarly, communication and information flow is between people in the organization. Therefore decisions are needed on where decisions are made and what information is needed at different places in the organization structure. These are the decision and information structures. The information structure must match the decision structure to ensure that information is available to those who need it for making decisions.

Decisions on important, long term and strategic matters are taken centrally, at the top of the organization. Decisions on day-to-day, short-term operations will be delegated down to managers at lower levels. Deciding the best level for decision making is important for the success of the organization. Bureaucratic and 'autocratic' organizations tend towards centralized decision making whereas more 'democratic' organizations seek to involve people and do so by delegating decisions. In modern, 'lean' organizations decisions are delegated, this tends to create more interesting and challenging jobs for people in the organization. This requires fewer managers because most employees are taking decisions themselves.

The delegation of decisions can create autonomous groups. This concept is referred to in several units in this website. Strategic business units are referred to earlier in this unit. The internal market, unit 20, plant within a plant, unit 57, profit centre, unit 80 and job design, unit 98, all express a common idea of active participation of employees, challenging jobs and delegated responsibility. With such delegation there will still be a central core for policy and strategic decisions. There may also be some central services such as personnel. Being central does not imply higher authority, just efficiency of organization. Centralized services are the servants not the masters of the wealth creating functions.(but in many organizations, centralized administrators think they are the masters!)THE COMMUNICATION STRUCTURE

Formal communication within an organization arises from the lines of responsibility and accountability. Person A can only tell person B what to do if B is on the same vertical line below A. In theory, and in a bureaucracy in practice, information and communication can flow only along these lines of command. This is the way in which Government offices operate. Most organizations cannot operate effectively with such limited communication so additional informal communication links need to be established. In an organization of any size it is an important and major task to design the information system and communication structure.

Information is power, so in the past information was kept at the centre, that is the top of the organization. It was thought by managers that if employees knew how much money the company was making they would ask for more money for themselves. If they knew what new products the company was developing they would tell the competitors. Such attitudes are based on mistrust and create mistrust. Information systems were then based on this mistrust. Each department had its own information system to which other departments did not have access.

In some cases, different departments used different data for the same thing because they did not believe the accuracy of the data being used by another department. For example, the time for a task is needed by at least two different departments. Manufacturing need it in order to schedule work. Accounting need it in order to cost the task. Personnel may also need this data for the payment system. Each department would use its own, but different, data. Clearly a single data is needed.

When decisions are delegated more information is needed at lower levels in the organization. For employees in one functional area to be effective they need to know what is going on in other parts of the organization. New types of information system are needed if such organizations are to have the information they need to be effective. Modern information technology using compute- based websites can provide a common website and common data for use by the different functions within the organization. Individual employees can access the website and obtain a more informed base for decisions. In this way the information system enables more integrated and better decisions to be made within the organization and more people are involved in decision making.

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