68 CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 68

6 The Organisation and its Structure

work of Frederick W Taylor who is seen as the ‘father’ of the

LEARNING OBJECTIVES: Scientific Management approach. Figure 6.1 shows a typical
At the end of this chapter students should be able to: functional organisational structure.
Discuss the importance of organizational structure Some of the features of a functional organisational
structure are:
Outline the different classifications of organizations
Well-defined communication channels which are
Illustrate the different classifications of organizations
Diagrammatically usually downward
Discuss the characteristics of the formal Clearly outlined chain of command and supervisory
organizational structure roles
Utilises job specialisation and departments have well-
defined roles
The structure is less flexible and so it relies heavily on
efore we delve into the major concepts of this formal procedures.

B
chapter it is important that the term ‘organization’
be revis- ited. In Chapter 5 an ‘organization’ was Advantages of the functional organisational structure
defined as Promotes co-ordination and control among employees,
a ‘group of people working together to achieve a common which can improve effectiveness
or collective goal’. Put another way, it is a well-coordinated Specialisation can improve the performance of
social unit of two o r more people with a desire t o achieve a departments
common goal or collective goals. Based on these defini- Operational functions can be delegated to lower-level
tions, we see that the organization should have some f o r m management.
of structure which will facilitate coordination of the
act i ve ties carried out by the firm. The structure also helps to Disadvantages of the functional organisational structure
guide employees as it relates to their actions and lines of Coordination and control may become too stringent and
commu- nication. The o r g a n i z a t i o n a l structure is a lead to low morale
f r a m e w o r k that outlines the l i n e s of authority and The decision-making process may be very slow,
c o m m u n i c a t i o n in the organization. especially for very centralised structures
The structure may become too rigid, so that it cannot
adapt to the changing environment
Classification of organizations
An organisation can be classified in different ways, with
Figure 6.1: Functional organisational structure
each classification being dependent on v a r i o u s factors
ions
such as functions, product and location. The different CEO
classificat
are described below.

Functional organisational structure

The functional organisational structure is
where the organisational structure is designed Purchasing Production Finance Engineering
Human
Resource
in terms of the functional areas of the business – Manager Manager Manager Manager Manager
for example, marketing, purchasing, accounting,
tion
etc. This is the most widely used classifica
of Human
by far, and is usually inexpensive. This type Purchasing Production Finance Engineering Resource
the Department Department Department Department Department
organisational structure has been credited to
 CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 69

In the long run, specialisation can lead to a lack of focus The success of the product is highly dependent on the
on the organisation as a whole. people with direct contact with the product
There is duplication of the functional areas
Product organisational structure Competition could become negative, which is not good
In situations where businesses have different products, for the firm as a whole.
management may decide to separate the activities for each
product. Each product would have its own management Geographical organisational structure
structure which is answerable to top management. The Where organisations are operating in different countries,
management structure of the product may be extended the likely organisational structure will be geographical.
to include the major functional areas of production, sales, The geographical organisational structure organises
finance, etc. An illustration of the product organisational the enterprise in terms of regions or countries. However,
structure is shown in Figure 6.2. each region or country can then be organised in terms of
The product organisational structure has the following function or product. This type of structure is frequently used
important features: by multinational corporations which have different firms
Allows for delegation of responsibility by top in various countries. An illustration of the geographical
management organisational structure is shown in Figure 6.3.
Each product unit is accountable for profit in that The geographical organisational structure has the
division following features:
Each product is assigned the main functional Each region is a profit centre
departments of the organisation.
Figure 6.3: Geographical organisational structure
Advantages of the product organisational
structure Owner-
President
Focus is placed on the product’s performance and level
of profitability
Diversification in the product offerings of the firm is
encouraged
Promotes positive competition among divisions Country 1 Country 2
Each product division is given more autonomy to
achieve divisional and organisational objectives.

Disadvantages of the product organisational

structure
Maintaining the different divisions may prove Marketing Operations Finance Marketing Operations Finance
to be expensive

Figure 6.2: Product organisational structure

General
Manager

Product Product Product

(dairy) (bun) (tinned food)

Production Marketing Finance Production Marketing Finance Production Marketing Finance

70 MODULE 2 | UNIT 1 | THE MANAGEMENT OF PEOPLE CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 70

The different regions are arranged on a functional or functional areas of the firm and horizontal lines which show
product basis the lines of authority across the different divisions, regions
Regions are allowed some amount of autonomy in the or departments. A typical matrix structure is shown in
management of their operations. Figure 6.4.

Advantages of the geographical organisational Advantages of the matrix organisational

structure The firm can respond quickly to local structure
environmental change Often leads to better use of resources
The organisation is presented with local opportunities Flexible and adaptable to the changing environment
which may not otherwise be available Employees are more involved in the operation of the
Promotes delegation of responsibilities firm
Each region has responsibility for profit generation. Improves cooperation and problem-solving techniques
Improves management skill.
Disadvantages of the geographical organisational
structure Disadvantages of the matrix organisational structure
There is duplication of resources across regions Workers may become confused from answering to so
Poor coordination across regions can hurt the entire many authority figures
organisation Slow decision-making process
Competition for corporate resources may lead to May lead to a power struggle among managers
conflict Teams or divisional goals may override the goals of the
Lower level of control by top management could lead to organisation
inefficiency. May increase the cost to the firm in organising its
activities.
Matrix organisational
structure Team organisational
The matrix organisational structure offers a different structure
tactic in organising business operations. It is usually used Later in this book we will examine the importance of
where the environment is rapidly changing and there is teamwork and its impact on the organisation. More
a need for effective coordination to combat the situation. and more organisations are embarking on a team-based
This structure combines elements of the functional, product approach to their operations. The importance of teams is
and
lines possibly geographical
of vertical organisational
authority which concentratestructures. The also
on the major evident in the
organisational s school system through group work. This
matrix structure depicts two lines of authority. It shows the thrust of teamwork
departmental bo has led to the development of the team
to tructure. The structure seeks to remove
Theundaries by establishing teams which work
are complete an overall business objective.
General
Manager fun se teams are usually cross-functional and
sale composed of employees from different
ans ctional departments, including production,
ands and finance. Team members are
Sales and struwerable to both their functional managers
Production Purchasing R and D
Marketing the team leader. A team organisational
Adv cture is illustrated in Figure 6.5 (p 71).

Product X antages of the team organisational

Product structure
Team X
Improves employees’ motivation
Figure 6.4: Matrix organisational structure
Product Z
Manager
 71 MODULE 2 | UNIT 1 | THE MANAGEMENT OF PEOPLE CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 71

faci authority to be delegated as the hierarchy

litat is lessened.
Product ing
Team Z intr
ade
part
me
ntal
rela
tion
shi
ps
Spe
eds
up
the
dec
isio
n-
ma
kin
g
pro
ces
s
Ad
apt
abl
e to
cha
nge
in
the
env
iro
nm
ent
and
con
su
mer
s’
tast
e
and
pre
fer
enc
e
All
ow
s
 CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 72

Advantages of the network organisational structure

Research
Develop
and
Minimises administrative costs
Produ
ment Faster decision-making process since there is a reduction
ction
Man in hierarchical structure.
ager

Man
Mark
Disadvantages of the network organisational structure
ager
eting Less control over what is done, since most workers are
contracted
Can be time consuming, especially where there are
Fin Mark
Man
anc Consu
eting regular meetings.
S ltant
Man
a
ager
e Virtual organisational structure
ager
l The virtual organisational structure uses networks to
e
Figure 6.5: Team s organisational create linkages among people, assets and ideas. These
structure linkages enable the company to manufacture and distribute
products without the hindrances of organisational
Disadvantages of the team organisational boundaries or location. This gives companies the ability to
structure draw on the capabilities of others without having to be
This structure may lead to conflicts among departments there physically. The virtual organisation relies on a
as they compete for scarce resources centralised database which uses technology such as
There is always a possibility of the problem of dual videoconferencing and e-mail via the computer to
loyalties communicate. To this end, the stakeholders within a
A lot of time is spent in meetings virtual organisation may not meet face to face for a while, if
Teams may substitute the firm’s objective for theirs as ever at all. Instead, they communicate via the internet to
decentralisation occurs. receive their assigned tasks and send their reports once their
tasks are completed.
Network organisational structure Since meeting in a physical location is not a usual
This organisational structure links a number of separated occurrence for the stakeholders, the physical company
organisations with a desire to achieve a common goal can be small but retrofitted with the capabilities to operate
through their interactions. The network can be in the form globally. A very successful example of the capability of
of a joint venture agreement or where some of the major virtual organisations is seen in Amazon.com. An illustration
functions of the firm are subcontracted to other firms. These of the virtual organisational structure is shown in Figure
firms are linked by and to a company which serves as the 6.7.
headquarters or hub. For example, a large construction firm The virtual organisation is often characterised by the
may give subcontracts to other firms that will assist with the
of this Minimal
following physical structure
features:
completion of a project. Figure 6.6 shows an example Heavy reliance on communication technologies
type of organisational structure:
man e
urc Manufacturing Design
H ncy
Tra ru company company
institu
inin ea
Manufact tion
g sg
urer oe
keting
y
genc Core
M
The company
aa
company
(central r Sales and marketing Logistics
Aud hub) company company
iting
f unsel
i
Le m)
r
Desi gal(l
m
gner coa
Distri w Finance
butor fir company

Figure 6.6: Network organisational structure Figure 6.7: Virtual organisational structure
No boundaries to
operation Work can be
 CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 73

done from home Very few

Elimination of the physical boundaries of the firm.
physical assets
Heavy reliance on a network of part-time self-employed
Disadvantages of the virtual organisational structure
workers who are connected electronically.
Heavy reliance on external organisations to provide
Advantages of the virtual organisational structure high-quality goods in large quantities
Lack of job security as the services of the employees
Access to worldwide expertise in order to provide high-
might be subcontracted
quality goods and services
Close monitoring of external suppliers is required
The firm can adapt quickly to changes in the external
It can be difficult to build a corporate culture, as
environment because of its flexibility
employees and employers may be from different
Minimal overhead costs, as products are often
cultures across the world
outsourced
Communication in the virtual office may be difficult,
Its smaller and flatter structure gives the firm better
as people are working within different time zones.
control

CASE STUDY

Amazon.com: a virtual difference

In hindsight, several years ago, who would have known that Amazon.com would have become one of the largest online compa-
nies? The company was established in 1994, with its headquarters in Seattle, Washington, USA. The company specialises in
the online sale of a number of items, including books, electronics, toys, tools and clothing. The company has expanded its
product offering significantly since its inception. Expansion is also seen in the company’s international retail websites, worldwide
network of fulfilment and customer service centres. There are also a number of Amazon teams across the world providing fast
and reliable shipping directly from Amazon retail websites to customers. Other services provided by Amazon teams worldwide
include customer service centres and technical support.
Driven by technological advancements, Amazon.com now employs over 88 000 people worldwide. In addition, over 2 million
third-party sellers participate in Amazon by offering new, used and collectible selections to Amazon customers worldwide. To
cement its position in the virtual environment further, Amazon.com opened its e-commerce platform to other retail brands and
individual sellers in the year 2000. This has given hundreds of thousands of retail brands and individual sellers the opportunity to
expand their market reach and increase sales drastically.

Questions
1. Explain what a ‘virtual organisation’ is, giving one (1) example other than the one used in the case study. (2 marks)
2. Give two (2) pieces of evidence from the case to show that Amazon.com is a virtual organisation. (4 marks)
3. State one (1) reason for why technology is important for the success of Amazon.com. (4 marks)
4. Discuss three (3) benefits and three (3) drawbacks of Amazon operating solely as a virtual organisation. (18 marks)

Total 28 marks

Factors influencing the classification of structure. Likewise, larger firms such as multinationals
organisations tend to have geographical or product organisational
Size of the firm – as firms increase in size it may be structures
necessary to upgrade or change their organisational The business cycle – firms may downsize or expand
structure. For example, an entrepreneurial business may in relation to fluctuation in external environment.
move from an entrepreneurial structure to a functional During periods of boom, firms may expand their
 CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 74

chain of command and functional areas. However, a Span of control

recession may force them to downsize, possibly closing
Span of control refers to the amount of employees that
international branches or cutting management
are directly under the control of one manager or
Business strategy and objectives – the strategies
supervisor. As you might imagine, the greater the number
employed by the organisation to achieve its objectives
of people being supervised by one person, the less effective
may necessitate a specific type of organisational
that supervision will be. Therefore most organisations have
structure. In other words, organisational structure
a limit on the size of the span of control. The span of control
should coincide with business strategy. For example,
is broken down into two categories, based on the number
if the organisation’s objective is to establish entities
of subordinates involved. These are:
overseas, then its organisational structure must be
flexible enough to be converted into a geographical one Narrow span of
The business environment – there are a number of control
factors in the business environment that might affect This is usually the case in organisations that have a very
the organisation. These include technological, political, tall organisational structure – that is, having a number
socio-cultural and economic factors. These factors will of managers or supervisors. However, it results in closer
affect the type of structure utilised by the firm. supervision of workers and helps managers to maintain
quality and reduce risks. See Figure 6.8.

Characteristics of the formal Wide span of

organisational structure control
This involves the supervision of a larger number of people.
Hierarchy Organisations with a wide span of control tend to have a
This shows the different levels of authority in the flatter organisational structure, with fewer levels of
organisation. The hierarchy in most organisations usually authority. A wider span of control enables managers to
consists of three levels. At the top of the hierarchy there is delegate responsibility to subordinates. See Figure 6.9 (p
top-level management which has responsibility for setting 74).
long-term objectives and policies to chart the way of the Some of the factors that may affect the span of control
firm to success. An example of a top-level management are outlined below:
position is Chief Executive Officer (CEO). Below this level The nature of the work being undertaken – that is, more
there is the middle management level, with managers complex tasks warrant greater supervision
having responsibility for the operational issues of the firm. The ability, competence and skill level of subordinates
This would include setting the jobs to be performed and The leadership style employed by management
the way in which they should be done. An example of a The structure of the organisation.
middle management position is Plant Manager. The lowest
level in the hierarchy is the first-line managers. They have a Line and staff
supervisory role and should ensure that the work is done relationship
by the staff. An example of a first-line management Line relationship – this is one that exists between
position is Department Manager. senior management and subordinates. It depicts an
organisation where authority or directives flow from top
Chain of command
Chain of command shows the lines of authority in the
organisation. These lines are used to transmit information
and instructions up and down the hierarchy of the
organisation. As was outlined above, the higher the level of
management, the greater the level of authority. Therefore
senior management is at the top of the chain of command
which will continue down the organisation so long as there
are people (subordinates) receiving directives from
someone higher in the chain than themselves.
 CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 75

Figure 6.8: Narrow span of control

 CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 76

Figure 6.9: Wide span of control

management down through the organisational structure. Accountabilit

This relationship gives management the opportunity to y
delegate authority, direct and control employees The concepts of responsibility and authority necessitate the
Staff relationship – in the organisation, there are concept of accountability. Managers or people who have
people who offer specialist advice to managers. These been given authority and responsibility should be able to
specialists do not have the authority to ensure that their justify their actions and the outcome of their decisions to
suggestions are implemented since they are not within higher-level management. The concept of accountability
the hierarchy of the organisation. An example of a staff also affects the subordinates who must be accountable for
relationship would be a legal secretary to a CEO of a any task given to them for completion.
large company
Line and staff organisation – this is one that Delegatio
combines the line authority with the supporting or n
specialist roles within the organisation. Both sets of The truth is that no one person can complete all the tasks
people work together to achieve the organisation’s that are necessary to bring about success of the organisation.
overall goals and objectives. To this end, managers pass down some of their powers to
subordinates to complete specified tasks. ‘Delegation’ may
Responsibilit be defined as the tendency of management to entrust
y subordinates with responsibility and authority to carry out
This refers to the fact that all people in the organisation are a task. There are a number of factors that would result in
obliged to perform the given task to the best of their ability. a manager delegating responsibility to subordinates. These
One’s responsibility will then give him/her authority in include:
the organisation to assign tasks to subordinates and make To facilitate specialisation
decisions. Time constraints
To foster a succession plan for managers
Authorit To encourage flexibility and adaptability to
y environmental change – for example, a change in
This is defined as the right or power to give instructions customers’ needs.
and make decisions in the organisation. Authority allows
management to direct subordinates to perform duties. This Benefits of delegation
characteristic of organisation structure is based on three Helps to motivate workers
underlying principles: Firm can utilise the specialist skills of employees
Similar positions have the same level of authority and Sheds some of the workload of managers
this authority comes with the position held and not the Increases the time that management has to focus on
individual issues at the corporate and strategic levels.
Subordinates accept and comply with the authority of
management because of their legitimate power Drawbacks of delegation
The level of authority flows down the hierarchy of Some managers may be reluctant to delegate some of
the organisation – that is, top management has more their responsibility
authority than lower-level management.
 CHAPTER 6 | THE ORGANISATION AND ITS STRUCTURE 77

There could be some reluctance by subordinates to Facilitates easy control and coordination of policies Cost
accept the tasks delegated minimisation since resources are not duplicated
If the task assigned is unsuitable, it may lead to Decision making is less time consuming
significant losses and inefficiencies. There are less extensive planning and reporting
procedures.

Centralisation and decentralisation Advantages of decentralisation

In centralisation senior management of the organisation Firms can respond to changes quickly
maintains full control of decision making and there is Decisions made can reflect the needs of the market and
minimal delegation of responsibility. On the other hand, in customers
decentralisation the organisation is one where decision May improve the level of motivation of the employees the
making involves subordinates and there is delegation of workload of the firm is spread across departments and to
responsibility. A decentralised organisation is often different individuals.
separated into divisions, with some amount of autonomy,
however, working towards the fulfilment of the
organisation’s goals. CASE STUDY
Advantages of centralisation