Chapter 8

Unit 2.2 - Organizational structure

""Whatever affects one directly, affects all indirectly. I can never be what I ought to be until you are what you ought to be.
This is the interrelated structure of reality"
- Martin Luther King,Jr. (1929 - 1968), Civil rights activist and Nobel Peace Prize (1964)

Organizational structure {A02)

The following terminology in relation to different types of organizational structures:
(i) Delegation, (ii) Span of control, (iii) Levels of hierarchy, (iv) Chain of command,
(v) Bureaucracy, (vi) Centralization, (vii) Decentralization, (viii) Delayering and (ix)
Matrix structure.

0 rganizational structure refers to the formal interrelationships and hierarchical

arrangements of human resources within a
business. Businesses organize their human resources in various ways. In a small firm,
such as a sole proprietorship, there may be an informal organizational structure as the
business owner carries out a range of functions including marketing, operations
management and finance. Their roles change depending on the demands of the job at a
particular point in time. The sole trader also carries out more mundane tasks such as being a
salesperson and a stock controller. However, in most businesses there is a need for a more
formal and organized structure as people have different job roles and responsibilities (see Box
8.1). This helps businesses to function more efficiently, due to accountability and responsibility.
Accountability shows who is held responsible (or answerable) for each particular job or task,
such as the marketing team being held accountable to the marketing director for their
performance. Accountability allows senior managers to have better control over the running of
their organizations.
Responsibility shows who is in charge of whom and in what role or capacity, such as the
operations management director being in charge of all production workers. Roles and
responsibilities can be seen in an organization chart.
Shows a typical structure for a secondary (high) school. The Head teacher (Principal) is at the top
of the organizational structure and is ultimately responsible for all the staff in the school.
Managers are responsible for their own teams, such as the Head of Modern Foreign Languages
who is in charge of the language teachers.
As an organization gets larger and more complex, it has to become more structured for
tasks and roles to be fulfilled in a manageable and coherent way. Although businesses differ
in their formal organizational structures, the typical configuration consists of different levels
of directors (or executives), managers and workers
 (i) Delegation
As a business grows, managers need to relinquish some of their roles and responsibilities because
they are not able to effectively control all aspects of the organization. This passing on of control and
decision-making authority to others is called delegation. It involves the line manager entrusting and
empowering staff to complete a task or project but holding them accountable for their actions.
provides major benefits for both managers and employees:

 The manager saves time by not having to tackle every single task, so can focus more on the strategic issues facing the
organization.

 Delegation can motivate and develop employees who feel that they are trusted and that their contributions are
important.

By contrast, poor delegation causes confusion and a feeling of inadequacy. This leads to demotivated and less productive
staff, resulting in a failure to achieve the tasks set.

(i) The span of control

The span of control refers to the number of people who are directly accountable to a manager. Hence, the higher up a
person is in a hierarchy, the wider their span of control tends to be. Although the CEO of a company is directly responsible to
the Board of Directors, s/he is also indirectly in charge of all workers in the organization, including all of the directors.
Hence, the CEO's direct span of control is narrow, but the indirect span of control in very wide.

An advantage of a wide span of control (see Figure 8.3) is that fewer layers are needed in the organizational structure. In this
example with 18 people, the CEO has two assistants who share a (wide) span of control of fifteen employees. This helps with
cost control as there are fewer managerial positions in the firm. A flatter structure also means that communications between
the different levels of the hierarchy should be more effective (in terms of speed and accuracy).
By contrast, a narrow span of control means that there are fewer subordinates who are accountable to a manager (see Figure
8.4). Here, the same number of people exists as in the previous example (eighteen), except that they have been arranged with
narrower spans of control. It is therefore easier to communicate with and control the team. Smaller teams might also be more
productive as there is likely to be better team spirit and cohesiveness. Larger teams tend to suffer from communication
problems which may cause tension and conflict. However, due to more levels of management in the organizational structure,
this configuration tends to be more costly
 The person directly above an employee on the next hierarchical level is known as the line
manager. For example, in Figure 8.5, those on level 5 (at the bottom) of the structure
report directly to their line manager on level 4. A line manager is responsible for the
day-to-day management of the people (known as subordinates) who are directly on the
next level below in the hierarchy.
There are two main advantages of using hierarchical structures.
First, they show clear lines of authority within the organization. This can improve the
coordination and productivity of workers. Second, hierarchical structures establish
departments or teams to create a sense of belonging in the workplace so can act as a
form of motivation.
However, hierarchical structures also have their limitations. Departmentalization can
mean workers are isolated from their official teams (see Chapter 12 for the benefits of
informal communications for an organization). Hierarchical structures also tend to be
rather inflexible. This might prove problematic when there are changes in the external
environment that may require flexible structural changes in the organization.

(iv) Chain of command

The chain of command refers to the formal line of authority through which
communications and orders are passed down in an organization.
(v) Bureaucracy
Bureaucracy is the execution of tasks that are governed by official administrative
and formal rules of an organization. Bureaucratic organizations are characterised by
prescribed rules and policies, standardized procedures and formal hierarchical
structures. Bureaucracy is often associated with excessive administration, paperwork
and formalities. Within an organization, this might include:
 the frequent requirement to fill out excessive or cumbersome paperwork.

 staff working in multiple departments and therefore having to report to several

managers.

 long, official chains of command.

 too many committees set up to investigate issues of concern to the organization.

 manager s with duplicate or overlapping roles and responsibilities.

 a bureaucratic organization is governed by several principles, including:

 Continuity - The establishment follows official rules and regulations rather than
taking high risks that might j eopardise its survival and continuity.

 Rules and regulations - Business activity is conducted in accordance with the official
policies of the organization, such as clear lines of authority, responsibility and
accountability.

 Hierarchical structures - Authority and responsibilities are part of a formal hierarchical

structure with line managers carrying out their tasks in an impersonal and impartial way.

 Accountability - Business activity is conducted with written evidence of compliance with

the firm's policies. Formality therefore makes all workers accountable for their
performance.

However, the main drawback of bureaucracy can be summarised by Parkinson's Law

(1955): "Work expands so as to fill the time available for its completion:' In many
organizations, bureaucracy hinders and/or prevents creativity and risk
taking and often slows down decision-making. Bureaucratic organizations tend to be
highly inflexible since formal decision making becomes slow and perhaps overly cautious.
(vi) Centralization
Decision-making power can be either kept in the hands of a few people or it can be shared
out among the workforce.
A centralized structure, decision-making is made by a very small number of people. These
decision makers, usually the senior leadership team of directors, simply hold onto decision -
making authority and responsibility. Decisions are made through the person(s) in the centre
without consultation with other members of the organization. This model was favoured by
scientific management practitioners
 The advantages and disadvantages of centralization are

The advantages and disadvantages of centralization

Advantages Disadvantages
Rapid decision-making - There is no need to consult Added pressure/stress for senior staff - Decision makers do
employees about decisions. Therefore, quick decision- not delegate authority so face added pressures from
making can take place. extra workload.

Better control - Centralization allows managers to have a Inflexibility - The organization becomes rather bureaucratic
better overview and tighter control of what is happening and inflexible as workers have very limited autonomy.
in their organizations. This is particularly important in They lack opportunities to be creative and simply
large firms where communications can break down due to follow the orders of decision makers. Hence,the skills and
a lack of overall control and authority. talents of employees are not recognised or acknowledged.

Better sense of direction - Decisions are made by senior Possible delays in decision-making Since a centralized
leaders, group makes all the decisions, it is likely that many
i.e. the people who are most qualified to lead the decisions will eventually be delayed. This is simply due
organization. As there are fewer decision-makers, to the sheer number of decisions that the group needs to
consistency in approach is also more likely to be achieved. make, especially in large organizations.

Efficiency - Centralized control means that instructions are Demotivating Employees lack opportunities to make a
clear and tasks are less likely to be repeated by different genuine contribution, so their motivation and productivity
people or departments in the organization. suffer as they feel less valued.

(vi) Decentralization
use decentralized structures, whereby decision-making authority and responsibility are shared with others
In this example, there are three levels of management that have decision-making authority and responsibility. Hence decision
making is more decentralized.
The advantages and disadvantages of decentralization

Advantages Disadvantages
Input from the workforce - Busi nesses ca n benefit Costly - Empowerment and delegation often requ
from the skills, expertise and efforts of their ire financial incentives, such as better pay and
employees, especially the i nput of their middle remuneration for middle managers, as well as
managers. training opportunities

Speedier decision-making - Planning and Inefficiencies - I n decentralized organizations,

execution are more efficient as there is delegation middle managers might carry out dupl icate f
of authority and responsibility to others i n the unctions as there is no overview of what everyone
organization. else is doing.

Improved morale - Empowered staff are more Greater chances of mistakes - Decentralizing authority
likely to feel valued and motivated as they have and responsibil i ty only works if the empowered
some input in the decision- maki ng process. The workers are sufficiently competent and skilled. With
autonomy also means that they can use their more decision makers, it becomes more difficult to
initiative and feel a sense of ownership for their track where mistakes were made or where thi ngs
work, so productivity also i mproves. went wrong

Improved accountability - Workers are held directly Some loss of control - By decentralizing decision-
accou nta ble for their input which can lead to making, authority is diluted. Thus, senior leaders
improvements i n the quality of their work have less direct control over the operations of the
business
 Teamwork - A feature of decentralization is Communication issues - By decentralizi ng
collaborative work across teams a nd departments. decision-maki ng power, there is a greater need for
The sharing of ideas can foster harmonious efficient comm unication. This might require
relationships and generate creative and innovative additional time and resources, which adds to the
ideas. overall production costs

So, the question is whether businesses ought to become more centralized or decentralized. The decision will
depend on several factors:

 The size of the organiza tion - The larger the firm becomes, the greater the need for decentralization
 The scale of importance of the decision - Decisions that have high -cost implications and/or consequences are more likely to be
centralized.

 The level of risk - Similarly, high -risk decisions will remain in the hands of the key decision makers, i.e. remain centralized.

 The corporate culture - Organizations such as computer software companies that rely on the creative and innovative skills of
employees tend to be decentralized. By contrast, factory operatives in low-skilled jobs producing mass produced goods are
organized through centralization

 Managem ent attitudes and competencies - Managers who have a positive outlook towards worker attitudes and abilities are
more likely to delegate power and authority. By contrast, managers who are unwilling to let go of their control or status are
more likely to hold onto their centralized decision-making authority.

(viii) Delayering
Delayering is the process of removing one or more levels in the hierarchy to flatten the organizational structure. This reduces
the number of layers and widens the span of control in the hierarchy
The advantages and disadvantages of delayering

Advantages Disadvantages
Reduces costs - Cost savings are made on the salaries Creates anxiety - Workers may develop a sense of
and benefits previously paid to middle managers that insecurity as they become worried about their jobs, e.g.
have been removed due to the flattening of the some are made redundant and others are demoted. These
hierarchical structure. issues harm morale and productivity.

Improves communication - Communications flow more Increased workloads - This adds extra burdens and stress
effectively due to the flatter hierarchical structures. This is on workers, which can be counter-productive and
also due to shorter chains of command. reduce the quality of work.

Encourages delegation and empowerment - There are Slower decision-making - Managers deal with larger
wider spans of control, which should provide more teams, so decision-making can take longer. It can also
opportunities for workers to take on wider create problems for meeting deadlines
responsibilities.

(ix) Matrix structure

A matrix structure is the flexible method of organizing employees from different departments to temporarily work together
on a particular project. Functional departments still exist, although the project team has the opportunity to work with
colleagues from other departments.
The advantages and disadvantages of matrix structures

Advantages of tall (vertical) structures Advantages of flat (horizontal) structures

Improved communications - Matrix structures can help to Added workloads - Members of matrix structures work
break down traditional barriers between different across teams for certain projects as well as within their
departments, thereby improving communication across own department or functional area, which can be a
the entire organization. burden.
 Maximizes skills set of the workforce - Matrix structures Difficult to coordinate - Members of project teams
allow individuals to use their set of skills across a variety need to report to two line managers, so there can be
of contexts in the workplace. conflicting or divided loyalties, making coordination
challenging.

Cost-effective- This structure can be a good way of sharing Time consuming - It takes time for teams in a matrix
ideas and resources across departments within the structure to achieve as the project is not their main area of
organization. work.

Organization charts

A
n organization chart is a diagrammatic representation of a firm's formal organizational structure. Formal groups are
established to carry out specific functions or job roles, such as a team of finance specialists or a department of marketers

The different functional departments within a business there are four functional departments shown: Marketing, Production,
Finance and Human Resources. Each of these is headed by a Director. It shows how different areas of the business link to one
another and verifies staff positions in the overall organization.
The chain of command - This shows the various positions of authority in the organization. In particular, it shows which
people have direct line authority over others, such as the Production Director having line authority over all employees in the
Production Department The span of control - This measures the number of staff directly accountable to a single line manager.
For example, the CEO has a direct span of control of four people (the four Directors). Each Director has a direct span of control
of one (their deputy manager) except the Production

(i) Flat (horizontal) organization charts

The advantages of horizontal (flat) structures are outlined below. By default, the disadvantages of flat structures are the
advantages of tall (or vertical) organizational structures which are explained in the section below.
 Delegation becomes a relatively important part of managing the organization. Hence, there are opportunities for
subordinates to take on extra responsibilities and to develop their careers.
 Communication should be improved overall since there are fewer layers in the hierarchy
 It is cheaper to operate because there are fewer managers to be hired due to fewer levels in the hierarchy. Many of these managerial
functions are either eliminated or delegated.
 Flat structures can help to eliminate a 'them and us' culture so workers do not feel alienated from senior management, i.e. there is
less of a psychological distance between senior managers and those at the bottom of the hierarchy.
(ii) Tall (vertical) organization charts

The advantages of tall (vertical) structures are outlined below. By default, the disadvantages of these structures are the advantages of
flat (or horizontal) organizational structures which were explained in the section above.
 There tends to be quicker and more effective communication within smaller teams. By contrast, a wide span of control means the
manager has to communicate with many more people and deal with many more issues.

 Smaller teams are generally easier to control and manage, with greater team cohesiveness.

 Greater specialization and division of labour can help to increase efficiency and productivity. Hence, managers do not have to
spend as much time monitoring their teams.

 There are greater opportunities for more people to be promoted as more levels exist in the organizational hierarchy. This can
motivate some employees to work harder, thus improving staff retention and labour productivity.
(iii) Organizational by product, function or region
An alternative to structuring an organization in a tall (vertical) or flat (horizontal) way is to arrange human
resources by product, function or region.
 Organization by product - Most large businesses have a broad range of products. Hence, they might choose to
structure their human resources according to the various types of products produced or sold.
 Organization by function - Most businesses are organized by function, i.e. the different operational roles within a business
such as Marketing, Production, Finance and Human Resources. Some businesses will also have functional departments in
charge of Administration, ICT and Research and Development (R&D).
 Organization by region - Multinational companies (see Chapter 6) are often organized by geographical region. This
allows the business to be more aware of and responsive to local and cultural differences

The organization chart in Figure 8.13 shows organization by product, function and region.

 Function: There are three Vice Presidents of the business, each in charge of one functional area (Marketing, Production
and Finance).

 Region: Plant managers are located in Thailand, Singapore and Vietnam. They are accountable to the Vice President in
charge of Production. The same structure exists in these locations for the Marketing and Finance Departments.

 Product: Within each region, there is organization based on either consumer products or industrial products.
Question 8.5 - Departments or faculties?

Many IB World Schools are organized by functional departments, who are held accountable to the Senior Leadership Team. For
example, Group 3 subjects (such as Business Management, Economics, Geography, History, Philosophy and Psychology) can be
organized as completely separate departments (see below). However, in other schools these subjects are grouped together as an
Individuals and Societies (or Group 3) Faculty, whereby the individual subjects are coordinated by Head of Subjects who are
accountable to the Head of Faculty.

(a) Explain how the above organization chart would be affected if the separate departments were to be line managed by a Head of
Faculty in charge of Group 3 subjects.
(b) Discuss whether it is more effective for schools to be organized as departments or as faculties.

Changes in organizational structures (HL only)

Changes in organizational structures, for example, (i) project-based organization and (ii) Charles Handy's "Shamrock Organization"
(HL only). A03

0rganizational structures do not have to be fixed in the way described above, with tall or flat structures or
organization by product, function or region. Flexible structures, used to adapt to changes in the internal and external

Project-based organization
The advantages and disadvantages of project-based organization

Advantages of project-based organization Disadvantages of project-based organization

Flexibility - As projects are time-limited by definition, project- Discontinuity - As workers always move between projects,
based organizational structures continuously change as with different teams and project managers, there could be
projects are completed, to the needs of clients and new fewer opportunities for people to develop personally and
projects are initiated. professionally.

Productivity - Projects are focused on solutions rather than Isolation - Each project team is self-sufficient yet usually only
functionality. Project managers focus on implementation, operates temporarily. There are very limited opportunities to
striving to meet deadlines and operating within the work with other teams or people in the rest of the
assigned budget of the project. organization, creating a sense of isolation.

Efficiency - As the project manager has direct control and Inefficiencies - Each project needs its own finances and team
authority over the project, tasks get done quicker. Efficiency of experts, often resulting in a duplication of resources and
is further improved if the project manager can assemble the effort. As people continuously move from one project to
team, made up of people most suited to the project. another, there can be added pressures and stress for staff.
(ii) Charles Handy's "Shamrock Organization"
Charles Handy (born 1932), co-founder of the London Business School in 1967, believes that people are the most important
resource in any organization. His ideas differed markedly from those of Henri Fayol (see Chapter 9) and F.W. Taylor (see Chapter
10) who both believed in tall hierarchical structures with close supervision of workers. By contrast, Handy
recommends that businesses ought to place greater emphasis on meeting the needs of workers through methods
such as job enrichment (giving workers more interesting and challenging tasks) and flexible working practices.
Due to these structural changes, Handy coined the concept of
the Shamrock Organization in 1991. The model gets its name from the shamrock plant, a three-leafed clover. Handy suggested
that there are three groups of workers within a shamrock organization.
Core workers - Also known as the professional core, this group consists of full-time and multi-skilled professional workers
(such as managers and professional technicians) who handle the daily operations of the business. They are crucial to the
organization's operations, survival and growth. With developments in teleworking and flexitime (see Chapter 7), core
workers are becoming smaller in size. This has led to downsizing and restructuring of the workforce in many businesses.

Peripheral workers - Also known as the contingent workforce, this group consists of part-time, temporary and portfolio
workers who are employed as and when they are needed on a flexible basis. They tend to be paid by piece rate for short
periods of employment, thus helping to reduce overall labour costs for the firm. The peripheral group forms the flexible
workforce for an organization (see Chapter 7) and constitutes a greater proportion of the workforce for large businesses. For
example, supermarket chains such as Walmart, Tesco and Carrefour employ far more part-time staff than full-time workers.

Contract workers - This group, also known as outsourced workers, consists of i n d i v i d u a l s or

b u s i n e s s e s t h a t are not employed b y t h e o r g a n i z a t i o n but are paid to complete particular and
specialized tasks, such as advertising campaigns or skills training. Freelance workers, subcontract ors,
a g e n c i e s , consultants and the self-employed are examples of outsourced workers
Organizational structure and the key concepts
An inefficient organizational structure can cause staff demotivation, a duplication of effort, communication problems, difficulties
in coordination and poor decision-making. Hence, organization charts can be useful visual tools for the process of change and
change management.

As an organization evolves and grows, it is inevitable that change will create new job roles as well as make other roles redundant.
The increased need for human resources in creative and flexible ways means that managers may have to restructure the
organization as part of their overall strategic plan. For example, tall structures, which were popularised
Although there has been extensive research into the optimal organizational structure, the conclusion is that there simply
isn't a model that suits all organizations. Each model has its own strengths and weaknesses and every organization is
unique in its character, code of ethics and culture. The 'best' or optimal strategy depends on several key factors,
including:

The size of the business - Larger organizations tend to require more formal structures.

Employee competencies - Organizations with highly skilled workers can adopt relatively flat, flexible or project-based
structures, whereas those with low-skilled workers require a more formal and rigorous structure.
Management attitudes - Managers who are able to trust their staff and are willing to relinquish or delegate decision making
power are more likely to implement flatter and flexible work structures.

The culture of the organization - Creative and innovative organizations that are accustomed to change, for example, might opt for
more flexible, project-based structures.

In today's fast-paced business environment, where change is unavoidable, flexibility is a key feature of an organization's
business strategy. Since many decisions and actions need to be spontaneous, the decision-making process can no longer be
heavily centralized. For example, if firms choose to adopt Handy's Shamrock Organization, then the internal structure of the
business needs to be reviewed. This often leads to delayering caused by downsizing

REVIEW QUESTIONS

1- What is meant by organizational structure and what is its purpose?

2- How does accountability differ from responsibility?
3- What is meant by delegation?
4- What is meant by span of control?
5- What are the advantages of a wide span of control?
6- What are the advantages of a narrow span of control?
7- What is meant by levels of the hierarchy in an organization?
8- What is the chain of command?
9- What is bureaucracy?
10- What are the differences between centralized and decentralized
structures?
11- What is delayering?
12- What is a matrix structure?
13- What is an organization chart?
14- What are the differences between flat and tall hierarchical structures?
15- What are the differences between organization by product, function and region?
16- What is project-based organization?
17- What is the Shamrock Organization and how does it differ from traditional
organizational structures?
18- In the context of the Shamrock Organization, what is meant by core workers?
19- In the context of the Shamrock Organization, what is meant by peripheral
workers?
20- In the context of the Shamrock Organization, what is meant by contract workers?
KEY TERMS
Accountability describes the extent to which a person is held responsible for the success or failure of a task or job.
It allows senior managers to have better control over the running of their organizations.
Bureaucracy is the official administrative and formal rules of an organization that govern business activity. It involves
prescribed rules and policies, standardized procedures and formal hierarchical structures.

Centralization occurs when the majority of decision making is done by a very small number of people (usually the senior
leadership team) who hold decision-making authority and responsibility.

Chain of command refers to the formal line of authority, shown in an organization chart, through which formal
communications and orders are passed down.

Decentralization occurs when decision making authority and responsibility are shared with others in the organization.

Delayering is the process of removing levels in the hierarchy to flatten the organizational structure, thereby widening the span of
control in the hierarchy.

Delegation is the empowerment of a person lower down in the organizational structure by passing on control and decision
making authority to complete a certain task or role.

A flat (or horizontal) organizational structure means that there are only a few layers in the formal hierarchy and hence managers
have a relatively wide span of control.
The hierarchy in a business refers to the organizational structure based on a ranking system. Each hierarchical level refers to a
different rank with its associated degree of authority and responsibility.

Levels of the hierarchy refer to the number of layers of formal authority in an organization. The number of levels is shown in
an organization chart
Line manager refers to the person directly above an employee in the organizational structure.
Managers are the people responsible for the day-to-day running of the business or a department within the organization

A matrix structure refers to a flexible type of organizational structure of representatives from different departments,
temporarily working together on a particular project or job.
Organization by function refers to structuring a workforce according to business functions, i.e. specialized roles or tasks
such as marketing or finance and accounts.
Organization by product refers to structuring a workforce according to the goods or services produced or sold.
Each department focuses on a different product within the organization's overall product portfolio.

Organization by region refers to structuring a workforce according to different geographical areas, based on where the
firm's operations are.

Organization chart is a diagrammatic representation of a firm's formal structure of human resources.

Organizational structure refers to the formal interrelationships and hierarchical arrangements of human
resources within a business.
Outsourced workers, in Charles Handy's Shamrock Organization, are the individuals or organizations hired on a
contract basis to carry out specific but non-core roles.

Peripheral workers, according to Charles Handy, are the contingent workers consisting of part-time and temporary
staff hired by the organization to provide greater flexibility.

Professional core, according to Charles Handy, are the core workers consisting of full-time specialists
(professionals) who are vital for the organization's operations and survival
A project-based organization arranges human resources around particular projects, each led by a project
manager. Such structures allow increased flexibility to adjust quickly to market changes and to adopt rapid
innovations.
Responsibility refers to who is in charge of whom and in what role or capacity. Roles and responsibilities can be seen in an
organization chart.
The Shamrock Organization refers to Charles Handy's model that organizations are increasingly made up of core staff who
are supported by peripheral workers and outsourced workers (consisting of consultants and contractors)
Span of control refers to the number of subordinates overseen by a manager, i.e. the number of people who are directly
accountable to the manager.

A tall (or vertical} organization structure means that there are many layers in the hierarchy and hence managers have a
narrow span of control.