Topic 7 – Business structures

Higher Business Management

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Learning Intentions / Success Criteria

Learning

Intentions

Business

structures

Success Criteria

Learners should be aware of business structures

available to an organisation, be able to describe these

structures, give reasons for using each one and give

any drawbacks to the structure:

• tall and flat management structures

• centralised and decentralised management structures

• matrix management structure

• entrepreneurial management structure

• staff groupings such as function, location, product

and customer.

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Tall (Hierarchical) Management

Structure • Hierarchy system - different levels of

authority and responsibility, those with the least amount of authority and responsibility at the bottom of the organisation and those with the most at the top.

• Commands flow down from the decision-makers at the top of the organisation to the workers at the bottom know as chain of command.

• Many layers of management.

• Takes a long chain of command; it will take time for instructions and information to pass through the structure.

• Suited to large organisations with many specialised departments.

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Advantages/Disadvantages of Tall

(Hierarchical) Management Structure

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Advantages

• Each staff member knows their

role and who to report to.

• With many levels come many

promotion opportunities which

can motivate staff.

• There is a narrow span of

control which means:

- managers have more time for

planning, supervision and

decision-making

- managers can support

subordinates.

Disadvantages

• Communications take time to

flow down though the levels,

which slows down decision-

making.

• The organisation can be slow to

react to changes in the market.

• The narrow span of control

means:

- managers supervise work more

closely, which can put staff under

pressure

- managers have fewer staff to

share ideas with.

Flat Management Structure

• Commands flow from top to bottom.

• Fewer layers of management

• Has a shorter chain of command; it will take less time for instructions and information to pass through the structure.

• Because there are fewer layers of management compared to tall structures, the cost of management salaries will be less.

• Suited to small to medium sized organisations.

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Advantages/Disadvantages of Flat

Management Structure Advantages

• Information can be communicated quickly between levels.

• The organisation can respond quickly to external (PESTEC) factors, such as competition.

• There is a wide span of control which means:

- managers have to delegate tasks to staff which can raise morale as staff feel trusted

- staff are empowered to make decisions themselves.

Disadvantages

• Fewer levels means fewer

promotion opportunities so

quality staff may leave to gain

promotion in larger organisations.

• As there are less management

levels, staff may be delegated

more tasks, which could put them

under pressure.

• The wide span of control means:

- Managers’ time is at a premium

which can lead to snap decisions

- Less time for planning

- Subordinates may have no one to

seek help from.

Delayering

Removing one or more

levels of management

from a tall structure, to

make it flatter.

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Advantages/Disadvantages of

Delayering Advantages

• Money is saved on paying the salaries of the management level that is removed.

• Quicker decision-making and communication are possible as there is a shorter chain of command.

• The organisation can be more responsive to changes in the market as there are fewer levels for information to pass through up to the decision makers.

• There is a wider span of control.

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Disadvantages

• There are fewer promotion

opportunities for staff.

• Redundancy payments will

cost the organisation a

significant amount of

money.

• The organisation will lose

key members of staff in the

restructure.

Centralised Management Structure

• Decision-making and control is kept at the

very top level of a centralised organisation.

• In organisations with many branches this

means important decision-making being

retained within head office and the senior

management, directors or owners that work

there.

• This structure is often associated with tall

(hierarchical) structures. In a plc, for

example, decisions might be made by

managers at the head office rather than

managers in different branches.

• Employees at various levels of the hierarchy

are not consulted about decisions being

made which can result in them becoming

demotivated.

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Advantages/Disadvantages of

Centralised Management Structure Advantages

• A high degree of corporate identity and strategy exists as decisions are made for the whole organisation.

• Procedures are standardised which ensures consistency.

• There is low risk of important information leaking from branches or departments.

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Disadvantages

• Less responsibility is given

to subordinates which can

result in demotivated staff.

• Decisions will not reflect

the needs of local markets.

• The organisation will react

slowly to external

(PESTEC) factors, such as

the competition improving

their product range.

Decentralised Management

Structure • Decision-making and control is delegated to

individual branches or departments.

• Associated with a flat structure and because

people at different levels of the hierarchy are

involved in decision-making, it can motivate

them.

• Best used in retail chains that need to respond to

the needs of their local markets, such as

supermarkets. While the overall strategy of an

organisation such as Tesco will still be

centralised, many decisions will be centralised,

such as buying and selling local products and

advertising in the local area.

• It can be harder to ensure consistency across the

organisation (e.g. departments might make

decisions to suit their own needs there than those

of the whole organisation) whereas a centralised

structure would achieve this consistency. 11

Advantages/Disadvantages of

Decentralised Management Structure Advantages

• The business reacts quickly to

change external (PESTEC)

factors.

• Decisions are made quickly as

local managers don’t need to

consult senior managers before

implementing decisions.

• More subordinates are

empowered which encourages

creativity.

• Senior management at head office

are relieved of the burden of

constant decision-making.

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Disadvantages

• The organisation can lose

an overall corporate

image if each

department/branch is

operating differently.

• Local branches could start

to compete with each

other if they are allowed

to make key decisions.

Matrix (or project-based)

Management Structure • This is when a specific task or project is to be

carried out.

• People from across the organisation will come

together from various departments.

• When the task or project has been completed, the

matrix structure will become obsolete.

• A project or team leader will be appointed to

provide leadership to the task or project being

undertaken.

• Employees may find this task motivating as they

have to work with people from across the

organisation.

• It gives employees the opportunity to learn new

skills, by participating in a project or task, but it

can be costly to implement and for the organisation

to coordinate.

• Employees may find having two managers (e.g.

from their own functional area as well as for the

matrix structure) confusing.

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Advantages/Disadvantages of Matrix (or

project-based) Management Structure

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Advantages

• Each team has

specialised staff from all

functional areas.

• Complex problems can

be solved.

• Staff can use their

expertise and as such

have satisfaction and

motivation.

Disadvantages

• Many managers across

all project teams will

mean high wage costs.

• Duplication of resources

such as administration

staff and equipment.

• Staff can be confused as

to who to report to.

Entrepreneurial Management

Structure • Often found in smaller

organisations.

• Decisions are made by the owner

(or certain managers) with very

little input from employees.

• This means decisions can be made

quickly because employees are

not involved in the process, but

reduces employees' motivation.

• It also means that good ideas or

creative solutions to problems are

not considered because employees

have not been consulted.

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Advantages/Disadvantages of

Entrepreneurial Management Structure

Advantages

• Decisions are made

quickly as there is little

consultation.

• Staff know who they

need to report to.

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Disadvantage

• This structure can create a

heavy workload for the

main decision maker.

• If the owner is busy or not

available, key decisions

can’t be made.

• Other staff don’t get a

chance to show initiative,

stifling creativity and

possibly demotivating some

staff.

Organisational groupings

As well as using a management structure such as tall,

flat or entrepreneurial, organisations can group their

activities in a number of different ways. The following

are different types of groupings:

• Functional

• Location/Geographical

• Product/Service

• Customer.

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Functional grouping

• Grouping an organisation into

departments based on skills and

expertise.

• The main functional areas of most

organisations are marketing, finance,

operations, human resources and also

supported by administration and IT

departments.

• People can contact specific

departments if they require specialist

advice or help.

• Clear lines of authority exist between

subordinates and managers, and

everyone will usually have clearly

defined tasks and duties to carry out.

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Advantages/Disadvantages of

Functional grouping Advantages

• Staff with similar skills and

expertise are together,

allowing for specialisation,

i.e. each department

becomes excellent at what

it does.

• Staff know who to report

to and can get guidance

from more experienced

staff in their area of

expertise.

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Disadvantages

• The organisation can become too large to

manage if functional departments grow

rapidly.

• Functional grouping is often coupled

with a centralised management structure

so communication can take a while to

filter through to functional departments,

causing slow reactions to external

(PESTEC) factors.

• Functional departments can be more

interested in their own objectives rather

than the organisation’s objectives as a

whole.

Location/Geographical grouping

• Grouping an organisation into

geographical divisions.

• Each division will operate to serve

customers in a particular location.

• Organisations can become familiar

with the needs of customers and

different cultures that exist in

different locations.

• Technology can be used to

communicate with staff in different

locations (e.g. video conferencing),

though this can be expensive.

• Duplication of resources can be a

downside to this structure.

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Advantages/Disadvantages of

Location/Geographical grouping Advantages

• Each division can meet the needs

of it local market, e.g. different

tastes or fashions in different

areas or countries.

• The business can react to

changing external (PESTEC)

factors quickly.

• It is easy to identify a failing

‘area’ and hold regional managers

accountable.

Disadvantages

• Duplication of resources, such as

administration staff or computer

equipment, across each group is

inefficient.

• Divisions may compete against

each other and forget the overall

objectives of the organisation as a

whole.

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Product/Service grouping

• Grouping an organisation into divisions that

deal with different products or services.

• Each department concentrates on one specific

product, which results in specialist knowledge

of each product.

• Able to respond quickly to changes in the

market, but if their product is not performing

well, this is easily identifiable to managers.

• If the organisation introduces a new product,

new employees need to be employed.

• There may also be rivalry between different

departments that can be counterproductive to

working relationships within the organisation.

• Line relationships (who an employee reports

to) in product groupings may not be as clear

as more traditional, functional structures.

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Advantages/Disadvantages of

Product grouping Advantages

• The advantages can react to

changing external (PESTEC)

factors that affect each particular

group’s market quickly.

• It is easy for management to

identify struggling

products/services.

Disadvantages

• Duplication of resources can

occur.

• A new group need to be set up

every time the business launches a

new product – meaning more

staff, equipment and premises

costs.

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Customer grouping

• Grouping the organisation’s

resources into divisions that each

deal with a different type of

customer.

• Products can be marketed towards

each specific customer group.

• The organisation can build up

loyalty with their customers

because activities are focused on

the specific customer group, and

therefore a higher level of

customer service is achieved.

• High staffing costs can be a

disadvantage of this type of

structure.

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Advantages/Disadvantages of

Customer grouping Advantages

• Each group can tailor its

product or service to its own

type of customer.

• Customer loyalty can build

up due to the high level of

personal service that can be

achieved.

Disadvantages

• Duplication of resources can

occur.

• This is only suitable for

large businesses, with many

customers types/segments

that are of sufficient size. It

is inefficient to offer a group

for a small customer

segment.

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