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Organisational Design


Definition:  the way in which management is organised, both horizontally (layers of hierarchy) and vertically (by function, operation or matrix).


Entrepreneurial Structure (Small Businesses)



1 or 2 people at the top making decisions.



This reflects the authority the entrepreneur has control over all aspects of the business and its employees.  This kind of structure will usually encourage delegation and empowerment.



  • where quick decision making is needed with an element of skill and flair



  • as an organisation gets bigger it becomes difficult for the entrepreneur to maintain direct authority over all employees and a change in structure is necessary.



A Functional Structure (Bureaucratic Structure)

The traditional approach was to divide an organisation into functional areas such as marketing, production and finance.  Each has many layers of hierarchy to reflect the distribution of responsibility and authority.





      specialisation between job and department, e.g., finance and marketing.

      reliance upon formal procedures and paperwork (co-ordination.

      clearly marked authority distinctions within the hierarchy and lines of authority.



  • to single product firms or firms producing a clearly related group of products.



  • it can be inflexible as thereís an inability to change and meet new demands, e.g., IBM had a functional structure with a strict distinction between areas such as marketing and research and development until 1988.  It was believed that this structure led to delays of up to two years in the introduction of new models and this caused IBMís profits to fall after 1984.  IBM has now split up its product range into divisions, each with their own production, marketing etc. staff.



Structure by Product (Divisional Structure)

Today many companies have reduced the number of management layers and have re-organised away from functional structure towards a divisional structure.  Within each division marketing, production and other staff would work together on the same projects.







  • each division is self contained and operates as a profit centre (a firm within a firm).
  • within each division the functional structures tends to be adopted.



  • allows individuals to specialise and gain expertise in specific products and markets.
  • allows a large company to operate as several smaller ones, each with greater identity and autonomy, thus facilitating rapid decision making and unambiguous performance measurement.
  • greater flexibility for growth and expansion (additional profit centres can be grafted onto the organisation).



  • conflict between divisions, e.g., allocation of fixed costs and machines, setting of budgets and availability of finance)
  • there can be higher costs as activities such as marketing will be replicated in different divisions.
  • difficult to co-ordinate if divisions grow too large.



The Systems Approach to the Design of Organisations

This structure regards organisations as groups of inter-relating elements that require co-ordination and information to turn a wide range of inputs into a variety of outputs.  This approach acknowledges the dynamic nature of business and recognises that static organisational structures are at times wholly inadequate for decision making.


Example: The Matrix Structure

The matrix approach involves organising the management of a task along lines that cross normal departmental boundaries, e.g., a new product development team might be formed from an engineer, a research chemist, a marketing manager and a designer.  This means that each team member can end up with two bosses; the departmental bosses and the project leader.  Once the project has been finished the team will usually be disbanded, with the individual members being drafted into other teams or absorbed back into the organisations skeleton structure.



In the matrix individuals have two or more superiors, e.g., a sales manager will report to the marketing director and the product manager



  • ensures the project is better co-ordinated than with four or five departments contributing occasionally.
  • if many different project teams are organised, it gives more people an opportunity to use their ability.



  • individuals may suffer if both bosses make heavy demands on them.
  • there is a failure to provide the clear line of accountability present when everyone has only one boss.



Factors Influencing Organisational Structures

  • Size.  As a business grows it is unlikely to move away from an organisational structure to one where authority is passed to other employees.  A large firm will tend to have a longer chain of command with more levels of hierarchy.
  • Views of the owner or leadership style.  If owners wish to retain control in the business, they will want a narrow span of control.  Owners or managers who wish to motivate employees may delegate decision making to them.
  • Business objectives.  If the business wishes to expand rapidly, perhaps by a merger, itís likely to find its span of control gets wider.
  • External factors, e.g., in a period of rising costs or recession, a business may be forced to reduce its chain of command in order to cut costs.  Similarly in a period of growth a firm may employ extra managers as specialists in order to gain economies of scale.
  • Changes in technology, e.g., a new information technology system could reduce the role of administration.


If the Organisational Structure is Wrong

  • decision making can be slow.
  • lack of co-ordination.
  • costs can rise.
  • failure to share ideas.
  • motivation may decrease as people donít know what is happening or why.  
Further Reading

Chris Argyris - Intro
Value Systems
Immaturity / Maturity Theory
Organizational Design
Chris Argyris - Intro
Value Systems
Immaturity / Maturity Theory
Organizational Design




E-mail Steve Margetts