Competitive Organisational Structures

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1 Competitive Organisational Structures Organisational structure basics Introduction The way in which a business is organised has a direct effect on its competitiveness. For a business to be able to achieve its aims and objectives, it needs to organise its people in a suitable way that is known as the organisational structure. The organisational structure of a business is important because it determines: Authority and responsibility who is responsible for whom and who is in charge? Individual job roles and titles The people to whom others are accountable The formal routes through which communication flows in the business One way to think of the organisation structure is of an explanation of the command and control system in a business. The organisation structure of a business will depend on several factors, including: Factor Size of the business Type of business Management and leadership style The competitive environment Explanation Small businesses will tend to have informal or flat hierarchical structures. Larger and more complex businesses will develop more complicated and detailed structures involving more layers of hierarchy, departments and functions Does the business operate from just one or several locations? Is the business in the service or manufacturing sector? Does it have overseas operations or outsource any significant business activities? Is the workforce mainly unskilled, semi-skilled, highly skilled? Often over-looked, but very important. An autocratic leadership style will often result in a very different structure compared with one designed by a leader who prefers to delegate responsibility Organisation structures are often influenced and changed by developments in the market for example changes in the use of distribution channels, suppliers, competitor actions Functional structures The traditional organisation structure of a business has focused on the functions, departments and main activities of a business. The traditional functional structure is based around certain principles of organisation which have historically been seen as important, including the principles of:

2 Principle Specialisation Authority Responsibility Definition Span of control Chain of command What is involved Employees should be a member of one specialisation or function In every organisation, authority for taking a decision must rest somewhere + the line of authority should be clear A superior is responsible for the actions of his/her subordinates Each position in the structure has a clearly defined role and responsibility No person should supervise too many subordinates There is a clear, unbroken line of authority and responsibility from the top of the organisation down to the bottom The result of these principles is the common functional structure an example of which is shown below: The main advantages and disadvantages of using a functional structure can be summarised as follows: Advantages Simple to understand Control is from the top down gives business a strong sense of direction Clear lines of communication and command Disadvantages Decision-making can soon become bureaucratic and too slow Structure is prone to inter-departmental conflicts (e.g. marketing arguing with finance) Not always easy to get co-ordinated action

3 Allows specialists to manage in their relevant functional areas Encourages employees to seek promotion across departments or functions Employees not encouraged to develop an overview of the whole business they can be stuck in silos Little reward for functions working together Matrix structures This type of structure combines the traditional departments seen in functional structures with project teams. In a matrix structure, individuals work across teams and projects as well as within their own department or function. For example, a project or task team established to develop a new product might include engineers and design specialists as well as those with marketing, financial, personnel and production skills. These teams can be temporary or permanent depending on the tasks they are asked to complete. Each team member can find himself/herself with two managers - their normal functional manager as well as the team leader of the project. An example of a matrix structure is illustrated below: Matrix structures have advantages and disadvantages. Advantages Can help to break down traditional department barriers, improving communication across the entire organisation Can allow individuals to use particular skills within a variety of contexts Avoid the need for several departments to meet regularly, so reducing costs and improving coordination Likely to result in greater motivation amongst the team members

4 Encourages cross-fertilisation of ideas across departments e.g. helping to share good practice and ideas A good way of sharing resources across departments which can make a project more cost-effective Disadvantages Members of project teams may have divided loyalties as they report to two line managers. Equally, this scenario can put project team members under a heavy pressure of work. There may not be a clear line of accountability for project teams given the complex nature of matrix structures. Difficult to co-ordinate It takes time for matrix team members to get used to working in this kind of structure Team members may neglect their functional responsibilities It is important to remember that a matrix structure often sites alongside a traditional functional structure it is not necessarily a replacement. Informal structures Nicely drawn, clearly labelled organisational structures look good in business studies textbooks. However, it is relatively rare to actually find them in use in real businesses. You would be very unlikely to find a functional organisational structure in a small or mediumsized business, and even in complex businesses, the organisation structure is probably outof-date and gathering dust in the HR Director s drawer. The reality is that organisation charts and structures usually do not describe what really happens in business. Many businesses rely on informal structures to make decisions rather than the command and control approach of functional structures. Centralised versus decentralised structures One of the organisational issues that a business needs to address is where decision-making power resides in the structure. Decision-making is about authority. A key question is whether authority should rest with senior management at the centre of a business (centralised), or whether it should be delegated further down the hierarchy, away from the centre (decentralised) The choice between centralised or decentralised is not an either/or choice. Most large businesses necessarily involve a degree of decentralisation when it starts to operate from several locations or it adds new business units and markets. The issue is really how much independence do business units or groups within a business have when it comes to the key decisions? Centralised structures

5 Businesses that have a centralised structure keep decision-making firmly at the top of the hierarchy (amongst the most senior management). Fast-food businesses like Burger King, Pizza Hut and McDonalds use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets. The need to ensure consistency of customer experience and quality at every location, together with a desire to exploit economies of scale, are the main reasons for this choice. The main advantages and disadvantages of this approach can be summarised as follows: Advantages Easier to implement common policies and practices for the business as a whole Prevents other parts of the business from becoming too independent Easier to co-ordinate and control from the centre e.g. with budgets Economies of scale and overhead savings easier to achieve Greater use of specialisation Quicker decision-making (usually) easier to show strong leadership Disadvantages More bureaucratic often extra layers in the hierarchy Local or junior managers are likely to much closer to customer needs Lack of authority down the hierarchy may reduce manager motivation Customer service does not benefit from flexibility and speed in local decision-making Decentralised structures In a decentralised structure, decision-making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations. Good examples of businesses which use a decentralised structure include the major supermarket chains like WM Morrison and Tesco. Each supermarket has a store manager who can make certain decisions concerning areas like staffing, sales promotions. The store manager is responsible to a regional or area manager. Hotel chains are particularly keen on using decentralised structures so that local hotel managers are empowered to make on-thespot decisions to handle customer problems or complaints. The main advantages and disadvantages of this approach can be summarised as follows: Advantages Decisions are made closer to the customer Better able to respond to local circumstances Improved level of customer service Consistent with aiming for a flatter hierarchy Disadvantages Decision-making is not necessarily strategic More difficult to ensure consistent practices and policies (customers might prefer consistency from location to location) May be some diseconomies of scale e.g. duplication of roles Who provides strong leadership when needed

6 Good way of training and developing junior management Should improve staff motivation (e.g. in a crisis)? Harder to achieve tight financial control risk of cost-overruns Delayering The traditional way to achieve a flatter organisational structure is through delayering. Delayering involves removing one or more levels of hierarchy from the organisational structure. Frequently, the layers removed are those containing middle managers. For example, many high-street banks no longer have a manager in each of their branches, preferring to appoint a manager to oversee a number of branches. Some schools adopt this policy too with a director of studies looking after several schools in a local area. Delayering does not necessarily involve cutting jobs and overheads. But it does usually mean increasing the average span of control of senior managers within the business. This can, in effect, chop the number of layers without removing a single name from the payroll, as the people affected are moved elsewhere in the business. However, it is fair to say that, increasingly delayering is seen as a way of reducing operating costs, particularly as a response to the economic downturn. Delayering can offer a number of advantages to business: It offers opportunities for better delegation, empowerment and motivation as the number of managers is reduced and more authority passed down the hierarchy It can improve communication within the business as messages have to pass through fewer levels of hierarchy It can remove departmental rivalry if department heads are removed and the workforce is organised more in teams It can reduce costs as fewer (expensive) managers are required It can encourage innovation It brings managers into closer contact with the business customers which should (in theory) result in better customer service But disadvantages exist too, making a decision to delayer less clear cut: Not all organisations are suited to flatter organisational structures - mass production industries with low-skilled employees may not adapt easily Delayering can have a negative impact on motivation due to job losses, especially if it is really just an excuse for redundancies A period of disruption may occur as people take on new responsibilities and fulfil new roles

7 Those managers remaining will have a wider span of control which, if it is too wide, can damage communication within the business. There is also a danger of increasing the workload of the remaining managers beyond that which is reasonable. Delayering may create skills shortages within the business a danger is that delayering means that the business loses managers and staff with valuable experience Any programme of delayering needs to be carefully thought-through. Get it wrong, and the damage to a business can be significant. Flexible working What is flexible working? The term describes a range of employment options designed to help employees balance work and home life. Why use the term flexible? It is because flexible working relates to working arrangements where there are a variety of options offered to employees in terms of working time, working location and the pattern of working. Amongst the most popular flexible working practices are the following: Part-time working Term-time working Working from home Flexitime Career breaks Job sharing Annual hours contracts Mobile working Shift swapping Of the options listed above, by far the most popular in the UK currently is part-time working. 86% of businesses surveyed by the CPID in 2007 offered part-time working options. Job sharing, flexitime and working from home are also increasingly popular. There are good business reasons why businesses are increasingly likely to offer employees one or more flexible working options. For example: Most importantly, savings on costs. A business can make substantial savings on overheads if it does not have to provide office and other accommodation for so many employees or if staff can work from home rather than commute into work every day As a way of helping with recruitment and staff retention. There is lots of evidence that flexible working results in better job satisfaction and higher staff morale To reflect the changing profile of the UK workforce. There are more women in the labour market and an ageing population as a result, it is increasingly common for staff to have caring responsibilities outside work To take advantage of developments in technology it is now simple and costeffective for employees to be able to access their employers online and other networked systems, and to communicate digitally with colleagues An increasing need for businesses to be able to deliver services to customers on a 24/7 basis. Flexible working makes it easier for businesses to offer extended opening hours, for example

8 The credit crunch - some organisations, for example firms of lawyers and accountants, have offered part-time working or career breaks as a method of avoiding or minimising redundancies To meet employment legislation increasingly the law allows certain groups of employees the legal right to request flexible working Whilst there any many advantages to flexible working, it is not always simple or appropriate to introduce it. Amongst the concerns that employers often raise about flexible working are: Additional administrative work and red-tape involved in setting up and running flexible working The potential loss of customers if key employees reduce their working hours Lower employee productivity Inability to substitute for certain skills if certain employees are absent (a common concern of smaller businesses_ Managers finding it difficult to manage or administer the flexibility A recent study by the Joseph Rowntree Foundation found that flexible working practices were most likely to be found in the following situations: In large organisations and businesses In public sector organisations Where the business does not operate in a highly competitive industry Where there are recognised unions Where there is a well established HR function Where there is high employee involvement in decision-making In workforces with larger proportions of women Where there is a highly educated workforce who has a large amount of discretion in organising work (e.g. professions, creative industries) Outsourcing A business does not have to do everything that is required to produce its products and services. A retailer does not design and make the fixtures and fittings that create the shop interior A large consumer products business will not do all its own primary market research A local baker will not grow wheat or even mill it into flour Why don t these businesses do these things? Because there are other businesses that are specialised in the tasks required and can do it better and cheaper. This process is called outsourcing. Outsourcing can be defined as follows:

9 the delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes to an agreed standard [CIPD] It is important to note that outsourcing is NOT the same thing as offshoring (the two terms are commonly, but wrongly taken as meaning the same thing. Offshoring involves either outsourcing business activities or services to a third party overseas and/or moving business activities or services to another country as a direct or indirect employer. In other words, offshoring does not always involve the services of an external provider. Outsourcing always involves getting another business or organisation to provide the service for you. Most businesses have always outsourced some of their activities. However in recent decades a larger proportion of business activities and processes are now bought-in from suppliers. The main reason for increased outsourcing is normally as a way of reducing costs. However, there can also be some significant gains in the quality and flexibility of the service or product offered. The choice of whether to outsource or not is really part of a debate that a business has about what the scope of its business should be. In other words: What should a business do itself? What should a business buy in from others? There are several factors that a business needs to take into account in deciding whether to do something in-house or whether to outsource. These relate to the corporate and functional objectives of a business and can be summarised as follows: Objective Do it in-house Outsource Quality Cost Speed Flexibility Easier to ensure quality and trace problems if done in-house In-house departments don t have to make a profit so might be cheaper Maybe too small to obtain economies of scale Easier communication Easier to schedule work or production to fit in with business needs Closest to the real needs of the business Ability to respond may be limited by Supplier may be a specialist, with greater experience and better equipment The main reason to outsource. Supplier likely to achieve economies of scale Motivated to keep costs low in order to make a profit Extra costs of communication Speed of response can be set as a requirement of the outsourcing contract Commercial pressure should encourage good performance Suppliers likely to have greater capacity and flexibility than in-house May have to balance conflicting

10 capacity demands from other customers

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