Effective Organization Structure Acts As Life Blood of Business

By Naila Iqbal

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An organization structure is the way in which the tasks and subtasks required to implement a strategy are arranged.

The diagrammatical representation of structure could be an organization chart but a chart shows only the 'skeleton'. The 'flesh and blood' that brings to life an organization is the several mechanisms that support the structure. All these cannot be depicted on a chart. But a strategist has to grapple with the complexities of creating the structure, making it work, redesigning when required, and implementing changes that will keep the structure relevant to the needs of the strategies that have to be implemented.

Successful strategy formulation does not guarantee successful strategy implementation.

  • Varies among different types and sizes of organizations, and organizational structure, and the controls that are a part of it affect firm's performance. When the firm's strategy is not matched with the most appropriate structure and controls, performance declines.
  • Specifies the firm's formal reporting relationships, procedures, controls & authority, and decision-making process.
  • Influences how managers work and the decisions resulting from that work.
  • Specifies the work to be done and how to do it given the firm's strategy or strategies.
  • Provides the stability a firm needs to successfully implement its strategies & maintain it's competitive advantages.

Structural Stability: Provides the capacity the firm requires to consistently and Predictably manage its daily work routines.

Structural Flexibility: Provides the opportunity to explore competitive possibilities & allocate resources to activities that will shape the competitive advantages of the firm that it will need to be successful in the future.

Structure & Strategy

  • Structure dictates how objectives & policies will be established.
  • Structure dictates how resources will be allocated.

Matching Structure w/ Strategy Changes in strategy = Changes in structure Basic Forms of Structure

Mainly categorized in five types:

  1. Entrepreneurial Structure
  2. Functional Structure
  3. Divisional Structure
  4. Strategic Business Unit Structure (SBU)
  5. Matrix Structure
  1. Entrepreneurial Structure

    The most elementary form of structure and is appropriate for an organization that is owned and managed by one person. A small-scale industrial unit, a small proprietary concern, or a mini-service outlet may exhibit the characteristics of organizations, which are based on an entrepreneurial structure.

    • Advantages of Entrepreneurial Structure
      • Quick decision-making, as power is centralized.
      • Timely response to environmental changes
    • Disadvantages of Entrepreneurial Structure
      • Excessive reliance on the owner-manager and so proves to be demanding for the owner-manager
      • May divert the attention of owner-manager to day-to-day operational matters and ignore strategic decision
      • Increasingly inadequate for future requirements if volume of business expands
  2. Functional Structure

    As the volume of business expands, the entrepreneurial structure outlives its useful­ness. The need arises for specialized skills and delegation of authority to managers who can look after different functional areas. The functional structure seeks to distribute decision-making and operational authority along functional lines. Most widely used as simple and least expensive.

    • Advantages of Functional Structure
      • Efficient distribution of work through specialization.
      • Delegation of day-to-day operational functions
      • Providing time for the top management to focus on strategic decisions
    • Disadvantages of Functional Structure
      • Creates difficulty in coordination among different functional areas
      • Creates specialists, which results in narrow specialization, often at the cost of the overall benefit of the organization
      • Leads to functional, and line and staff conflicts
      • Minimizes career development opportunities
      • Poor delegation of authority, inadequate planning for products and markets
  3. Divisional Structure

    The structural needs of expansion and growth are satisfied by the functional structure but only up to a limit. There comes a time in the life of organizations when growth and increasing complexity in term of geographic expansion, market segmentation and diversification make the functional structure in adequate.

    • Second most common type of structure. Can be organized by:
      • Geographic area
      • Product or service
      • Customer
      • Process
    • Advantages of Divisional Structure
      • Clear accountability
      • Higher employee morale
      • Creates career development opportunities for managers
      • Allows local control of situations
      • Leads to a competitive climate within an organization
      • Allows new businesses and products to be added easily
    • Disadvantages of Divisional Structure
      • Can be costly to set up
      • Each division requires functional specialists
      • Duplication of staff services, facilities, and personnel
      • Managers must be well qualified
      • Requires an elaborate, headquarters-driven control system
      • Competition between divisions may become so intense that it is dysfunctional
  4. The Strategic Business Unit (SBU)

    Any part of a business organization, which is treated separately for strategic management purposes. When organizations face difficulty in managing divisional operations due to an increasing diversity, size, and number of divisions, it becomes difficult for the top management to exercise strategic control. Here, the concept of an SBU is helpful in creating an SBU-organizational structure. In multidivisional organizations, an SBU structure can greatly facilitate strategy-implementation efforts.

    • Advantages of Strategic Business Unit
      • Establishes coordination between divisions having common strategic interests.
      • Facilitates strategic management and control of large, diverse organizations.
      • Fixes accountability at the level of distinct business units.
    • Disadvantages of Strategic Business Unit
      • There are too many different SBUs to handle effectively in a large, diverse organisation.
      • Difficulty in assigning responsibility and defining autonomy for SBU heads.
      • Addition of another layer of management between corporate and divisional management.
  5. The Matrix Structure

    Most complex of all designs - requires both vertical and horizontal flows of authority and communication. In large organization, there is often a need to work on major products or project each of which is strategically significant.

    • Advantages of The Matrix Structure
      • Project objectives are clear
      • Many channels of communication
      • Workers can see visible results of their work
      • Shutting down a project can be accomplished relatively easily
      • Facilitates the use of specialized personnel, equipment, and facilities
    • Disadvantages of The Matrix Structure
      • Can result in higher overhead
      • Dual lines of budget authority
      • Dual sources of reward and punishment
      • Shared authority
      • Dual reporting channels
      • Need for an extensive and effective communication system

All the structures have their own advantages and disadvantages. It is task of strategists to choose the type of structure that would suite their strategies best.

We usually conceive of organization structure as a chart consisting of boxes in which the names of position or designations of personnel (and sometimes the name of the person occupying the position) are written in a hierarchical order along with the depiction of the relationship that exists between various positions. To a strategist, an organization structure is not only a chart but much more.

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