You can never understand the types of organizational structure until you do not have the basic idea of organizational structure. Organizational structure is the arrangement in which the organization works at different levels. Work at different level to achieve its organizational goals and objectives. We may also define organizational structure as the allocation of tasks, coordination and supervision towards the achievements of certain organizational goals. There are different types of organizational structure, which works in different organization to achieve its certain goals and objectives. You need to be aware of them all of these types.
Types of Organizational Structure
- Functional Structure:
Instead of product lines, the organizational structure is arranged according to functional areas. The specialized ones in certain skills are group in separate units in functional structure. It is best for the organization which is making specific, uniform products. The organization that contains single dominant core product is best suited for the functional structure, because every sub unit of the structure become specializes in performing its particular course of action. This kind of organizational structure lack flexibility but are economically efficient. Different functional areas face difficulty in communication with each other.
The functional or centralized type structure is most widely used because it the cheapest & simplest among all other alternative organizational structures. Certain tasks & activities are assigned to different groups on the basis of particular function of the organization like marketing, production, research & development, finance/accounting & computer information system etc. If a university decides to make functional structure as its organizational structure then it groups its activities in the following functions.
- Academic Affairs
- Alumni Relations
- Student Services
There are certain other potential benefits that are associated with the functional structure of the organization like
- It is simple & inexpensive
- It encourages specialization of labor
- It promotes efficiency
- The need of elaborate control system is reduced
- Decision making is facilitated
Besides advantages, there are certain disadvantages of functional structure too which are as follow
- The accountability is pushed at top
- The career development opportunities are minimized
- It may result in low employee morale
- Staff/line conflicts emerge
- Delegation of authority become poor
- Improper planning for markets & products
- Divisional Structure
When an organization is divided into various self contained business units, it exhibits divisional structure in which each sub unit of the organization works as profit centre. Divisional structure is based on the market or product or combination of both. Each divisional unit works with certain basic functions like finance, corporate planning, personnel etc and there may be some functional areas or product lines too. The divisional units are partially managed on centralized basis usually through headquarter of the organization.
American businesses used decentralized type of divisional structure. The expanding organization finds it difficult to manage its various products or services in various markets. There are certain types of divisional structures which are quite useful in controlling operations, motivating employees & successfully competing in diverse locations. There are four ways in which a divisional structure can be organized.
- On the basis of geographic area
- On the basis of product or service
- On the basis of customer
- On the basis of process
The functional activities are performed both centrally as well as divisionally in the divisional structure.
There are obvious advantages associated with the divisional organizational structure. The main advantage is that there is clear accountability. This means that the responsibility of the sales & profits of the division is held by the divisional managers. As the extensive delegation of authority is the basis of divisional structure, therefore the employees & managers can easily view the results of their bad or good performances. This results in the enhancement of the employee morale which is not possible in the centralized structure. Besides these advantages, there are certain other advantages of divisional structure. There are many career development opportunities for the managers in divisional structure. The local situations are effectively controlled on divisional basis. The organization contains competitive climate. The new products & businesses are added easily in the divisional structure.
There are some limitations of the divisional design of the organizational structure. The main limitation is that it is much expensive due to many reasons. The first reason is that a functional specialist is required by each divisional unit who is remunerated with high pay. Secondly duplication exists in certain activities to each divisional unit like personnel, facilities, staff services etc. Thirdly qualified managers are required in each divisional unit who are paid high salaries because there should be proper delegation of authority which is effectively managed by qualified professionals. There is another reason of expensiveness of divisional structure that it needs expanded, headquarter-driven control system. Other limitation of divisional structure is that some customers, regions or products require special treatment & it is quite difficult for the organization to maintain countrywide practices consistent. However for most of the organizations the advantages of divisional structure are more than its limitations.
Divisional Structure by Geographic Area
This type of divisional structure is best suited to those organizations that are trying to amend their strategies to meet the certain needs & demands of customers in different geographical areas. Moreover those organizations that have resembling branch facilities present in widely dispersed areas are more appropriate for this type of structure. The coordination within the geographic region is improved along with the local participation in the decision making by adopting this structure.
- Divisional Structure by Product:
In situations where certain products or services require special emphasis, divisional structure by product is most suitable. Moreover this type of structure is effective when organization is offering limited products or services. Also in other cases where the products or services of the organization differ significantly this type of divisional structure is most appropriate one. The control & attention towards the product lines is enhances by organization. But the top management control is reduced and more skilled management force is required.
- Divisional Structure by Customer:
When there are certain customers that are significantly important to the organization & require variety of services then divisional structure by customer ids the most appropriate organizational structure for the relevant organization to implement effective strategies. The requirements of the special group of customers are effectively fulfilled by the organization by adopting this type of structure. For example the book publishing companies focus their efforts towards the group of customers like secondary schools, colleges and private commercial schools. There are certain airline companies that keep two separate divisions for customers which are freight or cargo services and passengers.
- Divisional Structure by Process:
Divisional structure by process has resemblance with the functional structure because the tasks are groups on the basis of the method of their actual performance. But there is one main difference between divisional structure by process and functional structure that there is no accountability of revenues or profits by the functional departments on the other hand the divisional process departments are accountable for the revenue or profits. For example, certain manufacturing business is split into six divisions: Glass cutting, electrical work, grinding, welding, painting & foundry work. In this organization all the related activities of certain process are categorized in separate division. Each division of process is accountable for the profit or revenue. This type of divisional structure is best suitable for the organization where distinct production processes can provide the competitive edge in the industry while accomplishing the objectives of the organization effectively.
- Strategic Business Unit (SBU) Structure:
Strategic Business Unit (SBU) is that business unit which has all the required elements to be considered as complete corporate business entity like vision & mission statements, certain external market with proper products & customers and management of that business unit can perform strategic planning. When the organization expands to very large size, then it is better for them to involve in Strategic Business Unit Structure.
The strategic factors that affect the performance of the homogenous SBUs can be better controlled by the large sized organization. SBUs are regarded as self contained planning units that require development of separate business strategies. SBU is either a complete company having particular product lines & market or it is smaller unit of particular company that is formed to accomplish certain task. Moreover there are separate objectives, strategies 7 competitors of the SBU which are quite different from the ones of parent company.
When the size, number & diversity of divisions are enhanced, it become more difficult for the strategists to control & evaluate expanded divisional operations. The increased volume of sales does not result into increase in the profitability. At the top levels of the organization, the span of control becomes quite large. For example, the chief executive of conglomerate organization containing 90 divisions is not able to remember the first names of divisional presidents. The strategy implementation efforts are greatly facilitated by SBUs of the multidivisional organization.
Similar SBUs are grouped as division of SBU and delegation of authority & responsibility is given to senior executive of each unit who reports directly to the CEO. By altering the structure in such manner, strategy implementation is facilitated through improvement in the coordination among different divisions & providing accountability to particular business units.
There are two disadvantages associated with the SBU structure. First one is that there is increased salary expanse due to additional layers of management. Second the role of vice president of the group is mostly ambiguous. But the advantages of the SBU structure are always much more than the disadvantages.
- Matrix Structure:
Matrix Structure is the most complicated structure among all other alternatives because it is based on both horizontal & vertical flow of communication & authority. On the other hand the divisional & functional structures are based on vertical flows of communication & authority. The overheads are much increased in matrix structure because there are more management positions present in it. There are certain other features of matrix structure that increase the complexity of the structure like dual sources of punishment & reward, dual lines of budget authority, dual reporting channels, shared authority and requirement for potential & effective communication system.
Although matrix structure is very complex but still it is used in many industries like healthcare, construction, defense and research. There are certain advantages associated with the matrix structure like objectives of the project are clear, there are a number of communication channels, the employees can view their performances clearly and it is easier to close down a project.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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