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NotesBusiness ManagementTopic 2.2Types of organizational structure
Back to Business Management Topics
2.2.112 min read

Types of organizational structure

IB Business Management · Unit 2

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Contents

  1. 1Tall and flat structures
  2. 2Grouping the work: by function, product or region
  3. 3The matrix structure
  4. 4Choosing a structure when things change outside
  5. 5Exam-style question
Who do you ask?: A counter assistant has an idea for a new cinnamon bun. Who does she ask? The answer depends on the shape of the business she works for.

At Lena's Bakery Ltd, a counter assistant who wants to try a new cinnamon bun asks Lena or Marco. The same afternoon they say yes or no.

The same idea at Goldcrust plc

1

Shift supervisor

The counter assistant tells her shift supervisor.

2

Shop manager

The supervisor tells the shop manager.

3

Area manager

The shop manager tells the area manager.

4

Regional director

The area manager tells the regional director.

5

Head office

The regional director raises it at head office.

One idea, one step at Lena's, five steps at Goldcrust. That difference is the shape of each business.

The way a business arranges its people, who reports to whom and who can decide what, is its organizational structure. Drawn as boxes joined by lines, it is an organization chart.

Two things tell one structure from another. How many layers of managers sit between the top and the front line (the levels of hierarchy). And how many people each manager looks after directly (the span of control).

Lena's Bakery LtdGoldcrust plc
SizeThree shops and the Mill Lane central bakery: 22 people400 bakeries across the country, thousands of staff
Layers from the top to the counterThree: Lena and Marco, four managers, then the bakers and counter staffSix: chief executive, regional directors, area managers, shop managers, shift supervisors, counter staff
People each manager looks afterMany: Priti, the head baker, has six bakersFew: a bakery manager has three shift supervisors
The shape of the chartShort and wideTall and narrow
The nameA flat (horizontal) structureA tall (vertical) structure, often called hierarchical

Tall: what it gives

  • Clear lines of authority: everyone knows who their manager is
  • Each manager looks after a small group, so staff are closely supervised
  • A ladder of posts to be promoted into, which keeps ambitious staff
  • Managers can specialise in one area, such as one region or one task

Tall: what it costs

  • Messages pass through many layers, so decisions are slow and can be changed on the way
  • Many managers' salaries to pay
  • Counter staff are far from the people who decide and may feel unheard
  • Rules and forms for every decision (bureaucracy)

Flat: what it gives

  • Messages travel fast: one step from the counter to the owners
  • Fewer managers to pay
  • Staff are close to the people who decide and often get more say, which can motivate
  • Quick to react when customers want something new

Flat: what it costs

  • Each manager looks after many people and can be overloaded
  • Less supervision and support, especially for new staff
  • Few posts to be promoted into
  • Roles blur as the business grows: who is in charge of what?

Switch between the two shapes. Count the levels from top to bottom, then count how many people sit under each manager.

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Tall is not the same as bad: It is easy to write 'flat is fast, tall is slow' and stop. But Goldcrust needs its layers: 400 shop managers cannot all ring the chief executive. The layers are what let one company run 400 shops safely.
Fit, not better: Lena's flat structure works because four managers can reach the owners with one phone call. The question is never which shape is better, but which one fits this business, at this size, now.

Lena and Marco's plan to grow from three shops to twelve puts their flat structure to the test. Twelve shop managers and a head baker cannot all bring every question to two owners. Something has to go between them, and that means deciding how to split the work.

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Five shops and a wholesale order book: Two years on, Lena's Bakery Ltd has five shops and also bakes for cafés and hotels across town.

Lena and Marco can no longer speak to every baker and counter assistant themselves. They decide to put a layer of managers under them. The harder question is how to split the work between those managers.

There are three ways to group the work, and each one gives the chart a different set of boxes under the top. Group people by what they do (by function), by what they sell (by product), or by where they sell it (by region).

By function

  • At Lena's: production (Priti, the head baker, at Mill Lane), shops, marketing, finance
  • Gains: people with the same skills work together, learn from each other and nothing is done twice
  • Costs: departments can pull in different directions, and nobody looks after one product from start to finish

By product

  • At Lena's: bread for the shops, celebration cakes, and wholesale to cafés and hotels, each with its own manager
  • Gains: each product gets full attention, and it is easy to see which one makes a profit
  • Costs: each product repeats jobs like marketing and ordering, so costs rise and the teams can compete

By region

  • At Goldcrust: North, South, East and West, each with a regional director and its own teams
  • Gains: managers know local tastes, prices and rules, and decide quickly without asking head office
  • Costs: each region repeats the same departments, and head office can lose control of the brand
By functionBy productBy region
The boxes under the top sayProduction, marketing, finance, human resourcesBread, cakes, wholesaleNorth, South, East, West (or one box per country)
Fits a business thatSells one main kind of product in one area and wants its specialists to be expertSells very different products to very different customersSells in places where tastes, prices or laws differ
The risk to watchDepartments that stop talking to each otherJobs done twice over, and product teams that competeJobs done twice over, and a brand that drifts
Shape and grouping are two different questions: Tall or flat says how many layers there are. Function, product or region says how the boxes under the top are split. Every chart has an answer to both.
BusinessShapeGrouping
Lena's Bakery, with a manager for each functionStill fairly flatBy function
GoldcrustTallBy region at the top, then by function inside each region

Large businesses often mix groupings like this.

Lena and Marco choose to group by function. With five shops in one town, the customers are much the same everywhere, so a manager for each region would add cost for nothing. What they need most is a head baker who is expert at baking and a shops manager who is expert at selling.

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Goldcrust's gluten-free range: Goldcrust plc wants a gluten-free range in all 400 bakeries within nine months.

The work needs a recipe developer, a food-safety specialist, a marketer and a cost accountant. They sit in four different departments, each with its own head.

So Goldcrust forms a project team with a project leader, Ines. Each member still belongs to their own department. For nine months each person answers to two managers: their head of department for their specialist work, and Ines for the project.

When people report to more than one manager, one for their specialism and one for a project, the business has a matrix structure. Drawn out, the departments run down the page and the projects run across it, making a grid.

Product developmentOperationsMarketingFinance
Gluten-free project (Ines)Recipe developerFood-safety specialistBrand marketerCost accountant
Coffee-bar project (Sam)Drinks developerShop-fitting plannerDigital marketerBudget analyst
Each person also answers toHead of product developmentHead of operationsHead of marketingHead of finance

Switch to the matrix and compare it with the other shapes: it is the only one where each person answers to two managers.

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What the matrix gives, and what it costs

1

Every skill in one team

The recipe developer and the food-safety specialist sit together, so a recipe that would fail a gluten test is caught in week one, not month six.

2

Faster, better launches

Problems are solved across departments without being passed up one chain and down another. Staff also learn how the rest of the business works.

3

Two bosses

The head of marketing wants the brand marketer on the Christmas campaign; Ines needs the launch posters the same week. The marketer gets two sets of instructions and has to choose.

4

More meetings, more cost

Two managers must agree every person's priorities, which takes time. The team can slow down whenever they disagree, and working for two can be stressful.

When a matrix fits: A matrix suits a large business running several projects at once, each needing skills from many departments, where things change quickly.

It works only if the managers agree priorities between themselves, so that the staff are not left to settle the argument.

Lena's Bakery Ltd has no need for one. With a head baker, a shops manager and two owners, everyone already works with everyone. A second boss for each baker would add confusion and nothing else.

The same change hits both: A delivery app arrives in town. It takes cake orders online until midnight and promises delivery the next morning.

Lena's Bakery Ltd

  • Lena and Marco talk it over at Mill Lane the next day.
  • They start taking online orders within a week.

Goldcrust plc

  • A shop manager's plan to match the app climbs through an area manager and a regional director to head office.
  • It is approved six weeks later.

No structure is best everywhere. The right one depends on what the business must do well, and that changes when things outside the business change: a new rival, new technology, a recession, a new law, a new market (external factors). A structure that fitted last year can be the wrong one this year.

Change outside the businessWhat the business now needsA structure that fitsWhat to watch
A fast rival or new technology (the delivery app)Speed: decisions close to the customerFlatter, with fewer layers between the counter and the decision; or a project team across departmentsManagers looking after more people each
A recession: sales fall, energy bills doubleLower costs, quicklyFewer layers of managers, so fewer salariesHeavier workloads, lost experience, worried staff
A strict new food-safety lawControl and clear responsibilityClear lines of authority, and a separate quality functionSlower decisions
New countries with different tastes and lawsLocal knowledgeBy regionThe same departments repeated in every region
Customers splitting into different markets (shops, cafés, weddings)Focus on each marketBy productJobs done twice over, and product teams that compete

Judging whether a structure fits

  • Name the change. What has happened outside the business: the delivery app, the recession, the new law.
  • Say what it demands. Speed, lower costs, control, local knowledge, or skills from several departments at once.
  • Test the current structure. Does it deliver that? Goldcrust's six layers give control but not speed.
  • Weigh the alternative. What would the new structure cost? Fewer layers means managers with more to do.
  • Decide, and say what it depends on. The size of the business, its staff, and whether the change will last.
Speed is not the only need: Faced with the delivery app, 'Goldcrust should become flat' sounds right. But Goldcrust also runs 400 kitchens under food-safety law, and removing layers removes the people who check them.

A stronger answer keeps what the structure does well: a small project team with the power to launch online ordering fast, while the chain of shops keeps its layers.

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How this comes up: Structure comes up in short questions about a chart or a named business, and as one argument in the longer case questions.
QuestionMarks
Given a chart of a business, comment on its organizational structure: say what kind of structure it is and point to the chart to prove it2
State two features of a tall or a flat structure2
Explain one advantage and one disadvantage of a structure for a named business4

In the longer case questions, structure is one of the arguments when a business grows, enters new markets or meets a new rival.

The two-mark comment

  • Say what the chart shows. Tall or flat; grouped by function, product or region; or a matrix.
  • Prove it from the chart. Count the levels, name the departments, name who sits at the top.
  • Keep it to one point, well proved. A comment and its proof, in one or two sentences.
Describing is not commenting: 'There are four departments under the directors' repeats the chart. 'It is organized by function: production, shops, marketing and finance each have their own department' says what the chart means.

And a comment with no name, department or level from the chart stops at one mark.
IB-style questionComment[2 marks]

With reference to Figure 1, comment on the organizational structure of Lena's Bakery Ltd.

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A growing bakery adds three layers of supervisors and managers between the owner and staff. the type of structure being created. [2 marks]

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