Entrepreneurial Structure
Key Point
Formal organisational structures are how an organisation divides tasks among its workforce, combines related roles, and coordinates actions to accomplish its objectives.
An entrepreneur is a person who takes a risk by starting a business.
An entrepreneurial business organisation is owned and controlled by the same person or (in the case of a small partnership) the same persons. Although the entrepreneur may employ others, the entrepreneur manages the business and makes all the critical decisions.
Aspects of an entrepreneurial structure are (with a farm example)
Aspect
Description
Example (Farm)
Entrepreneurial organisational structure
An organisation owned and controlled by one person or a small number of people, often the founder(s) of the business.
A small farm or shop would be an example of an entrepreneurial organisation.
Informal communication, control, and reporting
The organisational structure is informal in many respects. Employees may be asked to do any task. There are no fixed job descriptions.
Farm workers may carry out various tasks around the farm, such as looking after animals, fixing fences, and helping with the harvest, depending on the season. A shop worker unloads stock, stacks shelves and serves customers.
Owner involvement
The owner is closely involved, deciding what should be done, who should do it and when.
A small to medium-sized farm is often run by the farmer, who is the owner and who is involved with the running of the business daily.
Low specialisation
Anyone in the organisation may be asked to do any task. However, there may be limited specialisation, such as one person acting as the business’s bookkeeper.
Farms employ general workers to work on any task around the farm. They may also hire an administrator to do the p
The entrepreneurial structure is ideal for small businesses, especially sole trader businesses. It is also effective when a small business is beginning to grow, and the drive and enthusiasm of the entrepreneur can often inspire their employees.
As a business grows, it becomes more difficult for the owner to exercise control over everything, and entrepreneurs often dislike administration in formal organisations and are not good at it.
An entrepreneurial business may grow to a point where the owner needs to introduce more formality into the organisational structure, creating defined jobs with specific roles and responsibilities.
Functional Structure
A functional organisational structure is a common type of organisational structure. Tasks are divided by functions, and each is established as a separate department.
Below is an example of an organisation with a functional structure.
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Each function will have a management hierarchy and may be divided into sub-functions.
Features of a Functional Structure
Feature
Example
Economies of scale
Combining labour working on related tasks into functions allows them to become skilled in their work and achieve economies of scale for greater efficiency and lower costs.
The accounting function develops specialised knowledge and capability to efficiently manage financial information, while the production department focuses on maximising quality output.
Clear authority and responsibility
Individual managers clearly understand the scope of their responsibilities and authority.
There are clear lines of management authority. Each person knows to whom they report. Each manager knows which people report to them. This can make planning and control more effective.
Accounts executives will report to the finance manager and know the scope of their responsibilities.
They will not report to the production manager or be held responsible for production operations.
Specialists
Focus on functional tasks allows the organisation to train and employ specialists in a particular area.
An accounting function would yield sufficient work for accounting specialists to manage financial systems, whereas the production function may hire process design engineers and quality assurance specialists.
Output capacity
Organising by function allows the organisation to produce much more output that an entrepreneurial structure.
An accounting function can process and analyse much more volume of financial information than a general worker (who might not be a professional accountant) working on it parttime.
Disadvantages of a Functional Structure
A critical disadvantage of a functional organisation is that function managers are inclined to focus on their department’s activities and are not involved with the actions of other departments (working in silos).
This means that coordination may be needed when the organisation has to carry out special projects or activities that require close cooperation between several different functions.
When jobs have been specified and functional departments have been established, it is often tough to change the organisational structure in response to changes in the business and its environment.
In large functional organisations, there may be problems coordinating the activities of many different departments or sections.
There may also be problems with communication: communication through formal channels may be slow and sometimes unreliable.
Matrix Structure
In a matrix organisation, employees may have two different managers:
Their departmental or section manager, within the usual functional hierarchy; and also
A project manager or activity manager.
Example: Global Manufacturing Firm
For the global manufacturing firm in the above example, there are intersecting reporting lines:
By region (geographical), as illustrated by rows.
By function, as illustrated by columns.
For example, an employee in a production facility in America may have a direct line reporting to the American regional team and be guided on best practices in production by the Head of Production.
Characteristics of Matrix Structures
Individuals may need to manage two reporting lines and work in two overlapping teams.
These may enable the individual to gain specialist knowledge via the functional team and have visibility of local trends and operations via the regional bloc.
There might be issues if individuals are given conflicting instructions by a functional manager and a project manager; they need to know which instruction to prioritise.
A project manager instructs an employee in a functional organisation structure through the employee’s functional manager.
In a matrix organisation, a project manager can communicate directly with the employee without the involvement of the functional manager.
Project managers help to improve coordination between employees in different functional departments. The motivation of employees may be increased because their jobs are more varied.
The effectiveness of a matrix organisation will depend on the willingness of functional managers to cooperate with project managers and the effectiveness of systems to assist in this process (for example, staff scheduling); otherwise, there could be disputes between functional managers and project managers, resulting in slower decision-making.
A matrix organisational structure may be suitable for organisations where projects or activities require extensive cooperation between different functions. In other organisations, a functional structure is more likely to be used.
Divisional Structures
Larger organisations may be organised into divisions or business units, each with a divisional manager or board of directors.
The process of dividing an organisation is called divisionalisation.
Each division or business unit has its separate functional departments in a divisional structure.
There are three methods of dividing companies:
Division by Geographical Region
Operations are grouped by geographical regions, as shown below.
This is beneficial if a high level of localisation is required and the regional markets’ needs are very different.
Division by Product Group
A division structure by product group may be appropriate when each product (or group of products) has different requirements concerning product design, production or marketing.
In the example below, a vehicle manufacturer has three divisions – cars, vans and small trucks, and heavy trucks.
Each requires different production facilities and is aimed at various markets.
Division by Customer Type
This method of divisionalisation is less common than the other two.
In this case, electricity customers are divided into consumers – individuals and households – and business and commercial customers such as offices or factories.
The methods of marketing and distributing its products will be different for each type of customer.
Implementing a Divisional Structure
A vast organisation needs to be divided into manageable parts; otherwise, it will be too large and diverse to manage efficiently.
Divisional structures are most effective in large organisations, whereas a traditional functional structure is likely to be ineffective and inefficient due to the size and diversity of the business operations.
Each division has its management and organisation structure and can specialise in its regional area, products or customer types.
Effectively, what was a large and unwieldy organisation has been broken up internally into several small organisations, thereby improving focus and local control.
Advantages of divisional structure
Disadvantages of divisional structure
·        Performance of each part of the business is more easily monitored
·        It allows top management to focus on overall corporate strategy
·        It is easier to sell off parts of the business or acquire new companies as each division may operate independently.
·        It is usually inappropriate in small organisations, where senior management should be able to manage the entire business
·        There is a risk of duplication of activities, especially in administrative activities, unless divisions share some head office services
However, although each division has its functional departments, it may make sense for some services to be provided
Shared Services
Definition
Shared service organisation – Units within an organisation that provide services to the entire organisation. Shared services can be provided centrally for all divisions within a divisionalised organisation.
Shared service units within a divisionalised organisation help reduce redundant functions and enable economies of scale for crucial support functions by consolidating tasks and recruiting specialists.
Providing shared services centrally to all the divisions in a large organisation can save costs (because each division does not need to pay for a redundant service) and provide better operations coordination.
Examples of functions that are delivered through shared services include:
A central IT department may provide IT services to all organisational divisions.
It may be possible to provide some human resources services from a central department at the head office. For example, a multinational company such as a large bank may have a centralised department to train staff worldwide.
A large company may centralise its treasury operations, so matters such as cash and foreign exchange management are dealt with centrally. This may reduce the cost of providing the service and improve the level of service given as a centrally managed operation may decide to employ specialists.
Boundary less Organisations
Developments in computing and communications have enabled the spread of boundaryless organisations. These are organisations where the boundary is unclear, and it is no longer necessary for people to be physically together to do their jobs and work together.
They can work together on a common ‘platform’ or IT system, often through the internet. Individuals may enter and leave the organisation according to their ability to contribute to its current activities.
Three primary attributes characterise boundaryless organisations:
Attribute
Digital communications and IT
Developments in digital communications enable colleagues to work together without having to be in the same workplace.
·        Lisa logs in to a conferencing portal to collaborate with her team, which is spread across many countries.
·        Prabu uses cloud-based storage that enables simultaneous collaboration with colleagues across the globe.
Flexible working arrangements
Individuals may work from home or any other place at varying times of day to suit their preferences.
·        Brian works on tasks with defined outcomes and deadlines without needing to clock in a regular work week. His work is measured in milestones achieved rather than hours in the office.
New working relationships
Organisations develop new working relationships with employees instead of full-time employment.
This adds more flexibility and defines outcomes more clearly for both parties.
·        ABC Co hires Jane as contract staff to work on a project, with renewal and performance-based remuneration d
There are three types of boundaryless organisation:
Hollow Organisation
A hollow organisation outsources almost all functions,. leaving a small number of functions providing key competencies.
For example, it may maintain product design and development but outsource other activities such as manufacture, logistics, marketing, finance and after-sales service. External resources are effectively rented from others, and the statement of financial position, showing assets and liabilities, is relatively small.
Another example might be a software company where creating software is the core activity, and production, sales, and
Virtual Organisation
An organisation that outsources every function, leaving just crucial roles such as strategy and coordination. Functions such as production, sales and marketing, accounting etc., are effectively rented from other providers, so the statement of financial position, showing assets and liabilities, may be relatively small compared to a conventional organisation. Workers work remotely, or there may not be employees at all, instead with contractors supplying services to the organisation.
Modular Organisation
An organisation that outsources different parts of the production process to various supplier organisations. Each supplier is responsible for only a part of the entire production process.
An example of a modular organisation is an aircraft manufacturer that outsources the production of all components, such as engines and wings, and only retains the assembly operation in-house.
Activity 1
Determine whether the statements are an advantage or disadvantage of boundaryless organisations.
Statement
Advantage or disadvantage
A virtual organisation may rely heavily on information technology, so a fault or breakdown in the IT system or communication network may disrupt the business.
Virtual organisations are more attractive to individuals who want to work from home and do not want to travel to work each day.
Virtual organisations have lower operating costs because there is less need for workplace premises.
Virtual organisations cannot work with people or customers who lack IT skills.
Virtual organisations can exploit opportunities for greater efficiency achievable through digital working methods.
Customers may prefer to buy from an organisation that they can see and that has a physical presence.
People working from home for a virtual organisation may feel isolated and want the social benefit of working with colleagues on-premises.
*Please use the notes feature in the toolbar to help formulate your answer.
Separation of Ownership from Management
In small organisations, it is common to find that the business owner also works in the business and controls its operations. As an organisation grows, control by the owner ceases to be a practical possibility, and the organisation needs to employ professional managers.
In large companies, the shareholders (owners of the company) often cease to have any day-to-day involvement in the company at all. They leave the task of running the company entirely to professional managers. This is known as the separation of ownership from management.
The following are characteristics of Ticplas, a company where ownership and management are separated. Professional managers run the company.
Characteristic
A large number of shareholders
The Ticplas plastics company has a large number of shareholders.
These shareholders cannot all be involved in running the company. They delegate the task to professional managers who work for the company as employees.
Shareholders with large shareholdings
The Ticplas plastics company also has several shareholders with considerable shareholdings.
These shareholders may not have the time or inclination to involve themselves with day-to-day management; they rely on professional managers.
Management
Managers act as agents for the owners of the Ticplas plastics company and are expected to run the business in the owners’ best interests.
However, there is a risk that they will run the business more for themselves than for the benefit of the owners.
For example, they may run the business for short-term profits, which affect their bonus payments, rather than for longer-term value creation, which would be more beneficial to shareholders.
Accountability
Managers should be accountable to the owners for their management of the Ticplas plastics company and its performance.
In a company, accountability is achieved through a legal requirement to prepare financial statements, through general meetings of the company, and through the right of shareholders to dismiss (decide against re-electing) managers when they disapprove of them.
Separation of Direction from Management
In addition to the separation of ownership and management in companies, there should also be a separation of direction from management. Lack of separation will be a problem of accountability, as management may act in their self-interest rather than shareholders.
To overcome some of these adverse agency effects, company law requires a company to be led and directed by a board of directors.
The board of directors, rather than all the managers in the company, are accountable to the shareholders. Managers are responsible to the board of directors.
The following table shows the separation of direction and management in more detail:
Board of directors
Responsibilities
·        Major decisions, such as deciding overall strategy and business objectives
·        However, there can be a problem in deciding which matters should be reserved for decision-making by the board and which decisions should be taken by management
·        Implementing decisions by the board. Responsible for day-to-day operations
·        To the shareholders
·        To the board of directors
Part-time or full-time
·        Some directors are also full-time executives. Some are part-time non-executive directors
·        When senior individuals are both directors and senior executives, the distinction between direction and management may become blurred
·        Usually full-time employees
·        Managers often know much more about the business than nonexecutive directors
Activity 2
Determine if the activity is the responsibility of the board of directors or management.
Activity
Responsible party
(Board of directors or management)
Deciding the strategic direction for the company
Formulating and implementing policy on IT systems
Drafting the company’s annual budget plan
Approving the company’s annual budget plan
Span of Control and Scalar Chain
Definitions
Span of control – The number of subordinates directly reporting to an individual.
Scalar chain – The chain of command within the organisation.
Delegation – Empowering subordinates by transfer of power (authority), responsibility, and accountability.
Span of Control
The span of control in an organisation’s management structure refers to the number of subordinates reporting to their senior manager.
The illustration below shows a manager’s span of control of 4 individuals compared to 6.
Span of control = 4
Span of control = 6
The size (or width) of the span of control should depend on the nature of the work and how many subordinates a manager can manage.
Scalar Chain
The more management layers there are, the longer the scalar chain. Authority for operations is delegated from senior management to more junior management.
The number of management layers determines the length of the scalar chain.
The example below shows how the scalar chain and span of control impact the structure of an accounting department.
The scalar chain and span of control can be observed from the organisational chart.
Factors Affecting the Span of Control
The appropriate extent of the scalar chain and span of control depends on the nature of the organisation and the work to be done.
A manager must be able to manage their subordinates effectively.
Factors affecting the scalar chain and span of control include:
Factor
Type of work
A manager may have a wide span of control for simple routine work as he can manage many subordinates effectively.
For complex work, the manager or supervisor may need a narrow span of control to monitor what subordinates are doing closely; they may need to spend much time discussing problems and solutions with them.
In a supermarket, where employees stack shelves and work at the checkouts routinely, a manager may have a wide span of control over many subordinates.
In a company that builds software, a manager controls only a few subordinates as the nature of the work is complicated.
Operational risk
If the risk and impact of errors and mistakes are high, a manager should have a narrow span of control.
In a software company, mistakes could lead to the final software product being faulty, so it is crucial to maintain a narrow span of control.
Type of employee
Experienced employees capable of working with minimal supervision enable the manager to have a wider span of control.
A logistics firm’s core team of highly experienced pickers can operate with minimal supervision; they have only one overseeing manager at the s
Factors Affecting Scalar Chain
The span of control in an organisational structure can have important implications for administrative efficiency.
One issue is the length of the scalar chain and the management cost. The length of the scalar chain is the number of levels of management between senior management at the top of the chain and non-management workers at the bottom.
A general rule is that the wider the span of control, the flatter the organisation.
The example below illustrates how 256 workers are managed with varying spans of control.
1.    For a maximum span of control of 8, 37 management staff are needed with a scalar chain of 3 management layers.
2.    For a maximum span of control of 4, 85 managers are needed with a scalar chain of 4 management layers. This structure incurs a higher cost of management.
A long scalar chain means more levels of management, with the associated additional management costs. Big organisations with a long scalar chain are often slow-moving bureaucracies.
A narrower span of control means a longer scalar chain with more management layers, increasing management costs.
Activity 3
Determine if the scenarios result in a longer or shorter scalar chain.
Scenario
The extent of the scalar chain
(longer or shorter)
The organisation is enormous.
Top management wants closer involvement in the company’s operational activities.
Top management wants to delegate as much responsibility as possible to employees. They want to ‘empower’ employees.
The organisation needs quick decision-making in response to events in the marketplace.
Key Points
When an organisation has a long scalar chain (and so may have a narrow span of control for managers), the organisation is said to be tall.
When an organisation has a short scalar chain (and so may have a wide span of control for managers), the organisation is said to be a flat organisation.
Advantages and Disadvantages of Flat Organisations
A flat organisation has a wide span of control and a short scalar chain.
Advantages
Disadvantages
Cost less due to fewer management layers
Higher staff motivation, as the organisation is less bureaucratic and junior staff are more empowered.
Limited career development opportunities as there are fewer management jobs available.
May reduce management effectiveness, as the wide span of control may make management challenging. Also, senior management time may not be most efficiently spent dealing with junior staff issues.
Outsourcing and Offshoring
Outsourcing – Contracting with an external firm to perform a task or function.
Offshoring – Transferring operations to a different country.
Organisations may outsource non-core activities to concentrate on their core activities, where they have the expertise and can create a competitive advantage over rival firms.
Offshoring means transferring some activities to a different country. The organisation itself will often carry out these activities.
For example, a company may set up a manufacturing operation in another country, employing workers in that country and using its management to manage the operations there.
Advantages and Disadvantages of Offshoring
Cost savings
When a company transfers some operations offshore, such as its manufacturing operations, this is often because labour and other costs are lower in the other country.
Companies may also move operations offshore to take advantage of favourable forex rates.
Closer to local markets
A company that sells its products to other countries may establish operations in one of those countries to bring it closer to its customers and markets.
Loss of control
Offshoring may make it difficult for managers to monitor what is happening because of the geographical distance and possibly differences in time zones. There may be some loss of management control.
Language and culture barriers
There will be differences in culture, and possibly also in language, between the two countries. These differences can make communication and understanding difficult.
Distribution costs
When a company transfers manufacturing operations offshore, it may need to transport the manufactured goods back to its own country. This will increase distribution costs.
Outsourcing and offshoring are different, but the two can be combined. A company may outsource operations to an external supplier in a foreign country. This is both outsourcing and offshoring.
For example, a company that sells branded fashion clothes in the UK may outsource clothing production to an independent supplier in Bangladesh.
Activity 4
Determine if the scenario best describes outsourcing, offshoring, or both.
Outsourcing, offshoring, or both
A company in Southern India moves some administration activities to Sri Lanka.
A publishing company in France uses a printing company in the Philippines to do its printing work.
A phone company in the UK opens a call centre in India to deal with customer queries and complaints.
A bank in Australia arranged with a training company in the USA for the US company to train all the bank’s worldwide graduate recruits.
A farm in Zambia that used to use its staff to deliver its produce to customers now uses a distribution company to make the deliveries
Robert Anthony’s Levels of Management
In the scalar chain, authority is delegated from senior management down to more junior management at lower levels in the management hierarchy. Senior management retains ultimate control but delegates authority to others to help do the work.
Some decisions are taken at each different levels in the management hierarchy. The decisions taken at each level will differ between organisations and depend on the scalar chain length. In other words, managers’ decisions depend on their level within the management hierarchy.
Robert Anthony has suggested a practical method of classifying management decisions according to management level.
Management Level
Strategic
Senior managers carry out strategic management. It is concerned with making significant strategic decisions for the organisation, such as setting business objectives and deciding on corporate strategy.
Strategic management decisions often involve long-term planning.
Tactical
Tactical management is carried out by middle managers and relates to business control and the allocation of resources. It involves developing plans, often medium-term, for implementing strategic managers’ directions.
It includes tasks such as annual budgeting and other medium-term planning, implementing the plans when approved by senior management, and monitoring actual performance against the plan, ensuring that day-to-day operations lead towards achieving longterm strategic goals.
Operational
Junior managers or supervisors usually carry out operational management. It is concerned with the implementation of tactical plans and with the management of short-term, detailed day-to-day operations.
Operational management is the lowest level of management in Anthony’s hierarchy.
Below is an illustration of the task performed by the various management levels in potentially expanding the operations of a successful farm:
Task
Management level
Resources involved
Timeframe impact
Deciding to expand operations by buying more land
High
Long-term
Deciding on how to fund the purchase of more land
Identifying suitable land for purchase
Medium
Medium-term
Arranging finance with banks and investors
Recruitment of employees to work on land
Plan, forecast, and budget for profits and revenues
Monitoring actual progress to plans
Low
Short term
Plant crops, decide daily workloads, give operational instructions, and manage day-today operations.
Short t
Generally,
·        short-term means within a year;
·        medium-term means between 1 and 3 years;
·        long-term means beyond three years.
Activity 5
Determine whether the responsibility is for strategic, tactical, or operational management.
Responsibility
(Strategic, tactical, or operational)
A factory manager asks a maintenance engineer to repair a minor fault in a machine.
A sales management team agree that the company should reduce selling prices temporarily during an annual one-month sales period.
A store manager agrees that a customer who returns a recently-purchased item because she does not like it should be given a full refund for the purchase cost.
A decision to make a significant investment in new equipment that will reduce emissions of polluting gases from the company’s production process
A decision to expand the company’s business from Europe into Central and Southern Africa
A meeting by management to review production and sales reports and compare actual performance with the planned performance
Centralisation and decentralisation
Decision-making by management in an organisation may be centralised or decentralised. This refers to where the bulk of the decisions is made.
in a centralised organisation, senior management takes decisions at the head office. Decision-making authority is concentrated at the top of the management structure and is not delegated.
For example, the sales manager and team of sales representatives at a paper manufacturer sell the company’s range of papers. The sales manager briefs each of their staff on which customers – printers and publishers – to visit, which paper products to sell, and at what price.
in a decentralised organisation, decisions tend to be made at a more local level.
Decisions are delegated from the head office (by senior management) to more junior managers throughout the organisation and sometimes to the workers themselves.
In a company that operates in many different countries, decision-making may be decentralised to management in each country.
For example, the sales office of an office stationery company consists of a sales manager and a team of sales representatives whose job is to visit potential business customers to sell the company’s products.
Here, the sales manager allows each sales representative to decide which potential customers they will visit, which products they should try to sell and whether they can offer price discounts to win a sale. They are free to make their own decisions.
In practice, decision-making is usually partly centralised and partly decentralised, but it is helpful to think of centralisation and decentralisation as opposing concepts of organisational structure.
The Importance of IT in Centralised and Decentralised Structures
Whether in a centralised or decentralised structure, management needs information for decision-making.
IT facilitates this information flow, ensuring managers get the data they need.
Centralised decision-making needs information from the lower management hierarchy.
A centralised repository of information facilitates this.
Decentralised decision-making may need information from higher and lower management hierarchies.
A central information depository may also share information efficiently with decentralised decision-makers.
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Centralisation and Decentralisation: Advantages and Disadvantages
Centralised organisation
Senior management can exert much more control over the business
It isn’t easy to exert control over a company that operates in many countries or over a wide geographical area
Centralised decisions ensure that standardised choices are made throughout the entire organisation.
Decisions may need to reflect local conditions, which central management may not be aware of
With centralised decision-making, it is easier to establish rules for the entire organisation.
Local management can take decisions much more quickly instead of referring the matter to head office for a decision.
It is easier to coordinate decisions when these are all taken centrally
Local managers and junior managers usually understand the details of an operational problem much better than senior managers at the head office
When decisions require a high degree of expertise and skill, an expert at the head office can take these decisions.
Local and junior managers may lack motivation if they perceive their bosses’ refusal to allow them to decide on matters as a lack of trust.
The advantages and disadvantages of decentralisation are the reverses of centralisation.
Determine if the statements represent an advantage or disadvantage of decentralisation.
Decentralisation
(Advantage or disadvantage)
It avoids putting too much of a burden on senior management.
Local conditions differ between different parts of the business.
Junior managers may take decisions that conflict with those of other managers.
Operational decisions can be taken more quickly.
Lack of expertise of local managers
Motivation of local managers
