3.3. Factors Influencing the Organisational Structure

Many organisation structures are dynamic – that is, they change or evolve through time. Change will often occur simply as a result of a growth in the size of an organisation. But whatever the reason, structural change will be aimed at improving the effectiveness and efficiency of the organisation.

There are a number of factors which can influence the choice of organisational structure and prompt change. We can separate these into internal and external pressures:

Internal factors

• Size: The larger the organisation, the less able top managers will be to control every aspect of the business. Large firms, therefore, tend to have more decentralised and flatter structures than smaller ones. Company directors and/or senior mangers will tend to confine themselves to setting overall objectives and steering the firm, while managers lower down the hierarchy will be responsible for day-to-day activities and the achievement of targets in production, sales, finance, and administration.

• Location: Some firms have factories, offices, or shops in more than one location. For example, multinational enterprises operate in several countries. Authority will be delegated to managers in these different locations, since they will be better informed about local conditions, such as labour supply, suppliers, consumer tastes, even languages, currency, and laws.

• Nature of product: Management structures tend to be more decentralised in firms supplying goods or services to satisfy specific customer requirements. For example, consider the fitting of double-glazed windows. Responsibility for the measurement and fitting of these windows must rest with those employees who undertake the work. In organisations that mass-produce products for national or even international markets, top-level managers will be able to monitor and control production and marketing efforts more closely.

• Management style: The structure of an organisation will be a reflection of the particular personalities and management style of top managers. If they enjoy having the power and authority to command all aspects of business activity, then the structure will be tall and centralised, whereas those managers who are more democratic and seek to include employees in decision-making will prefer a flatter, decentralised structure.

• Changes in working arrangements: Growing competition has meant that firms are increasingly changing their working methods in an attempt to boost productivity. Work groups are being created in which authority over the organisation of tasks and the working environment is delegated to team leaders and supervisors. The idea is that working and problem-solving in groups will provide employees with the incentive and commitment to work harder. Similarly, new production techniques, such as ‘Just In Time’ production, whereby stocks are ordered and delivered just in time to be processed, require personnel lower down the organisational hierarchy to be able to make quick decisions on the timing and need for further supplies. Such changes in working arrangements have tended to ‘flatten’ organisational structures and decentralise authority and decision-making.

External factors

• Increasing competition: This is perhaps the most important influence on private sector organisational structures. Markets are becoming increasingly competitive at home and abroad. A firm that is slow to react to changing market conditions – for example, new technologies and changing consumer demands – will fail. Passing information up and down a tall chain of command can take precious time and a market opportunity may be missed while top managers decide what to do. Thus, in order to keep pace with changing consumer demands and rivals’ marketing strategies, decisions on production, sales, and marketing activities are increasingly being taken by employees ‘at ground level’.

• Entering new markets: A firm that intends to market a new product may devolve authority and control over the product to an individual department or project group (as in a matrix organisation). A firm that enters new markets, especially overseas where there are cultural, language, and legal barriers to overcome, will often need to employ sales and marketing staff with specialised, local knowledge and the authority to take decisions.

• Technological change: Businesses have become increasingly aware that communications can be improved by restructuring from hierarchical to flatter structures. This allows information to be transmitted more quickly and easily, and means that managers are given more authority to make decisions. Information Technology is also enabling many office workers to telework from home and control their own work tasks and working environment.

• Change in ownership: A company that is taken over or merges with another company may often undergo structural change. A take-over occurs when one company buys control of another through the acquisition of shares in the ownership of that company. A firm that is taken over will often lose its original identity and become part of the purchasing or acquiring company. A merger occurs when two or more firms agree to join together to form a new enterprise with a new legal identity. This is usually done by shareholders of the merging companies exchanging their existing shares for shares in the new organisation. The name of the newly created enterprise will normally reflect the names of the merging companies.