The Hong Kong Management Associatlon-

Hong Kong Polytechnic Joint Diploma

HK
MA in Management Studies

MODULE Introduction to Management P-31 (6/15)

LECTURE: Forms of Organisation

ORGANISING AND ORGANISATIONAL STRUCTURE

Organisational structure can be defined as the arrangement and
interrelationship of the component parts and positions of a company.
An organisation's structure specifies its division of work activities
and shows how different functions or activities are linked; to some
extent it also shows the level of specialisation of work activities.
It also indicates the organisation's hierarchy and authority
structure, and shows its reporting relationships. It provides the
stability and continuity that allow the organisation to survive the
comings and goings of individuals and to coordinate its dealings with
its environment.
The Organisation Chart
The job functions of employees need to be divided among them and
combined in logical ways. Workers with related functions usually
share a common work area and constitute a work unit. Efficiency of
work flow depends on the successful integration of various units
within the organisation. Division of work and logical combinations
of tasks should lead to logical department and subunit structures.
As a company grows, the number of work units and subunits increases,
and layers of supervision are added. Managers and subordinates alike
become further removed from the eventual results of their actions.
They need a clear understanding of how their activities fit into the
larger picture of what the organisation is and does. Most
organisational structures are too complex to be conveyed verbally.
To show the organisation's structure, managers customarily draw up an
organisation chart, which diagrams the functions, departments, or
positions of the organisation and shows how they are related. The
separate units of the organisation usually appear in boxes, which are
connected to each other by solid lines that indicate the chain of
command and official channels of communication.
Not every organisation welcomes such charts. For example, Robert
Townsend, the former president of Avis, suggested that organisation
charts are demoralising, because they reinforce the idea that all
authority and ability rest at the top of the organisation. Most
organisations, however, do develop these charts and find them helpful
in defining managerial authority, responsibility, and accountability.
The following illustrates five major aspects of an organisation's
structure.
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THE FIVE MAJOR ASPECTS OF ORGANISATIONAL STRUCTURE

1. The division of work. Each box represents an individual or
subunit responsible for a given part of the organisation's work
load.
2. Managers and subordinates. The solid lines indicate the chain of
command (who reports to whom).
3. The type of work being performed. Labels or descriptions for the
boxes indicate the organisation's different work tasks or areas
of responsibility.
4. The grouping of·work segments. The entire chart indicates on
what basis the organisation's activities have been divided - on a
functional or regional basis, for example.
5. The levels of management. A chart indicates not only individual
managers and subordinates but also the entire management
hierarchy. All people who report to the same individual are on
the same management level, regardless of where they may appear on
the chart.

The Formal Organisational structure

An organisation's departments can be formally structured in three
major ways: by function, by product/market, or in matrix form.
While these three forms of structure are most frequently cited in
discussing business organisations, they can be used in organisations
of any type.
Organisation by function brings together in one department all those
engaged in one activity or several related activities. For example,
the organisation divided by function might have separate
manufacturing, marketing, and sales departments. A sales manager in
such an organisation would be responsible for the sale of all
products manufactured by the firm.
Product or market organisation, often referred to as organisation by
division, brings together in one work unit all those involved in the
production and marketing of a product or related group of products,
all those in a certain geographic area, or all those dealing with a
certain type of customer. For example, the organisation might
include separate chemical, detergent, and cosmetic divisions. Each
division head would be responsible for the manufacturing, marketing,
and sales activities of his or her entire unit. currently, General
Motors is a good example of this type of organisational structure.
In matrix organisation, two types of design exist simultaneously.
Permanent function departments have authority for the performance and
professional standards of their units, while project teams are
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created as needed to carry out specific programs. Team members are
drawn from various functional departments and report to a project
manager, who is responsible for the outcome of the team's work. Many
aerospace companies that rely on contract work use this matrix. On
the whole, however, the matrix structure is found much less
frequently in organisations than are the functional and product
market structures.
As we shall see, all three types of organisation design have
advantages and disadvantages. Few organisations rely on any one type
exclusively.
Functional organisation
Functional organisation is perhaps the most logical and basic form of
departmentalisation. It is used mainly (but not only) by smaller
firms that offer a limited line of products, because it makes
efficient use of specialised resources. Another major advantage of a
functional structure is that it makes supervision easier, since each
manager must be expert in only a narrow range of skills. In
addition, a functionalised structure makes it easier to mobilise
specialised skills and bring them to bear where they are most needed.
FUNCTIONAL ORGANISATION CHART FOR A MANUFACTURING COMPNAY

I PRESIDENT I
I

I I I I
VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT
Production Marketing Finance Human Resources

Note: Each vice-president is in charge of a major organisational

function.
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CHARACTERISTICS OF FUNCTIONAL STRUCTURE

ADVANTAGES
1. Is suited to a stable environment.
2. Fosters development of expertise.
3. Offers colleagues for specialists.
4. Requires little internal coordination.
5. Requires fewer interpersonal skills.
DISADVANTAGES
l. Slows response time in large organisations.
2. Cause bottlenecks due to sequential task performance.
3. Does not encourage innovation; has narrow perspective.
4. Fosters conflicts over product priorities.
5. Does not foster development of general managers.
6. Obscures responsibility for the overall task.

Source: Arthur A Thompson Jr., and A J Strickland III, strategy

Formulation and Implementation, p 324. Copyright 1983 by
Richard D Irwin, Inc. Used with permission.

Product or market organisational structure the organisation of a

company by divisions that brings together all those involved with a
certain type of product or customer.

Product/Market Organisation
Most large, multiproduct companies, such as General Motors, are
organised according to a product or market organisation structure.
At some point, sheer size and diversity of products make servicing by
functional departments too unwieldy. When a company's
departmentalisation becomes too complex for the functional structure,
top managers will generally create semiautonomous divisions, each of
which designs, produces, and markets its own products. The following
shows how a product or market organisation can follow one of three
major patterns.
THE THREE MAJOR PATTERNS OF PRODUCT OR MARKET ORGANISATION
l. In division by product, each department is responsible for a
product or related family of products. For example, General
Foods has a different division for each of its major types of
food products. Product divisionalisation is the logical pattern
to follow when a product type calls for manufacturing technology
and marketing methods that differ greatly from those used in the
rest of the organisation.
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2. Division by geography brings together in one department all

activities performed in the region where the unit conducts its
business. This arrangement follows logically when a plant must
be located as closed as possible to (a) its sources of raw
materials, as with mining and oil-producing companies; (b) its
major markets, as with a division selling most of its output
overseas that must locate abroad; or (c) its major sources of
specialised labour, as with diamond cutting operations in New
York, Tel-Aviv, and Amsterdam. Service, financial, and other
nonmanufacturing firms are generally organised on a geographic
basis.
3. Division by customer occurs when a division sells most or all of
its products to a particular class of customer. An electronics
firm, for example, might have separate divisions for military,
industrial, and consumer customers. As a general rule,
manufacturing firms with a highly diversified line of products
tend to be organised by customer or by product.

Unlike a functional department, a division resembles a separate

business. The division head focuses primarily on the operations of
his or her division, is accountable for profit or loss, and may even
compete with other units of the same firm. But a division is unlike
a separate business in one crucial aspect: It is not an independent
entity; that is, the division manager cannot make decisions as freely
as the owner of a truly separate enterprise, because he or she must
still report to central headquarters. As a rule, a division head's
authority will end at the point where his or her decisions have a
significant effect on the workings of other divisions.
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PRODUCT/MARKET ORGANISATION CHART FOR A MANUFACTURING COMPANY:

DIVISION BY PRODUCT

I PRESIDENT I
I I I
VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT
Research and Marketing Production Finance
Development

I I
GENERAL MANAGER GENERAL MANAGER GENERAL MANAGER
Pharmaceutical Proprietary Personal-Care
Products Products Products

Note: Each general manager is in charge of a major category of

products, and the vice-presidents of the functional areas
provide supporting services to the general managers.

CHARACTERISTICS OF PRODUCT/MARKET STRUCTURE

ADVANTAGES

1. Is suited to fast change.

2. Allows for high product visibility.
J. Allows full-time concentration on tasks.
4. Clearly defines responsibilities.
5. Permits parallel processing of multiple tasks.
6. Facilitates the training of general managers.

DISADVANTAGES

1. Fosters politics in resource allocation.

2. Does not foster coordination of activities among divisions.
3. Encourages neglect of long-term priorities.
4. Permits in-depth competencies to decline.
5. Creates conflicts between divisional tasks and corporate
priorities.
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Matrix Organisation
Neither of the two types of structures we have discussed meets all
the needs of every organisation. In a functional structure,
specialised skills may become increasingly sophisticated - but
coordinated production of goods may be difficult to achieve. In a
divisional structure, various products may flourish while the overall
technological expertise of the organisation remains undeveloped. The
matrix structure attempts to combine the benefits of both types of
designs while avoiding their drawbacks.
In a matrix organisation, employees have in effect two bosses - that
is, they are under dual authority. One chain of command is
functional or divisional, diagrammed vertically in the organisation
charts. The other lateral chain depicts a project or a business
team, led by a project or group manager who is expert in the team's
assigned area of specialisation. For this reason, matrix structure
is often referred to as a "multiple command system".
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BOARD CHAIRMAN

0I PRESIDENT
Other
Cost Centers Services
- -1 Functions
MKTG MFG TS&D RES EVAL
MGR I MGR MGR MGR CONTR
I I
p 1---l Bus No 1 - 1--- O ---t- 0 ------- 0 ----- 0 ---- 0
r
0
------------~-----t---~---t---------t--------t--------f----------J
Bus No 2 _J___ O --,- 0 ------- Q ----- 0 ---- y Busines]
f
i 1-1---1
t

C
------------~-----t---:---t---------t--------f------- j __ Board__
e 1-----, Bus No 3 --1--- O __ J_ Q ------- 0 ----- 0 0
n
t
e
r 1---l Bus No 4 _J___ 0
I '. 0I ------- 0I
---1-
I
----- 0 0
I
s

I
1 . l I
l l 1
1Functional!
Future I Profes- I
lsionalism I
, _________ _J

Source: William C Goggins, "How the Multidimensional Structure Works

at Dow Corning", Harvard Business Review, January - February
1974. (Copyright 1973 by the President and Fellows of
Harvard College; all right reserved).
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CHARACTERISTICS OF MATRIX STRUCTURE

ADVANTAGES

1. Gives flexibility to organisation.

2. Stimulates interdisciplinary cooperation.
3. Involves and challenges people.
4. Develops employee skills.
5. Frees top management for planning.
6. Motivates people to identify with end product.
7. Allows experts to be moved to crucial areas as needed.

DISADVANTAGES

1. Risks creating a feeling of anarchy.

2. Encourages power struggles.
3. May lead to more discussion than action.
4. Requires high interpersonal skills.
5. Is costly to implement.
6. Risks duplication of effort by project teams,
7. Affects morale when personnel are rearranged.

Source: Some of the material in this box is from Harold Kerzner.

"Matrix Implementation" Obstacles, Problems, Questions, and
Answers", in David I. Cleland, ed., matrix Management
Systems Handbook (New York: Van Nostrand Reinhold, 1984),
pp. 307-329; and William Jerkovsky. "Functional Management
in Matrix Organisations", IEEE Transactions on Engineering
Management 30, no 2 (May 1983): 89-97.

The Informal Organisation

Relationships within an organisation are certainly not restricted to
those official ones outlined in formal organisation charts. Managers
have always realised that an informal organisation exists side by
side with the formal one. this informal organisation grows
inevitably out of the personal needs and group needs of company
members. It has been described by Herbert A Simon as "the
interpersonal relationships in the organisation that affect decisions
within it but either are omitted from the formal scheme or are not
consistent with it".

Barnard suggested that strict adherence to the formal structure -

that is, always "going through channels" - could be detrimental. In
emergencies, for example, an informal communication network makes
faster decisions possible. Informal relationships also smooth the
flow of personnel and materials across the lines of authority, and
these relationships promote cooperation among departments that have
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only indirect poins of contact on the organisation chart. The

informal relationships that develop in an organisation not only help
organisation members satisfy their social needs but also assist them
in getting things done.
Barnard, however, overlooked the fact that informal organisation may
also arise among employees as a protective device against management.
In such cases, the aims of the informal organisation may well run
counter to the objectives of the enterprise. For instance, the
informal group may set work norms well below the standards prescribed
by management and enforce a slowdown in various ways, ranging from
persuasion to violence.
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MODULE: Introduction to Management P-31 (6/15)

LECTURE: Case Study

The Standard Paint Company - Manufacturing Plant

The Standard Paint Company was a subsidiary of a large national paint
corporation. It had one large plant, which was located in the
midwest.
Under the plant manager there was a production manager who directly
supervised two production department superintendents. The two
departments were the paint and lacquer department and the filling and
finishing department. Another production superintendent of the
varnish manufacturing department reported directly to the plant
manager. In addition, there were seven staff departments that
reported directly to the plant manager; namely quality control,
purchasing, industrial engineering, stockkeeping, plant engineering,
receiving and stores and personnel.
The plant was tied into a parent company computerised system for
forecasting production requirements of the plant by specific product
while making all necessary seasonal adjustments. This production
forecast was, in turn, interpreted in terms of required raw materials
and lead times. This information was passed to the parent company
central purchasing where the raw materials were ordered for delivery
to the plant. The centrally procured materials were limited to those
in high volume use, leaving to the plant the responsibility for
ordering and expediting the more exotic materials which were usually
on a long time basis. Local purchasing relied on central purchasing
to expedite all materials bought centrally. The plant received a
thirty - day advance forecast of production requirements with planned
production dates. However, lead times for delivery of raw materials
increased. This caused a widening gap between the scheduled
production dates and the availability of required materials,
especially those ordered by central purchasing.
Delayed production schedules showed up in finished goods shortages
and short shipments. The plant stockkeeper for finished products
initiated production orders according to information called out by
the computer. He was responsible for the coordination with central
data processing on production schedules and stock produced. But he
was constantly explaining the failure to meet requirements.
The paint and lacquer department was responsible for planning and
initiating the production of each paint order and would prepare
requisitions for raw materials involved in each formular. The
requisition would then be sent to receiving and stores department,
which prepared and delivered all raw materials to production.
However, these materials were frequently delivered late. There was
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also a growing incidence rate of non-availability of materials

required, even though inventory records maintained by the local
purchasing required, even though inventory records maintained by the
local purchasing department showed materials to be on hand. Any
unexpected shortage of materials would cause an immediate change in
the planned order of production. New materials had to be quickly
requisitioned for alternate paint orders to avoid excessive idle time
and lost production.
As an outgrowth of frequent late deliveries of materials from stores,
production had begun to store large amount of the more commonly used
materials on the production floors. Of course, this latter practice
required production to report raw material usage to inventory
records. These reports were often neglected in the rush of
production activity.
Very often the receiving and stores department actually had the raw
materials on hand but couldn't find it. Usually, this was due to the
erratic pattern of receiving raw materials. At times, receipts were
so heavy that the usual storage area would not hold it. On these
occasions, the supply was split up and other areas used for storage
of it. These other areas were sometimes remote and difficult to
identify. the unpredictable receiving schedule had another
unfavourable effect on receiving and stores. overtime costs in that
department had mounted, and demurrage was increasing significantly.
Even though there were frequent shortages of required materials,
there was a continuous increase in total investment in raw material
inventories. Part of this problem was due to the central purchasing
buying in quantity for best unit price and most favourable shipping
rates. While the receiving and stores superintendent bore the brunt
of the demurrage cost and much of the criticism for lack of raw
materials when needed, he felt helpless to correct it.
Another problem was production overruns (exceeding gallons
scheduled). These were frequent and almost always caused production
stoppages. The filling and finishing department would run out of
containers, labels, or cartons when overruns occured. These
stoppages, in turn, caused idle time and missed schedules in the
filling departments.
The filling and finishing department had one other problem. It often
experienced reduced output due to failure to match specific holding
tank locations with the most efficient filling machine operation for
a given product. The initial mixing operations were on the highest
floor of the plant, and after mixing, the batches were dropped one
floor below into holding tanks for shading and filling operations.
The filling department was at a still lower floor with gravity flow
from the holding tanks. Filling machines within the range of holding
tanks were often not the best for the product involved.
Quality control was extremely important, and the quality control
department had been credited with outstanding accomplishment.
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Products leaving the plant were of excellent quality. There was

rarely a customer return or complaint. There was literally no
spoilage or waste.
The quality inspection process was fairly rigid. As a batch of paint
neared completion, it had to be checked for colour and other
qualities.
If not accepted by the inspector, an adjustment to the batch was made
by production; that is, more raw materials, pigment, etc had to be
added. A quality control inspection was required prior to each
adjustment. The usual practice was to adjust each batch not more
than once every 24 hours. Several adjustments were usually necessary
to satisfy quality requirements. It was traditional that the same
production employee, known as a "shader", would make all of the
adjustments to his own batches. Technically, the batches could have
been adjusted every four hours.
Shaders seemed to be quite cautious and conservative in their
approach to adjustments. They would very gradually add materials to
the batch, thereby lengthening the total period that the batch stayed
in the holding tank and set up a requirement for traditional
inspections. There was one other obstacle that prevented more
frequent adjustments of the batches. Quality control did not have
sufficient inspectors for assignment to the afternoon and midnight
shifts. These had been cut out earlier in behalf of cost savings.
Quality control did, however, leave written reports of inspection for
the use of shaders on the afternoon and midnight shifts.