Organization Structures

ORGANIZATION STRUCTURES
Key to SUCCESSFUL Businesses
How Well Organized is Your Organization?

An apt analogy for the organization structures of many family businesses is that they are akin to an old country house that was built one room at time.

As the family grew, so did the house. At the time, little thought was given to how functional or how efficient the floor plan was - what drove the design of that old country house was expediency - not a thoughtful design process. So as the house grew in size, it became ever more inefficient.

"With family-owned businesses, the awful truth is that many are very poorly organized. So many family businesses never achieve the true potential of their business because their organization simply "evolved" as the business grew," according to top family business advisor Don Schwerzler.

"An effective organization is the product of thoughtful consideration - the implementation of an organizational strategy."

Schwerzler has been studying and advising family business entrepreneurs for more than 40 years and he is the founder of the Family Business Institute.

What are some of the symptoms that the organization structures of your family business are not effective?

  • Is your family business in need of change - does it need to be re-energized?
  • Does it have trouble taking advantage of new business opportunities?
  • Has it grown reliant on its founder's way of managing the business and remains unprepared for new leadership and new ideas?
  • Have most improvement programs ended up wasting time, money, and management's credibility?
  • The tricks and methodologies that used to work don't.
  • Managers and employees fail to understand the strategic direction of the business - and their role in pursuing it.
  • Processing an order is seldom routine because there is a lack of coordination between different departments
  • Employee productivity is poor.
  • Employee motivation is poor.
  • Employees have poor attitudes - after all, it's just a job.
  • Performance standards and expectations are seldom achieved.
  • Few people strive to improve the organization. Most just don't care.
  • Being at work is never fun - always stressful.
  • Some departments operate like political fiefdoms.
  • Customers are complaining about service and quality.
  • Competition is taking more and more business from you.
  • Managers do not plan - they just move from one crisis to another.
  • Change in your family business moves glacially.

It doesn't have to be that way!

If you have concerns about the organization structures of your family business, contact us. We can help!

Very often the first step in getting the business better organized involves getting the family better organized. That is our business!

We would like to present five of the traditional organization structures. Each has some specific advantages and each has some disadvantages. But regardless of what organization structures you use, remember, to work well, they must be well organized.

To select the best organization structures, first consider your firm's strategic intent, then adapt the organization structure that best supports that intent.

Of course, it rarely happens that a family business adopts any one of these organization structures exactly. The reality is that form changes and adapts over time as strategies change and reporting needs change. Growth in the structure can happen vertically [adding additional reporting levels in the organization] or horizontally [adding new functional or divisional responsibilities].

Organizations with relatively few reporting levels are known as flat organization structures and usually have decentralized control, while those with many levels are known as tall organization structures and usually have more centralized control.

Five Formal Organization Structures

Functional Organization

Description

  • small size,  single-product line
  • undifferentiated market
  • scale or expertise within the function
  • long product development and life cycles
  • common standards
  • hybrids in large organizations may follow structure by division or business unit


Strategic Advantages

  • Centralized control of strategic results
  • Very well suited for structuring a single business
  • Structure is linked tightly to strategy by designating key activities as functional departments
  • Promotes in-depth functional expertise
  • Well suited to developing functional skills and functional based competencies
  • Conducive to exploiting learning/experience curve effects associated with functional specialization
  • Enhances operating efficiency where tasks are routine and repetitive


Strategic Disadvantages

  • Excessive fragmentation of strategy-critical processes
  • Can lead to inter-functional rivalry and conflict, rather than team-play
  • Multi-layered management bureaucracies and centralized decision-making slow response time
  • Hinders development of managers with cross-functional experience because the ladder of advancement is up the ranks within the same functional area
  • Forces  profit responsibility to the top
  • Functional specialists often attach more importance to what's best for the functional area than to what's best for the whole business - can lead to functional empire-building
  • Functional myopia often inhibits creative entrepreneurship, adapting to change, and attempts to create cross-functional core competencies


Geographical Structures

Description

  • low value-to-transport cost ratio
  • service delivery on-site
  • closeness to customer for delivery or support
  • perception of the organization as local
  • geographical market segments needed


Strategic Advantages

  • Allows tailoring of strategy to needs of each geographical market
  • Delegates profit/loss responsibility to lowest strategic level
  • Improves  functional coordination within target market
  • Takes advantage of economies of local operations
  • Area units make an excellent training ground for higher-level general managers


Strategic Disadvantages

  • Poses a problem of how much geographic uniformity headquarters should impose versus how much geographic diversity should be allowed
  • Greater difficulty in maintaining consistent company image/reputation from area to area when area mangers exercise strategic freedom
  • Adds another layer of management to run geographic units
  • Can result in duplication of staff services at headquarters and district levels, creating cost disadvantages


Decentralized Line of Business 
[Product or Service]

Description

  • product focused
  • multiple products for separate customers
  • short product development and life cycle
  • minimum efficient scale in functions or outsourcing


Strategic Advantages

  • Offers a logical and workablemeans of decentralizing responsibility and delegating authority in diversifiedorganizations
  • Puts responsibility for business strategy in closer proximity to each business' unique environment
  • Allows each business unit toorganize around its own value chain system, key activities, and functional requirements
  • Frees CEO to handle corporate strategy issues
  • Puts clear profit/loss accountability on shoulders of business-unit managers


Strategic Disadvantages

  • May lead to costly duplication of staff functions at corporate and business-unit levels, thus raising administrative overhead costs
  • Poses a problem of what decisions to centralize and what decisions to decentralize [business  mangers need enough authority to get the  job done, but not so much that corporate management loses control of key business-level decisions].
  • Business/division  autonomy  works against achieving coordination of related activities in different business units, thus blocking to some extent the capture of strategic-fit benefits
  • Corporate management becomes heavily dependent on business unit managers
  • Corporate managers can lost touch with business-unit situations, end up surprised when problems arise, and not know much about how to fix such problems


Strategic Business Unit Structure

Description

  • important market segments
  • product or service unique to segment
  • buyer strength
  • customer knowledge advantage
  • rapid customer service and product cycles
  • minimum efficient scales in functions or outsourcing


Strategic Advantages

  • Provides a strategically relevant way to organize the business-unit portfolio of a broadly diversified company
  • Facilitates the coordination of related activities with a SBU, thus helping to capture the benefits of strategic fits in the SBU
  • Promotes more cohesiveness among the new initiatives of separate but related  businesses
  • Allows strategic planning to be done at the most relevant level within the total enterprise
  • Makes the task of strategic review by top executives  more objective and more effective
  • Helps allocate corporate resources to areas with greatest growth opportunities


Strategic Disadvantages

  • It is easy for the definition and grouping of businesses into SBUs to be so arbitrary that the SBU serves no other purpose than administrative convenience. If the criteria for defining SBUs are rationalizations and have little to do with the nitty-gritty of strategy coordination, then the groupings lose real strategic significance
  • The SBUs can still be myopic in charting their future direction
  • Adds another layer to top management
  • The roles and authority of the CEO, the group vice president, and the business-unit manager have to be carefully worked out or the group vice president gets trapped in the middle with ill-defined authority
  • Unless the SBU head is strong willed, very little strategy coordination is likely to occur across businessunits in the SBU
  • Performance recognition gets blurred, credit for successful business units tends to go to  corporate CEO, then to business unit head, last to group vice president


Matrix Structure

Description

  • alternative to the functional structure
  • potential for new processes and radical change to processes
  • reduced working capital
  • need for reducing process cycle times


Strategic Advantages

  • Gives formal attention to each dimension of strategic priority
  • Creates checks and balances among competing viewpoints
  • Facilitates capture of functionally based strategic  fits in diversified companies
  • Promotes making trade-off decisions based  on "what's best for the organization as a whole".
  • Encourages cooperation, consensus-building,conflict resolution and coordination of related activities


Strategic Disadvantages

  • Very complex to manage
  • Hard to maintain "balance" between the two lines of authority
  • So much shared authority can result in transactions logjam and disproportionate amounts of time being spent on communications
  • It is hard to  move quickly and decisively without getting clearance from many other people
  • Promotes  an organizational bureaucracy and hamstrings creative entrepreneurship


Jay R. Galbraith. Designing Organizations, Jossey-Bass, 1995, p. 37-39. 

A. A. Thompson and A. J. Strickland. Strategic Management, 6th edition. Irwin McGraw-Hill, 1995, p. 251-261.



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How Well Organized is YOUR Organization?

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If...

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The Practitioner's Guide for Organizing an Organization
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