Organisation structure

The essentials

An organisation structure is the framework within which managerial and operating tasks are performed. It shows the relationships between people, their positions and the work done. The span of management, the number of subordinates a manager can effectively supervise, decides the number of levels in the structure. The two main structures are functional and divisional.

Key points

• Functional structure: activities are grouped by major functions such as production, purchase, marketing, finance and human resources, each under a functional head who reports to a coordinating head.
• Advantages of functional structure: specialisation, better control and coordination within a department, managerial efficiency, minimal duplication of effort, easy training of employees and equal attention to all functional areas.
• Limitations: departmental objectives may get more importance than overall objectives, coordination across departments is difficult, conflicts of interest may arise and it can lead to inflexibility.
• Suitable when the firm is large, has diversified activities within one product line and needs a high degree of specialisation.
• Divisional structure: units are grouped by product or market; each division has its own functional departments.
• Advantages: product specialisation helps develop the varied skills of the division head, fixes responsibility for performance, allows flexible and quick decisions, and makes expansion easy (a new division can be added).
• Limitations: conflict among divisions over resources, duplication of activities and higher costs, and divisional managers may ignore the interests of the whole firm.
• Suitable for firms with many different products.

Exam tips

• A firm producing many different products, such as soaps, foods and cement, should use a divisional structure.
• Remember: in a divisional structure, each division has its own production, marketing and finance sections.

Common mistakes

• Thinking functional structure always causes duplication. It is divisional structure that duplicates functions across divisions.
• Forgetting that a narrow span of management creates more levels (a tall structure).