This article has been written by Janaki Ratna pursuing an Executive Certificate Course in Corporate Governance for Directors and CXOs from Skill Arbitrage.
This article has been edited and published by Shashwat Kaushik.
Table of Contents
What is BOS
Business organisation structure (BOS) is the hierarchy through which a company/firm or organisation wants to operate on day to day, short term and long term basis. This is to enable operations, planning, forecasting, stakeholder management, financial management, supplier management, employee management, and general administration that drive the overall functioning of the organisation towards its goals. In another way, organisation structure defines at what level tasks are performed, who each role reports to, where the ultimate authority lies, the relationships between various teams, functional/regional connections, where decisions are made and delegation levels within a company. It can start right from the level of the board or CEO, all the way down to the starting level/bands of the employee or role structure.
An organisation chart is a pictorial representation of the organisation structure. Organisational structure can be a true reflection of the company/organisation’s culture. Employee motivation and engagement are directly influenced by the structure due to the impact of decision-making, role definition, autonomy and speed of execution.
Factors influencing BOS
There is no one right organisational structure. Organisational structure can change with the dynamic needs of business and with expansions, mergers, diversification, etc. However, forming the right structure can lead to the success or failure of a business. Hence, it is very critical to have the right structure to make a company agile, effective and productive, leading to profitability. Businesses decide their organisational structure based on their mission/vision, principles and policies, which define control, ownership and liability. Strong drivers are business types that have objectives and goals depending on the business entity. They are also driven by whether they are in a regulated or unregulated type of business, as well as the tax treatments. At a high level, the factors impacting the choice of business organisation structure are broadly based on:
- What the company does and its size
- Business objectives/goals – short term/long term
- Employees, stakeholders, products and its interrelationships and complexity
- Technology penetration – nil to latest
High level types of BOS
Organisational structure can be highly mechanistic—centralised, specialised, regulated or organic with decentralised authority, minimum specialisation and a focus on performance rather than roles. They can also be seen as vertical or flat to define levels of various roles, or hierarchical or circular based on the size or group of leaders across teams. Traditional structures focus more on hierarchy & being rigid, whereas modern structures focus on collaboration, performance and efficiency.
Types of organisational structure
Based on the above, below are the types of organisational structure :
| Type of Organisation | Traditional or Modern | Mechanistic/organic |
| Function or role based organisation | Traditional | Mechanistic |
| Product or Market Organisation | Traditional | Mechanistic |
| Process based Organisation | Traditional | Mechanistic |
| Flat Organisation | Modern | organic |
| Matrixed Organisation | Modern | Organic |
| Circular Organisation | Modern | Organic |
| Network Organisation | Modern | Organic |
| Hybrid Organisation | Modern | Organic |
Comparative analysis
As we have seen, no one type is best for all businesses. While all the above have their advantages and disadvantages and will have to be chosen per the needs of the organisation. I have taken up product and function based comparative analysis here. Those are the most popular and widely used as they are proven structures, though traditional in nature. However, in recent times, we have seen organisations use a combination of them, which are known as modern structures.
Definitions
Product based organisational structure
Here, employees are grouped into usually self-contained divisions that are for the same product or services or customers they produce/deliver and cater to. Popular product based companies are Amazon (which falls under both product based and function categories), Adobe, Cisco, Walmart, Costco and Intel.
Pros
- A product-based company focuses on delivering highest quality services for its customers rather than focusing inward.
- It is used when the organisation has varied products/services/customers
- Each structure or division, is self-sustaining. E.g. HR, stores, production elements, marketing, R&D, etc. However, some element of shared components can also exist
- Each unit can be treated as a profit centre.
- A unit or division can be shut down separately or independently of other products/services/customer groups.
- Since these are typically smaller units or divisions, day to day management/administration are relatively easier for the managers.
- Accountability and motivation of employees are higher as they see results faster and have more autonomy.
- Customers see speed of services and evolution.
- Further diversification of products or services can be achieved faster.
Cons
- Duplication of resources exists.
- Resource optimisation is hard to achieve, thereby making economies of scale highly impossible.
- Costs are higher.
- If not supervised properly, divisions can become isolated with less co-operation.
- Easy to drift from “company’s interest is above division’s interest.”
Functional organisational structure
In this type, the entire organisation is divided based on the specialisation of their skills, expertise and work activities. Examples of the departments: HR, Marketing, production, etc. Starbucks, Amazon and Apple follow this structure effectively. When departments are organised by their skill set, it is easier for organisation; business owners focus on business goals and manager’s focus on teams’ deliverables.
Pros
- Skill development is the highest.
- Employees are motivated as their career path is clearly set and they can keep upskilling in the same specialisation.
- Economies of scale are achieved.
- Technical expertise lies within the same team and hence speed of resolution of issues is faster.
- Centralised decision-making.
- The hierarchy is clearly defined and flow of communication is within the group
Cons
- Functions can start working in silos.
- Territorial conflicts can arise.
- Limited view of organisational goals/vision.
- Resistance to drastic changes, particularly when it challenges “status quo” or “out of comfort zone.”
- Imbalance between functions can cause distress.
Product based organisation vs function based organisation
| Functional | Product/Divisional | |
| Meaning | Grouping based on the function – skills | Grouping based on products or services |
| Based on | Functional Specialisation | Products or Services |
| Other name | U Form or Unitary Form | M form or multidivisional |
| Company Type | Small, medium or single product based | Large and product diversed |
| Autonomy | Lies within the function | Lies with the division |
| Decision making | By the manager at the top of the functional hierarchy | By the manager at the top of the divisional hierarchy |
| Operating Cost | More economical | More Expensive |
| Specialisation | Same function | Different functions but same division |
| Location suitability | Single location based | Multi location |
| Managerial capabilities | Managers tend to be more technical | Managers have overall understanding of the business goals |
Findings
For ease of comparison, we took only 2 business organisation structures. Each model is found to have its merits and demerits. Product based organisational structure is more suitable for organisations that are large and complex to manage. When there are more products or divisions to manage, product based organisation is a better fit. Function based suits small companies that are more stable in nature. Where activities are repeatable, functional structure works better. However, it is recommended to choose the best of both as needed.
Conclusion
Businesses in the process of strategizing their vision and goals should also focus on having the right organisational structure for them. If not designed properly, it can adversely impact their profits/goals. Each structure has its advantages and disadvantages, as seen above. Hence, it is imperative for organisations to understand their priorities and establish a structure that can help achieve their goals. The more agile they are, the faster they can adapt and grow. Hence, depending on the stage of the organisation, their goals and what they want to cultivate as the organisation’s culture, business organisation structures will have to be strategized and implemented.
References
- https://study.com/academy/lesson/what-is-a-business-organization-structure-types-examples.html
- https://www.forbes.com/advisor/business/organizational-structure/#:~:text=As%20discussed%20below%2C%20functional%2C%20product,responsibilities%20and%20decision%2Dmaking%20authority
- https://copymate.app/blog/multi/organization-structure-analysis-of-organizational-models-and-their-impact-on-operational-efficiency/
- https://www.youtube.com/watch?v=J4yO-lBK1gU
- https://www.aihr.com/hr-glossary/functional-organizational-structure/
- https://www.differencebetween.com/difference-between-functional-and-vs-divisional-structure/#google_vignette
