Chapter 1

The nature and structure of organizations

NOTE: This chapter introduces us to different types of organizations along with
various corporate structures.

1. Organizations
An organization can be defined as:

A social arrangement which pursues collective goals, which controls its own performance, and which
has a boundary separating it from its environment.

OR

An organization is a social arrangement which aims for collective goals. It controls its performance and
is separate from its environment. (An organization is an arrangement where people/resources get
together and they are aiming for collective goals)- Collective goals can be a variety of different things:
PROFIT-ORGANIZATION if it is a commercial organization it could be aiming for profit/ increasing
market share.

NOT FOR PROFIT ORGANIZATION charity goals, wildlife-safeguarding of animals.

BENEFITS OF ORGANIZATION HAVE OVER AN INDIVIDUAL

Shared expertise (A group of people working within an organization will have a larger knowledge
base than one individual.)
Enables pooling of resources
(Definition of organization along with its advantages)
2. Systems (system terminology)
Environment
Boundary

Input Output

Organization

The environment is what the organization sits or lives in. For example a business lives in its national
(government) or country environment (local population, suppliers, and customers) and perhaps in the
international environment. The boundary separates the environment from the organizational system.
Input normally goes into the organization and output comes out of the organization; some sort of
processing takes place within the organization.

Open system/organizations do receive input from the environment and produce output which
is sent to the environment. Nearly all organizations are open organizations. These are the only
ones of any practical importance.
Closed system/organizations they take no input from the environment and give no output to it.
These are very theoretical and have no long life. It will be difficult to see an organization continuing to
compete successfully if it paid no heed to technological advances, or what its rivals were doing, or what
its customers wanted.

All organizations or systems can be divided into subsystems. For example, an organization will
have a sales and marketing department, an accounting department, a manufacturing
department and so on. Subsystems can then be further split down into even smaller
subsystems. For example, the accounting department will consist of the receivables ledger,
the payables ledger, the cash book, the nominal ledger and so on. Sub systems are important
to determine what inventory is needed, we dont want any gaps, no overlaps between
subsystems.
3. Types of organizations

Type of
Organizations

Commercial NOT for profit

(PROFIT seeking)
ownership

Public sector Private sector

Commercial (profit Not-for-profit

seeking)
Quoted companies-quotes Charity-e.g. world-wide life
companies are quoted on a fund, UNICEF- they exist to
stock market/stock benefit other things as
exchange (traded shares opposed to making money.
around the world e.g.
London stock exchange)
Private companies-these NGOs(Non-governmental
are not quoted on a stock organizations)
market these are private
companies- also known as
limited liability e.g. abc Ltd
Partnerships-a group of Clubs/societies e.g. golf
individuals and they get club-service to the
together and form a members of the society
partnership e.g. if I get
together with a friend and
set a business this is a
partnership.
 Public sector(government) Private sector
Basic healthcare Not controlled by the government
Public transports/roads
Police, military
Primary Education

Commercial organizations are profit-seeking. They can be sole traders, partnerships, limited
liability partnerships(they work as a partnership but the advantage is that if the organization
goes bankrupt(liquidation)/fails, then the creditors can look for assets that the partnership
owns) and limited companies(if a company goes bust its liability is unlimited.). The main
advantage of limited liability partnerships and limited companies is that if the organization hits
hard times and has to go to liquidation/bankrupt, the owners of the organization are
protected. Creditors and banks can pursue only the assets which are in the company. Sole
traders and partners, on the other hand, have unlimited liability for all the businesss debts.
Sole trader vs partnership
1. Sole trader-Profit or loss belongs to the single owner. Partnership - Profit or Loss is
divided among the partners.
2. Sole trader -Inefficient management due to limited supply of skills. Partnership-
Collective skill of partners leads to efficient management.
3. Sole-trader -It does not require any agreement as there is only one member.
Partnership- Agreement or Deed either in writing or oral is necessary.
4. Sole trader- Inefficient management due to limited supply of skills. Partnership-
Collective skill of partners leads to efficient management.
Similarity between limited liability partnerships (LLP) and limited companies (LC)
1. Organizers of LLCs and LPs are given flexibility in how they define the rights and
responsibilities of the entity's members or partners, as well as how the entity is
structured. Both of these are internal agreements that remain in force until amended or
changed by unanimous consent of all company members or partners.
2. Pass-through tax treatment means that the business itself is not subject to federal
income tax. However, each investor will often be required to report his/her share of the
business's income, gain, loss, and deduction.

Difference between limited liability partnerships (LLP) and limited companies (LC)
1. A limited partnership is composed of general partners and limited partners.
Limited partners can invest in the business and share its profits or loss, but cannot be
active participants in the day-to-day operations of the company.

A limited liability company can have as many owners (known as members) as it would
like. All members have the right to participate in the business' management.
Co-operatives are owned by the people who work in the organization. Some farmers, for
example, set up co-operatives to market their products more effectively than they could on
their own. (They bring their own capital) they may or may not be for profit-seeking. They are
not so common.
The second type of organization is a not-for-profit organization. An example of a not-for-
profit organization could be a charity, such as a charitable hospital. Instead of producing a
profit and loss account, they tend to produce income and expenditure accounts. Ultimately
their income has to exceed their expenditure or they will run out of money.
Public sector organizations are owned by the state either at a national level or at a local level.
Examples could be the defense/police department, many health services and educational systems.

Non-governmental organizations tend to be not-for-profit organizations. Many United Nations

organizations will fall into this category.
4. Organization structures
Organization structures can be described as:
Entrepreneurial- its a boss and the workers. They are small, often family-owned, and are not large
enough to be divided into separate departments.

Advantages:

1. quick to react to opportunities or competitor movement- the boss knows everything and is in
touch with all the staff members
2. close to workers-they are not a lot levels of hierarchy

Disadvantages:
1. Relies only on the boss/ one person-it is stressful
2. Difficult to grow above a certain size- 50 members
Functional-Often found when an organization grows out of an entrepreneurial stage. This means that
there are separate departments according to function a sales and marketing department, an
accounting department, a payables department, receivables department, research and development
department and so on. This can be a very efficient structure as expertise is concentrated in each
department and there could be great economies of scale.

Advantages:

1. Allows growth
2. Enables standardization/specialization

Disadvantages:

1. Can be slow
2. Could be conflict between various departments
The main functions within in organizations are:

Ordering and purchasing - provision of raw material and non-current assets, how much
do we need to negotiate in prices, spending at orders, counting the goods
Manufacturing or service provision(direct-service provision e.g. IT-provides shared
service )
Sales- encouraging people to buy the products and marketing (finding customers wants,
selling to them)
Distribution
Research and development (new products and services)
Accounting including payment of suppliers and employees, invoicing customers and
collecting payment, cash management, and financial statement preparation.
Treasury management (to ensure there is enough capital and to reduce risks such as
foreign exchange movements)

Divisional- business is better off being divided up into different divisions where divisions will consists
of departments (on the basis of product divisions or geographic divisions-north America and Europe)
which can specialize. You might have a division which makes and sells paint and you might have a
division which makes and sells pharmaceuticals. E.g. If you are selling paint and pharmaceuticals it is
likely that the manufacturing is very different.
 Matrix- often used in project management. Dual reporting by an individual to, for example
the county manager and the head office sales director. A project team for project A, for example,
will have a project leader or manager for project A. The members of the team report to that manager.
But the members of the team also have functional responsibilities. For example, there will be a project
accountant and someone who looks after the quality control aspects of the project. These people, as
well as reporting to the project manager, also have to report to their functional heads. Therefore each
person can have two bosses.

A boundary-less organization can be virtual, hollow or modular:

Virtual: create a company outside the organization to respond to exceptional, often

temporary market opportunities.
Hollow: all non-core operations are outsourced e.g. accounting, human resources, legal
services and manufacturing could be outsourced, leaving the company to concentrate
on its core competence e.g. design of new products.
Modular: order parts from different internal and external providers and assemble into a
product.
5. Mintzbergs structure
Mintzberg divides organizations into five parts.

The strategic apex is equivalent to top management or the Board of Directors. The middle
line/scalar chain is the middle managers. This is the hierarchy as it passes down through the
organization. The operating core are the people near the bottom who for the most part do the
day-to-day work. Support staff would include the accounting staff and IT staff. The
technostructure is the part of the organization responsible for devising and enforcing standards
and procedures. It is the technostructure that would write the quality control manual, the
employee handbook, the health and safety manual, the finance manual.
6. Levels of Organizations

Strategic level- top managers and the board of directors. A five year plan for the whole
organization (strategy).-what its competition be like in 5 to 10 years.

Operational level- recording transactions, day-to-day activities are carried out. E.g. processing
invoices, sending out orders, dealing with customer queries

Tactical level- level of a manager of a department. Typically this person will have a time horizon
of about a year because this person will often be concerned with meeting the years budget and
expectations.-medium term and focuses on use of resources.

7. Tall/narrow, wide/flat

Organizations are often described as being tall-narrow or wide-flat.

In the tall narrow organization each manager or supervisor looks after relatively few people.
(Having a span of control of two-small span of control.) There can be very close supervision of
subordinates. The tall narrow structure is sometimes described as very bureaucratic, very
formal, strict job descriptions. Poor vertical communication.
 In the wide flat organization the span of control is much wider. In this diagram weve shown a
span of control of seven, meaning that each supervisor or manager has seven people reporting
directly to him or her. Communication between top and bottom will be much faster. There
tends to be less emphasis on strict job descriptions and a greater emphasis on how we can get
the job done.

8. Centralization/decentralization
Decentralization or centralization looks at where the power lies. (Describes how far down the
organization power is passed.)
Advantages of decentralization:
1. Work-load/time- If nothing is decentralized, all decisions have to remain at the top of
the organization, with the managing director or the board of directors for example. Those
people would be overworked, they will be mixing up trivial decisions with important
decisions,
2. Speed- if requests have to be passed up through an organization for a decision to be made
and then the answers are passed down, decisions are likely to be much slower. So
decentralization adds speed.
3. Expertise- it might be better to decentralize power to areas of expertise. For example the
best person to make a decision about where to place advertising is somebody in the sales
and marketing department, not the managing director who may have come from an
accounting or engineering background
4. Motivation- good employees like to make decisions and like running their own
departments or divisions
5. Training/assessment- f you never allow any junior people to make decisions, how will
you know who the good ones are and who should be promoted in the future?

But
Poor coordination/ dysfunctional decision-making- Thats where one division could
make a decision which although good for it may harm the organization as a whole. This may
require the head office or the board of directors occasionally to interfere with the
decentralization and to impose decisions.
9. Recent trends
There have been some recent trends in organizational structure.
1. Downsizing has been necessary to keep costs down.
2. Delayering, moving towards wider, flatter organizations, both to save costs and to achieve
flexibility.
3. Outsourcing -means getting an outside firm to perform some of your operations.
4. Offshoring is moving part of your business abroad usually to make use of cheaper labor
rates found there. The processes could be outsourced to abroad.
5. Shared services is the consolidation of business operations that are used by several parts of
the same business. For example, IT and accounting could be located in one city and country
to service the needs of an international organization.

10. Formal and informal organizations

Formal organization is what management knows about, and also its often written down. It could
be procedure manuals-on health and safety, quality control, mission statement- often appear on
websites, it says what the organization is for, staff appraisals- showing which staff may be better
and which ones have certain weaknesses, organization charts- matrix structures, division structures
which is often written down.

Informal organizations is what is not written down. If management is unaware of the informal
organization then they are liable not to be able to manage very well. It consists of personal
ambitions- e.g. I want to stay in this firm get some experience then move on, personal preferences-
e.g. hate working with some people, alliances and group norms everyone agrees with each other,
rumor/ gossip- information is disseminated and sometimes inaccurate information, shortcuts- in
terms of quality and safety, mutual cover-up- if a friend makes a mistake his other friend covers him
up instead of telling him he did wrong.