Organisations

The syllabus for Paper F1, Accountant in Business includes the theory of organisations and related topics. Candidates must be familiar with the different organisational structures that can be adopted, as well as related concepts such as departmentalisation, divisionalisation, centralisation and decentralisation, span of control, scalar chain and tall and flat organisations.

In addition to these topics, candidates should also study some of the more contemporary organisational models. These include ‘boundaryless’ organisations and shared services organisations, both of which are examinable for the first time in 2014.

This article provides an overview of some of these concepts.


Purposes of organisations

An organisation is a group of people with a common purpose. The purpose is defined by the entity for which they work. In smaller businesses, such as partnerships and small companies, it is common for those who work for the organisation to have created it, or to have had some part in creating it. By contrast, larger organisations have to employ or involve more people, the majority of which will have little or no connection with the founders or owners.


The development of organisations

Organisations have been around for thousands of years. The mighty armies of Greece and Rome were organisations, and the Phoenician merchants who plied their trade across the oceans could not have run successful businesses without some organisational structure. Whenever two or more people come together to pursue the same outcomes, we have an organisation. Organisations exist because synergy can be achieved by combining human resources. Together, those in an organisation can produce more than the sum total output of individuals working alone.

The industrial revolution of the eighteenth and nineteenth centuries brought a need for more systematic and formal consideration of how organisations should be configured. Adam Smith used the example of the division of labour in a pin factory to describe the benefits of specialisation:

‘One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head: to make the head requires two or three distinct operations: to put it on is a particular business, to whiten the pins is another ... and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which in some manufactories are all performed by distinct hands, though in others the same man will sometime perform two or three of them.’ (The Wealth of Nations, 1776)

Generally, businesses start as small entities, and many remain so. Every country in the world has thousands of sole traders, many of which work alone and are able to make their living without involving others. However, if the activities of the business grow, it eventually becomes necessary to utilise the labour of others. In family concerns, the trader may involve a spouse, children or siblings, and this may not even require the creation of any contractual relationships. Yet it does require some degree of organisation. Who carries out which tasks? Does everybody do the same work or does each individual specialise? To what extent should everyone be able to carry out the tasks usually reserved for others? How do we ensure that all work is done, but there is no wasteful duplication of effort? These questions can be addressed in a relatively informal manner in a small business where all control is in the hands of a single person. However, the very same questions have to be asked in the largest and most complex businesses, and for these the answers are less straightforward.


The entrepreneurial structure

The entrepreneurial structure is adopted by smaller businesses. It is simple, informal and very fluid, in that it may change on a day-to-day basis.

This structure is adopted by sole traders who employ others, some small partnerships and some small companies. Those who own and control the business take decisions on the work to be done, how it will be done and by whom. It is quite common for employees to be expected to multitask and not to expect rigid job descriptions. Specialisation may be possible, such as a family member dealing with bookkeeping, but that individual may also be required to carry out additional tasks, perhaps if there is no bookkeeping work to be done at certain times.

The entrepreneurial structure is perfect for many small businesses, but is too informal and can even be chaotic once the level of business activity reaches a certain level. Eventually, the entrepreneur has to consider formalising the roles that employees play, and creating jobs with defined duties and responsibilities.


The functional structure

The functional structure is the most common organisational model. It is usually depicted as a triangle, with the chief executive officer at the top and reporting lines of others flowing vertically. The functional structure is formally depicted as an organisation chart. Figure 1 shows a typical organisation chart.

The duties of individuals are allocated according to the functions they perform. For example, a small company may have a production manager, finance manager, sales manager and IT manager reporting to the chief executive officer. Each of the functional managers is responsible for a department.

Many larger companies have general managers or assistant general managers responsible for groups of functions. For example, the General Manager (Marketing) may be responsible for advertising, public relations, merchandising and direct sales, and there may be a departmental manager responsible for each of these activities.

For each function, employees are grouped together to perform similar or complementary tasks.  Just as the organisation as a whole can be represented on an organisation chart, so too can each department. Figure 2 shows how a finance department might be organised.

The functional structure has several advantages:

  • it facilitates specialisation, by bringing together those with the knowledge and skills necessary to carry out each function, and therefore should create economies of scale
  • it enables the organisation to operate through clear lines of authority and well defined responsibilities, with all employees knowing to whom they report and for whom they are responsible
  • it prevents duplication of effort, thereby reducing inefficiencies
  • it accommodates specialists.


The disadvantages of the functional structure are:

  • it can be inflexible, particularly in a period of rapid change, and in economic systems where it is difficult or costly to recruit or dismiss employees
  • it encourages demarcation lines to be created, which may make employees reluctant to carry out tasks that they consider not to be their responsibility
  • as organisations become larger, there may be coordination problems as the number of functions increases
  • as information tends to flow through formal organisational lines, larger organisations may encounter communication problems
  • some argue that the functional model is too inward looking, focusing on processes instead of considering deliverables defined by customer needs.


The functional structure is common to many organisations, but different concepts can be deployed within it. For example:

  • the organisation can be tall or flat: tall organisations have many levels (a long scalar chain), while flat organisations have fewer levels
  • the organisation may have many employees reporting to each manager, few employees reporting to each manager, or a combination of these: this so-called span of control will depend on many factors, including the nature of the work, variety of tasks performed, capabilities of employees and risk factors
  • some organisations concentrate authority at the top of the management hierarchy, with key decisions taken by senior executives, while others empower subordinates, with greater discretion permitted further down the management chain: this relates to the concept of centralisation and decentralisation.


Functional organisation by product

The functional model can be adapted for organisations that offer a range of products. Just as managers responsible for different products can report to the product manager, it is also possible for each product manager to have his or her own functional structure. In this way, several functions are duplicated across the organisation, as the manager responsible for each product may have their own production, sales, marketing, finance and administration departments. This is shown in Figure 3.

This organisation structure is sometimes appropriate if the design, production and marketing of each product is unique or significantly different to those for other products. This structure can also be suitable if products are distinctive brands. For example, some manufacturers of detergents offer both quality (or premium) products and discount products. Although they compete with one another to some extent, the products are usually targeted at different market segments.

Functional organisation by geographical region
Many organisations operate across different regions, or across international frontiers, so they may consider it to be appropriate to maintain separate functional structures in each location. This approach is not appropriate to all geographically dispersed businesses, but is suitable for organisations whose geographical locations have distinctive but contrasting characteristics. For example, companies with a presence in the UK, Ireland and Germany would be able to identify major differences in the demographic profiles, personal and family values and tastes in the three locations, while companies operating in Belgium, Luxembourg and the Netherlands would identify differences that are less crucial in commercial terms.

Functional organisation by geographical location is especially important for large companies that operate across several continents.


Matrix structure

The matrix structure evolved in companies that sought to overcome some of the rigidities of the functional organisation structure. It was first deployed in the aerospace industry in the USA in the 1950s.

The most common application of the matrix structure is the creation of an extra layer of responsibilities across the traditional functional structure. As well has occupying a position in the organisational pyramid, which defines line relationships, employees have responsibilities to project managers. In this way, the employee may have two or even more managers. For example, an individual working in the finance department may report to the head of finance but may also have some duties in relation to IT/IS or marketing projects. The managers responsible for these projects will be able to call upon staff across organisational boundaries on a formal basis.

Figure 4 shows the matrix organisation.

Matrix organisations can be taken further in environments that are less dependent on rigid chains of command and lines of communication. For example, in some professional firms and consultancies, a position in a functional organisation chart is only important for the purpose of establishing accountabilities under employment law. As one individual working in such an organisation put it, when asked ‘Who is your manager?’, the reply was ‘It depends what day it is.’

There are several advantages of adopting a matrix structure:

  • by involving individuals formally in teams allocated to specific projects, the organisation can capitalise on the knowledge, skills and experience they can offer
  • communication lines are shortened in that project managers can deal with staff assigned to them
  • bureaucracy should be reduced
  • employees’ jobs are enriched, and this may improve motivation
  • more ambitious individuals can exploit opportunities made available to them and more readily pursue advancement
  • cooperation between departments can be increased, and the disadvantages of work being demarcated by ‘silos’ can be reduced
  • the matrix approach may make employees more responsive to change and more willing to welcome change.


The disadvantages include the following:

  • the matrix structure sacrifices the notion that every employee should be responsible to one manager, and this can result in conflicting demands on the employee, in terms of what work should be done, how time should be apportioned and how work should be carried out
  • the different managers to whom the individual reports may have very different styles, which may create conflict, or even confusion as to the best or correct approach
  • the matrix structure creates additional time management pressures, which may have an effect on costs
  • if the matrix is not designed or implemented systematically, it can create organisational inefficiencies, such as slower decision taking.


Boundaryless organisations

Traditionally, organisations bring people together in one or more physical locations in order to process inputs and create outputs, all within a formally defined structure. Advances in information communications technology have resulted in new approaches that have redefined where, when and how people work. The most obvious evidence of this is the reduction in reliance on the 9.00am to 5.00pm working day, the emergence of flexible working arrangements and increases in work sharing and home working. Organisations have also adopted new ways of configuring relationships.

Virtual organisation
A virtual organisation is one which operates primarily through electronic communications, taking advantage of the efficiencies made possible by information technology. It removes many of the features of the working environment that were once taken for granted, such as bringing managers and staff together at a defined location. People work together remotely, with little or no dependence on physical premises. Instead, communications take place through media such as emails, e-conferencing, extranet and intranet. This virtual aspect of the operation sometimes extends to links with suppliers (upstream), and customers (downstream). By extending the virtual concept to customer relationships, the dependence on retail premises and customer-facing staff is eliminated. Amazon is often cited as the first major virtual business in this respect.

The virtual organisation model can be adopted wholly or in just certain parts of the business. For example, one major insurance company maintains a large head office which serves as a base for functional departments, but many of the staff working for certain departments work from home and rarely if ever need to visit the office.

Some service organisations can adopt the virtual approach in its entirety, with a token physical presence at a registered office to satisfy statutory registration requirements.

The advantages of virtual organisations are:

  • Costs can be greatly reduced, as there is less dependence on premises. This can result in significant reductions in overheads, such as electricity, water, mortgage or rent, and service staff.
  • The adoption of e-business solutions can create efficiencies, such as automated re-ordering and seamless transaction processing. In fact, while the virtual organisation is a relatively new business concept, many of the technologies deployed have been available for many years. For example, electronic data interchange (EDI) was first developed in the 1960s.
  • Jobs with the organisation may be more attractive, as the need for daily commuting is removed. This can be particularly appealing to those with family commitments at certain times of day, and those who would be deterred from working due to the cost of transport and car parking.
  • The virtual organisation has a modern image which may appeal to several stakeholder groups, including customers, suppliers and distributors. Increasingly, this approach to business aligns with the expectations of such groups.


The disadvantages of virtual organisations are:

  • There is heavy reliance on information technology, so if things go wrong this can have a catastrophic effect. Problems can arise from lack of connectivity, hardware and software failures, malware and security breaches.
  • Those who lack basic IT skills, or are unprepared to use information technology equipment, have no prospect of doing business with virtual organisations or working for them.
  • In some cultures, there remains a preference for the ‘personal touch’, so virtual organisations may find it difficult to achieve a foothold.
  • Some of those who work for virtual organisations feel isolated as direct human interaction on a face-to-face basis is minimal. Feeling personally connected to a work group can be motivational, and this effect is lost when members of teams do not meet on a regular basis.


Hollow organisation
A hollow organisation is one which relies heavily on outsourcing, enabling it to maintain low staffing levels while capitalising on the competences of partner organisations.

The most common application of this model is where an organisation identifies those competences that are core and must be retained. These are then kept in-house, while all non-core operations are contracted out.

The hollow organisation must forge strong strategic links with trusted partners. An example of this organisational form is Nike, a sports goods manufacturer, which sub-contracts production activities whilst maintaining total control over design and quality specifications.

Modular organisation
A modular organisation extends the hollow concept by breaking down production processes into modules. Production is outsourced, but each external organisation is responsible for only one element of the process. For example, in producing the Dreamliner aircraft, Boeing enters into contracts with many suppliers, each of which is responsible for one component or assembly. The outputs of these suppliers can then be integrated.

The modular organisation is a more efficient, contemporary version of the model previously used by many car manufacturers, who often owned the subsidiaries which produced components that make up the final product. The modular organisation removes the need for complex ownership structures through holding companies and subsidiaries, and also creates forced efficiencies, as those responsible for each module have to compete with organisations in the same marketplace for their services.


Shared services organisations

The shared services organisation is a medium through which defined services can be provided across the organisation by a dedicated unit. This differs from outsourcing, in that the shared services provider is actually a part of the organisation.

Shared services organisations reduce the level of duplication of tasks. For example, instead of each part of the organisation employing human resources or information technology specialists, these services can be provided centrally, through a single team. In this way, they can reduce costs significantly and also standardise the policies and processes across the business. Management and operational support can be delivered through facilities such as hotlines or helpdesks.

An example of a very effective use of the shared services concept is the provision of professional training courses and support across large consultancy firms operating on a regional or multinational basis.

While the use of shared services organisations is increasing, the model is not suitable for all. For example, if the business units are very diverse, a centralised model may not be appropriate. It has also been suggested that potential cost reductions should not be over-estimated, as many organisations will still rely on local provision to meet the idiosyncratic needs of each business function or locality.

Written by a member of the Paper F1/FAB examining team