Fundamental Forms of Organizational Structure

Simple Structure

What is a Simple Structure?

The simple structure is a form of organizational structure that starts out with an entrepreneur who founds the company to promote an idea as a product or service. The entrepreneur tends to involve in every detail of the organization, make all major decisions, and monitor all activities.

Simple structure does not rely on formal systems of division of labor. If the firm is a sole proprietorship, one person performs all the tasks the organization needs to accomplish. If the firm consists of more than one person, tasks tend to be distributed among them in an informal manner rather than each person developing a narrow area of specialization.

Thus, the staff, if any, servers as an extension of the entrepreneur’s supervisory authority. Typically, the entrepreneur actively works in the business on a daily basis.

Informal relationships, few rules, limited task specialization, and unsophisticated information systems characterize this structure. Frequent and informal communications between the entrepreneur and employees make coordinating the work to be completed relatively easy.

The simple structure is matched with focus strategies and business-level strategies

Firms implementing these strategies commonly compete by offering a single product line in a single geographic market. Local restaurants, repair businesses, and other specialized enterprises are examples of firms using a simple structure.

Characteristics of Firms Implementing Simple Structure

Strategy and growth: Strategic decision-making in this form tends to be highly centralized. The drive of the founders energizes the organization in its struggle for growth.

Planning and management: Planning is usually short-range or reactive. The typical managerial functions of planning, organizing, directing, staffing, and controlling are hardly performed at all.

Rules and regulations: There is little emphasis on hierarchy within a simple structure, thus organizations that use this type of structure tend to have very few rules and regulations.

Employees: This simple form of organization allows the founders to have direct control of the activities of every employee. The process of evaluating and rewarding employees’ performance also tends to be informal.

Advantages and Disadvantages of a Simple Structure

The informality of simple structures creates both advantages and disadvantages.

On the positive side, the flexibility offered by simple structures encourages employees’ creativity and individualism.

On the negative side, important tasks may be ignored if no one person is specifically assigned accountability for them. A lack of clear guidance from the top of the organization can create confusion for employees, undermine their motivation, and make them dissatisfied with their jobs.

Thus when relying on a simple structure, the owner of a firm must be sure to communicate often and openly with employees.

Yet, the greatest weakness of simple structure is its reliance on the entrepreneur to decide general strategies as well as detailed procedures. If the founder fails, so does the entire organization.

Evolution from Simple Structure to Functional Structure

As the small firm grows larger and becomes more complex, managerial and structural challenges emerge.

Additional growth and success may cause the firm to change its strategy. Even if the strategy remains the same, the firm’s larger size dictates the need for more sophisticated workflows and integrating mechanisms.

At this evolutionary point, firms tend to move from a simple structure to a functional organizational structure.

Functional Structure

What is a Functional Structure?

Within a functional structure, employees are divided into departments that each handle activities related to a functional area of the business. People are arranged on the basis of their common expertise and experience or because they use the same resources.

The most common areas are marketing, production, human resources, information technology, and customer service. Each of these areas would be headed up by a functional line manager who coordinates all activities related to her functional area.

As a small organization grows, the person in charge of it often finds that a simple structure is no longer adequate to meet the organization’s needs. Organizations become more complex as they grow, and this can require more formal division of labor and a strong emphasis on hierarchy and vertical links. Thus, these firms evolve from using a simple structure to relying on a functional structure.

The functional structure consists of a chief executive officer and a limited corporate staff, with functional line managers in dominant organizational areas. In adopting a functional structure, a company increases its level of horizontal differentiation to handle more complex tasks. The structure enables it to keep control of its activities as it grows.

The transition to functional structure requires a substantial change in the style of the founders. They must learn to delegate to teams who have functional specializations, otherwise having additional staff members would not yield any benefits to the organization.

In this form, the corporate strategy favors protectionism through the dominance of the industry, often through vertical and horizontal growth.

By concentrating on one industry while it remains attractive, an organization can be very successful. Once the company diversifies into other products in different industries, the advantages of a functional structure will break down. People managing diversified product lines need more decision-making freedom than top management is willing to delegate to them.

The functional structure supports implementing business-level strategies and some corporate-level strategies with low levels of diversification.

However, when changing from a simple to a functional structure, firms want to avoid introducing value-destroying bureaucratic procedures since such procedures typically have the potential to damage individuals’ efforts to innovate as a means of supporting strategy implementation activities.

Advantages of a Functional Structure

Advantage 1: Specialization of Labor

Each person can learn a great deal about his or her particular function. By being placed in a department that consists entirely of marketing professionals, an individual has a great opportunity to become an expert in marketing. Thus a functional structure tends to create highly skilled specialists.

This structure allows for functional specialization, thereby facilitating an active sharing of knowledge within each functional area. Knowledge sharing facilitates career paths as well as the professional development of functional specialists.

If people who perform similar tasks are grouped together, they can also learn from one another and become better, and thus be more specialized and productive, at what they do.

Advantage 2: Facilitation of Teamwork

All people in a particular department can share the same background training, they tend to get along with one another. Thus, conflicts within departments are relatively rare comparing to a structure without functions.

They can monitor each other to make sure that all are performing their tasks effectively and not shirking their responsibilities. As a result, the work process becomes more efficient, reducing manufacturing costs and increasing operational flexibility.

Advantage 3: Control of Organizational Activities

Functional structure gives managers greater control of organizational activities. Many difficulties arise when the number of levels in the hierarchy increases. If people are grouped into different functions, however, each with their own managers, then several different hierarchies are created, and the company can avoid becoming too tall.

Managing the business now becomes much easier when different groups specialize in different organizational tasks and are managed separately.

Disadvantages of a Functional Structure

Disadvantage 1: Communications Problems

As separate functional hierarchies evolve, functions grow more remote from one another. As a result, it becomes increasingly difficult to communicate across functions and coordinate their activities.

For this reason, the CEO must verify that the decisions and actions of individual business functions promote the entire firm rather than a single function.

This communication problem arises because, with greater differentiation, the various functions develop different orientations toward the problems and issues facing the organization.

Different functions may have different time or goal orientations. These factors may cause each function to develop a different view of the strategic issues facing the company. The research and development department may strive to overdesign products and components to achieve technical elegance, while manufacturing may argue for low-frills products that can be mass-produced more easily.

Disadvantage 2: Measurement Problems

As the number of its products grows, a company may find it difficult to measure the contribution of one or a few products to its overall profitability.

Consequently, the company may turn out some unprofitable products without realizing it and so make poor resource allocation decisions. This means that the company’s measurement systems are not complex enough to serve its needs.

Disadvantage 3: Location Problems

If a company makes and sells in many different regions, then the centralized system of control provided by the functional structure no longer suits it because managers in the various regions must have the flexibility to respond to the needs of their customers.

Thus, the functional structure is not complex enough to handle regional diversity.

Disadvantage 4: Strategic Problems

Sometimes the combined effect of all these factors is that long-term strategic considerations are frequently ignored because management is preoccupied with solving other problems. As a result, a strategic change can be very slow, a company may lose direction and fail to take advantage of new opportunities while costs escalate.

Evolution from Functional Structure to Divisional Structure

With continuing growth and success, firms often consider greater levels of diversification.

Successfully using a diversification strategy requires analyzing substantially greater amounts of data and information when the firm offers the same products in different markets (market or geographic diversification) or offers different products in several markets (product diversification).

Trying to manage high levels of diversification through functional structures creates serious coordination and control problems, a fact that commonly leads to the form of the divisional structure.

Resources

Even More Reading

Related Concepts

References

Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic Management: Concepts: Competitiveness and Globalization (12th ed.). Cengage Learning.
Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.

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