Types of Business Organization
There are millions of successful businesses around the world. They range from local fruit stands to huge multi-national businesses worth billions of dollars. One common trait all these businesses share is that they have some sort of organization. Without organization a business is doomed to fail because it will be inefficient and that inefficiency will eventually cause its downfall. Most entities use one of four basic organizational designs to try to ensure smooth sailing. These four basic designs are Functional, Divisional, Conglomerate, and Matrix. Also, some companies use some type of mix of these four; they are said to use Hybrid Design. Anyone of these organizational choices cannot be said to be superior to another because companies are successful using each. Each of these designs of corporate organization has their strengths and their weaknesses when compared to the others, and in the coming pages, I plan to explore both the set up of each of designs as well as their strengths and weaknesses.
The functional design is based on the concept of functional departmentalization. This means that the entity is broken down into parts by the different functions these parts would perform. This design is also known as the U-form, or unitary form, because the company is broken down into its separate units. These companies tend to be rather tall in organizations with many levels of authority. An example of this is a brick manufacturing plant having departments such as manufacturing, shipping, marketing, human resources, and finance. All of these departments would have their own Vice President who is in charge of everything that goes on in his or her department. They also would each have their own supervisors as well as their own workforce. This design of corporate organization is said to have reciprocal interdependence which means the department depends greatly on the other departments and cannot survive without the others (Griffin 367). For example, the shipping department could not do its job if the manufacturing department did not supply them with the product.
This makes the job of the CEO or president of the entity very important because he or she is responsible for overseeing all of the departments and making sure they are functioning smoothly. The functional style of organization leads to a very centralized authority. A benefit of this design is that it allows experts in their field to be assigned to department which allows greater efficiency and progress in each of the departments. This design of organization is very well suited for a company that makes a single product (http://www.family-business-experts.com/organization-structures.html). Some of the disadvantages of this design are that it can often cause inter-company feuds between departments and also it causes managers to tend to be less diversified after reaching upper management because they climbed the ranks all in one department. Also, decisions involving multiple departments can be arduous and time consuming because of the multiple layers of management that have to be gone through.
Another problem that is often faced by this design is that the CEO is sometimes tied up with operational decisions and cannot make strategic or competitive decisions (http://www.family-business-experts.com/organization-structures.html). Most experts agree that the functional design of organization is best used by smaller companies that tend to specialize in one product because after a certain point it becomes increasingly difficult for the CEO of the entity to coordinate and oversee the entire operation. Some well known companies that use this method of organization include the WD- 40 Company and the McIllenny Company, which makes Tabasco hot sauce (Griffin 367). The divisional design of organization is in use when an entity has divisions of the same or related products that are largely ran by managers in each department and overseen by the upper management.
This form of organization is also known as the M-form, or multidivisional form. In an entity with a divisional design some activities are centralized at the corporate level while others are left up to the individual division. This kind of organization can be said to have pooled interdependence which means that the divisions basically act independently and the results are pooled at the entity headquarters. General Motors is a very good example of a divisional organization. At one time they had six divisions all making automobiles. These divisions were Cadillac, Oldsmobile, Pontiac, Buick, Chevy, and GMC, or General Motors Coach. Each of these divisions had within it multiple departments including production, research and development, and marketing. Each division had control over its product unless General Motors as a whole was against it. For example, if the marketing people in the Pontiac division wanted to market the Pontiac towards upper class Americans the marketing department of General Motors would likely tell them no because the Cadillac was already marketed towards the wealthy. Another example of an entity that uses divisional organization is the Limited clothing company.
The Limited Incorporated’s divisions include Structure, Bath and Body Works, The Limited, Express, Lerner New York, Victoria’s Secret and a few other chains (Griffin 370). Each of the divisions is basically in the same field and has a separate general manager, but they manage to avoid stepping on each other’s toes by keeping open lines of communication between divisions. Divisional entities are often rigid and inflexible due to their highly structured means of organization. The ability to share resources is one of the biggest advantages of this type of entity. They entity can purchase resources in bulk for much cheaper than one division would be forced to pay. Yet another advantage is the ability to coordinate efforts to try to capture a larger piece of the market. This can be seen in the Step Ladder approach to automobile ownership that General Motors pushes. Also divisional organization allows for upper management to watch each division and make sure they are reaching set goals. This type of organization also frees the CEO to do more long term strategizing and planning for the entity rather than overseeing day to day operations (http://www.family-business-experts.com/organization-structures.html).
If healthy competition is maintained between divisions this could cause a rise in production, but often times what starts as healthy competition can lead to internal conflicts. Some disadvantages of the divisional design of organization include that it often times causes duplicate positions that make for a higher cost of everyday business and also that it often leads to a not my job Research has determined that if a divisional entity is efficiently running that it will outperform both a Functional and Conglomerate entity. A couple other successful divisionally organizes entities include PepsiCo and the Woolworth corporation (Griffin 370). The conglomerate design is put into use when an entity has holdings in many unrelated businesses. This form is also known has the H-form because it is basically a holding company that comes about from unrelated diversification.
This holding company form of organization is similar to product departmentalization but requires less cross entity interaction. Since the branches of the entity are non-related each is completely responsible for its own profits and losses and almost never has to answer the other businesses in the entity. Each individual business is usually run by a general manager who oversees all of the actions in his department (Griffin 368). As is always case, the manager must answer to the upper management of the entity. At the corporate level the entity usually has people who evaluate each business, help determine allocation of resources, and help shape opinions on the buying or selling of businesses (Griffin 369). Despite this, conglomerate organizations are said to be relatively decentralized with each of its businesses making most of their own decisions. Below the general manager the organization of each department could look like the M-form or U- form that we have seen above, but because of the organization at the top of the entity it is said to have a conglomerate design of the organization.
The best American example of a conglomerate design of organization is General Electric. General Electric has holdings in aircraft engines, electrical appliances, broadcasting, financial services, lighting products, plastics, health care, and many other unrelated businesses. It is in charge of everything from NBC and all of its related television networks to building the engines for Lockheed helicopters (Griffin 368). Spreading resources into this many unrelated businesses gives great stability even in the event of a complete collapse of one of the market, but it also makes many of the decisions the upper management must make incredibly complex. Robert Larsen, the CEO of Johnson and Johnson another American conglomerate has been quoted as saying, Twenty years form now you can tell me if I am right or wrong. But I am convinced that the future belongs to companies that are broadly based.(Griffin 369) Costs of an H-form entity are also raised by the extra level of management need to supervise all of the different divisions.
Also special care must be taken to make sure that all of the businesses are pulling their weight. Because of this and many other reasons, research has shown that conglomerate entities often only make average financial gains when compared to entities using other organizational designs. The recent trend tends to be away from these huge conglomerate designs of corporate organization, not only because of lack of profitability but also because in today’s ever changing economic environment the entities of this kind just do not have enough flexibility to survive. Other than General Electric and Johnson and Johnson some other conglomerates include Pearson PLC and Tenneco (Griffin 368). The fourth corporate organizational strategy is matrix design. The matrix design is based on two overlapping areas of departmentalization. The matrix concept starts out as a normal functionally designed entity with separate departments for separate tasks. The matrix design of organization then adds in special project groups that cross department boundaries.
Members of a matrix organization are simultaneously apart of their department and their project group (Griffin 368). For example a project group that is working on employee efficiency may be composed of two members from marketing , two members from production, two members from finance, and two members from engineering. These members would have a responsibility to both their department and their project group and also answer to both their department supervisors as well as their project leader. Reporting to both the department supervisor and project head shows the multiple-command structure of the matrix design of organization. One example of the matrix design took place when the automobile maker Ford used specialists from marketing, engineering, design, production, and other areas to make up Team Focus. This team not only developed a very successful product they also succeeded in getting it on the market a full year before it would have been available using another type of organization (Griffin 372).
The matrix design also allows for quick and radical change by just changing the project groups this is a great benefit in today’s fast paced business world. It cuts overhead because new departments do not need to be made and staffed to fulfill certain needs of the entity. There are three main scenarios when the matrix design of an organization becomes most useful. The first scenario is when the there is a strong pressure from the environment. An example of this if there is a high amount of competition the marketing department may need to push a campaign, but they also may need to inform the production department to change the product slightly. In this case a joint project maybe best. The second would be an instance when a large amount of information would need to be processed. Lateral relationships would allow a greater amount of information to be processed. The third case is when resources must be shared (Griffin 372). An example of this is if a company has 6 product divisions and only 3 engineering experts.
The matrix form would allow these workers to do more. Some of the advantages of a matrix design organization are that it allows for specific goals of the entity to be focused on at minimal cost and also allows for a system of checks and balances because of the multiple supervisors, each who have different viewpoints, working on one problem. Another benefit of this system is that it pushes a what is best for the entity as a whole outlook because of the decisions that are made with input from all departments (http://www.family-business-experts.com/organization-structures.html).
The matrix design also allows for great amount cooperation and coordination of related activities. It also lends to employees learning more than one skill because of the cooperation amongst departments (Griffin 372). Some of the disadvantages of matrix organization include that it becomes a very complex system to manage, and also it causes problems in balancing two authorities.
Another disadvantage of this system is that with multiple supervisors employees may feel the need to get the clearance of all before making decisions; this can cause a costly waste of time. This system also tends to be rather bureaucratic with decisions taking a rather long time to come down from upper management (http://www.family-business-experts.com/organization-structures.html). Some well known companies that use this form of organization include The Chase Manhattan Bank, Compaq Computers, and Prudential (Griffin 372). Many companies also mix and match parts of each of the designs mentioned above. These companies are said to use a hybrid design of organization. For example an entity may have 3 related divisions and 1 unrelated making it a cross between the M-form and H-form. Many times companies will be hybrids because they started as one organizational form and had to adapt to survive (Griffin 373).
Such is the case with Ford which started as a functional design and appears to slowly making the transition to a divisional design and also has some matrix like elements. As you have read there is no perfect organizational design. Each of the above have their own unique benefits and drawbacks. Making the decision of what design to follow must be done on a case to case basis. Just like no two human beings are exactly the same there are no two businesses that are exactly the same, and just because one company flourished while using a certain design does not mean that that design will always work. A successful entity pays more attention to the changes in the environment than its does to what organization category it falls into. At the end of the day all that matters is the almighty dollar. A profitable company is a successful company, but usually a successful company is an organized company.
- Chapter 13 study guide. Matraves, Kate Ph.D. 2003. Albion College. [02 December 2003] http://courses.albion.edu/em389Matraves/ch13orgdesign.htm
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- Beckham, John. 1999. SUNY Institute of Technology. [02 December 2003] http://policycenter.sunyit.edu/organization/mform.htm Organizational Structures. 2003.
- Family Business Experts. [02 Dec. 2003] http://www.family-business-experts.com/organization-structures.html