2.

2 Organizational structure (HL)

IB Business Management
By the end of this topic, you should be able to:
• Contrast formal organization and informal organization.
• Define the terms organizational structure and organizational chart.
• Define the terminology in relation to different types of
organizational structures.
• Draw and describe different types of organizational charts.
• Outline the project-based organization and the Shamrock
organization.
• Explain the appropriateness of different organizational structures
given a change in external factors.

2.2 Organizational structure (HL)

‘There are two types of business…
the quick and the dead.’
Unknown
• Refers to the official structure that exists in an organization.
• Established group of norms, structures, and procedures to order
an organization.
• The authority, responsibility, and accountancy of individuals are
clearly defined.
• There is a system of coordination and formal channels of
communication are used.
• Usually written with a clear language that leaves the least margin
for interpretation.
• It is stable.
• Objectives are specific and well-defined.
• Main objectives are productivity, expansion, and profitability.

Formal organization
• Refers to the unofficial network of personal and social
relations that exist within an organization.
• Group of interactions among relatives, friends and companions
within an organization. These interactions are present during
work, meetings, trips, lunch time, etc.
• Exists in every organization and it is not stable.
• Does not officially exist as it does not have its own rules and
regulations.
• Escapes from the limits of the formal organization such as work
schedules, physical area, etc.
• Individuals get a certain social position or status based on their
role in each group.

Informal organization
• Communication is informal – it is done through rumours and
non-official channels.
• The main objectives are friendship, security, common
interest, individual and group satisfaction, etc.
• Members get social and personal benefits such as the
development of friend circles, communities, groups, etc.

Informal organization
• Define the term organizational structure.
• Formal system that orders and directs the different elements of
an organization in order to achieve its aims. These elements
include rules, procedures, roles, functions, and responsibilities.
• Define the term organizational chart.
• Graphical representation of an organizational structure. It shows
the levels of hierarchy within an organization as well as the lines
of authority, control, accountability, and communication.

Knowledge check
• Define the term delegation.
• Decision of a superior to pass down the responsibility of a
function or task. The superior remains accountable for the
outcome of that decision.
• Define the term bureaucracy.
• Managing system that has rules and procedures to make
decisions.
• Organizations are usually bureaucratic.
• A highly bureaucratic organization or an organization with “red
tape” is an organization with many rules and procedures that
makes the decision-making process complex.

Knowledge check
• Distinguish between a line manager and a staff manager.
• A line manager is an individual with the authority to make
decisions and who bears responsibility for the outcomes of those
decisions. A staff manager is an individual with the authority to
communicate the decisions made by a line manager without the
responsibility for those decisions.
• Distinguish between centralization and decentralization.
• Centralization is the concentration of the decision-making in a
single authority, usually the senior management. Decentralization
is when the decision-making is distributed among the different
levels of an organization. Senior management maintains the core
decisions.

Knowledge check
• Define the term de-layering and state the main purposes of its
application.
• Removal of levels of hierarchy from the structure of an
organization.
• The main purposes are: to reorganize the organizational
structure, to downsize the organization, to reduce bureaucracy, to
reduce costs, to improve communication, to improve efficiency.
• State one possible disadvantage of de-layering.
• It can lead to problems associated with wide spans of control.

Knowledge check
• State the different types of organizational structures.
• By hierarchy
• By function
• By product
• By region
• Matrix

Knowledge check
• Outline the main features of a matrix structure.
• It combines two different types of organizational structures,
generally by product and by function.
• Each product has a team of employees.
• The product manager gets input (and often approval) from the
functional managers.
• The employees have multiple superiors as they report to both the
product manager and a functional manager.

Knowledge check
By hierarchy
By function
By product
By region
Matrix
Draw an organizational chart to represent the following
business.
• The business has four levels of hierarchy. The managing
director has a span of control of four. Each of the four
functional directors controls a supervisory team and has a
span of control of two functional supervisors. Functional
supervisors are responsible for each function and have a span
of control of five members in their staff.

Workpoint
 Managing
Director

Functional Functional Functional Functional

Director Director Director Director

Functional Functional Functional Functional Functional Functional Functional Functional

Supervisor Supervisor Supervisor Supervisor Supervisor Supervisor Supervisor Supervisor

5 Staff 5 Staff 5 Staff 5 Staff 5 Staff 5 Staff 5 Staff 5 Staff

Comment on the structure of the business.

• It is a flat or horizontal organizational structure as it only has four
levels of hierarchy and a short chain of command. It is structured by
function as there are four clear functional areas. Each functional
area has a director who reports directly to the managing director.
Span of control ranges between two (each functional director) and
five (each functional supervisor).
• Describe the following organizational structures:
• Project-based organization
• Shamrock organization

Knowledge check
‘The most appropriate structure for a
business will be that which best helps it
to achieve its objectives.’
Dearden and Foster (1994)
• State the factors that influence the decision about the
structure of an organization.
• Type of organization
• Business objectives
• Potential growth
• Nature of the market
• External factors

Knowledge check
IB learner profile - Thinkers
Apply the Shamrock organization to your school. Identify:
• The functions that must be considered as core.
• The functions that could be contracted out.
• The functions that are peripheral.
Justify your answers.

Workpoint
• Lominé, L., Muchena, M., and Pierce, R. (2014). Business
Management. Oxford, United Kingdom: Oxford University Press
• Clark, P. and Golden, P. (2009). Business and management Course
Companion. Oxford, United Kingdom: Oxford University Press
• Gutteridge, L. (2009). Business and Management for the IB
Diploma. Oxford, United Kingdom: Oxford University Press
• Thompson, R. and Machin, D. (2003). AS Business Studies. London,
United Kingdom: Harper Collins Publishers

Sources