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Organizational Types and Relative Advantages

As a byproduct of the present situation, mergers and acquisitions are on the rise. This is not an article about how to acquire companies, but focuses on how businesses are governed and controlled. Governance is defined as how businesses are structured to optimize information flow, coordinate works, facilitate decision-making, and enhance unique value-add. Corporations have many functional and structural organization options.

Structural options typically revolve around two main poles: centralized and diverse. The differences relate to span of control. Hierarchical organizations tend to be more militaristic, or command and control. Networked organizations are run more by consensus, with employees being far more empowered. For simplicity's sake, we'll limit the structures to Pure Hierarchy, Hybrid Hierarchy, Matrix, and Networked.

People in the structure can be grouped in any number of ways, but the most traditional groupings are around the following:

  • Function
  • Product
  • Geography
  • Customer
  • Project

The best grouping and structure for your company depends on many things, including the following:

  • External Interaction. How will the company interact with third parties and customers? How will office supplies be purchased? Customers serviced? And so on.

  • Type of Business. A service business will probably be organized differently from a manufacturing company. It also depends on whether the company does business in one country or several countries.

  • Vertical Interaction. This addresses how employees interact within the chain of command. Do you need many layers of management, as in a global manufacturing enterprise; or is the hierarchy flat, like a start-up services company? How empowered are employees down the chain of command?

  • Horizontal Interaction. This address how employees interact between groups. Will the company cover several geographies, or only a small home market? How will disparate teams interact to launch a product in a third country? How will internal and external auditors interact with personnel?

To understand which organization might be best for your company, let's look at the relative merits of each.

Hierarchical Organizations

Hierarchical structures are run very much from the top down, without much employee empowerment and often most functions are centralized. This sort of organization will allow economies of scale within functional departments, execution of functional goals, centralized decision-making, coordination within departments, well-defined functional career advancement, and in-depth skill development. It seems to work best for small- to medium-sized businesses with one or a few related products.

It is not the best choice for large businesses or those in fast-moving environments. This type of organization will usually be slow to react to environmental changes, have poor cross-functional/horizontal coordination; poor cross-training options/career development options result in less innovation, and will create difficulties when it comes to assigning responsibility.

Hybrid Organizations

Hybrid hierarchical structures are normally based on strategic business units (SBUs) with reporting split between the SBU and headquarters. This might be seen more in larger companies with more products, and results are measured more by profit centers. This structure allows organizations to achieve adaptability and coordination product divisions while maintaining efficiencies in centralized functional departments. It results in better alignment between corporate-level and divisional-level goals than does a pure hierarchy; and it coordinates, both within and between product lines.

For companies with creeping sales, general, and administrative costs (sales, general, and administrative), it might not be an ideal structure because it has the potential for excessive administrative overhead. It can also lead to conflict between divisional and corporate staffs, with separation of strategy and execution. This may all lead to undermining corporate goals.

Matrix Organizations

The structures get more disbursed as we move down this list. Matrix structures are identified by their dual reporting with high evidence of shared authority. The individual is more empowered, and with that comes a trust that each individual shares the ideals and goals of both the team and the company. These structures enable relatively quick response times to multiple exogenous demands. They are suited to complex decisions and frequent changes from unstable environments. They also provide opportunities for functional and product skill development, offering flexible shared resources across products. These structures seem to work best in medium-size organizations with multiple products.

Dual-reporting authority is always confusing and forces conflict, causing high frustration and confusion. Employees need good interpersonal skills and extensive training to be successful. Normally, this means frequent meetings and conflict-resolution sessions, and won't work unless participants actively support the structure and are clear about their responsibilities and accountabilities.

Networked Organizations

Networked structures are even more decentralized, with a very light headquarter component. ABB is a good example of this sort of environment that is run in a successful way. Networked structures often develop centers of excellence throughout the world, and subsidiary managers can initiate a strategy for the corporation as a whole. Coordination and integration are achieved through information, shared values, and managed relationships instead of any sort of vertical hierarchy. Alliances are established throughout and with other companies. Strategy often grows from the ground up, as well as the top down.

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