THE CONCEPT OF BUSINESS ORGANISATION

This document deals with various aspects of the internal structure of a business and also its external relations with, amongst others, its suppliers and markets. With the aid perhaps of organization charts, the structure of a typical business and of groups within a business needs to be appreciated. This should then lead on to a rather greater depth of knowledge of the functions of different departments within the business organization. A businesss relations with its consumers are important in the modern business environment. Not only must businesses market and sell their goods; these days they need to take account of consumer power, exercised partly through the legal system, but also through the agency of organizations such as pressure groups. The relevance to you is how (see Topic 3) businesses respond to external influences. 1. BUSINESS FUNCTIONS: FINANCE, MARKETING, PRODUCTION, DISTRIBUTION, PURCHASING, RESEARCH & DEVELOPMENT As a business grows in size, its activities need to be grouped in departments in order to establish and maintain systems of control, simplify the task of management and to allow the organization to benefit from specialization. Business departments are usually classified according to the major functional areas of management such as finance, marketing and the others listed above, together with other business functions such as personnel. A functional department such as finance is one which serves an organization-wide requirement or function and which has authority and responsibility for that function as it affects the whole organization and other functional departments within the organization. The financing function concerns the raising of finance for business operations and activities and the making of decisions on how the money raised should be spent. (The related accounting function involves the collection, recording, presentation and analysis of financial information and data). The marketing function centers on identifying and responding to the needs of the customers on whom the business is ultimately reliant for profits and survival. The marketing function should not be equated simply with selling, encompassing as it does market and product research and design, which themselves closely link with other business functions such as production and research and development. Whereas the marketing function can ultimately determine what the business makes, the production function determines how it is made. In a service industry firm such as an airline, this function often goes under the name of operations function. Taken together, production and operations management (POM) deals with all matters relating to techniques of production, scheduling, stock control and quality control. In a small business, the purchasing, distribution and research and development functions may not be separated from production. But in larger businesses they will normally be organized as separate departments or business functions. The purchasing function deals with the buying or acquisition of non-human resources or inputs such as items of plant or machinery and raw materials. The distribution function relates in a rather similar way to the movement or transportation to customers of the finished goods or outputs which the business is selling. The research and development (R&D function deals with the development of completely new goods or new models of existing goods, to be produced, marketed and sold in future years, either as replacements for existing product lines or as extensions or diversifications to the businesss current product range. The personnel function deals with the businesss acquisition of labour or human resources, covering recruitment, dismissals and redundancies, employment contracts and workers welfare. 2. ORGANISATION STRUCTURES; GROUP STRUCTURES Organisation structures can be formal or informal. Virtually all business organizations, other than the most simple such as sole traders and informal partnerships, have an official formal organization structure, commonly set out in an organization chart which is like a family tree of the organisation. The organisation chart sets out the principal features of the formal organization, namely: the way in which the organization is grouped; the roles and status of individual posts; and the delegation of authority within the organisation. The organisation chart can also aid identification of responsibilities, accountability, spans of control and lines of communication with the organisation. Authority refers to the legitimate exercise of power within the organisation structure. In large business organisations there are usually three distinct

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forms of authority; (i) line authority in which superiors (such as senior managers) have the right to give orders to subordinates (such as junior managers and production line workers) and to have the orders implemented; (ii) staff authority, which is the authority to advise or support, for example in a consultancy role, rather than to command, and (iii) functional authority whereby managers or executives carrying out a particular function such as product design are authorized to give orders to another business department or function within the organisation such as production. Most businesses have a pyramid-shaped formal organisation structure in which authority and responsibility extend downwards in a hierarchical pattern. However, developments in the fields of IT and communications are leading to the development of flatter and more flexible organisation structures, more in line with the informal organisation structures that often exist within a business. A formal organisation structure reflects the intentions of the ultimate controllers of a business in terms of the chain of command within the organisation and who reports to whom. However, formal organisation structures do not set out the way in which informal contacts within the organisation affect the way the business functions. These informal structures give rise to group structures within the formal organisation, arising out of the network of personal and social relationships between individuals employed in the organisation. An informal group is one which develops naturally and spontaneously in a work situation because members of the group have common interests, even though they may be at different positions in the formal hierarchy of the organisation.

3.

THE MARKETING CONCEPT AND MARKETING FUNCTIONS (links to Topic 6) Marketing is one of the most important business functions of any commercially orientated organisation concerned with producing and supplying goods or services to clients and customers. Typically a marketing department is responsible for:

(i) identifying market opportunities; (ii) undertaking market research; and (iii) designing and implementing marketing strategies and programmes.

The marketing mix. This refers to the mix or combination of factors in a businesss overall or wider marketing strategy that can be varied in order to increase customer appeal and sales. These are commonly known as the Four Ps: product; price; place; and promotion. A change in the price of a product usually a reduction is perhaps the most obvious way of increasing demand for and sales of a good or service. But the other ways are to change the nature of the product itself, the way it is promoted and the place where it is sold or from which it can be obtained. Price covers the basic price at which a good or service is sold, together with other pricing factors such as the offer of discounts and credit facilities. The marketing variables which can be adjusted under the heading of product include the name of the product; its quality; features and facilities; and factors such as size, colour; packaging and the inclusion of after sales service facilities. Place includes the distribution structure and outlets, and factors which affect the availability of the good or service. Finally, the promotion heading covers such marketing variables as the role of advertising, publicity, and methods of accessing potential customers such as personal selling and direct mailing. Marketing segmentation. Different customers have different needs, wants, likes and dislikes. A business cannot usually provide a different or customized product for each of its clients, but it is possible to group customers with similar characteristics into market segments. Market segmentation involves identifying different groups of customers and then dividing and separating the overall market into different parts so that different marketing strategies can be aimed at each group. A number of ways of segmenting the market are possible. Geographic segmentation

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groups customers according to where they live; demographic segmentation is based on age groups, for example separating the important youth market from adult and senior citizen age. A reasonable level of precaution would be for current backups to be kept in secure, fire-proof cupboards or rooms and for there to be provision for storage of other material off-site. The precise decisions as to what level of back up should be kept and how much data needs to be stored off-site will be a matter for commercial judgement taking into account the costs of the precautions and the effects on the organisations should a disaster occur. There will be many considerations such as the ease with which the data can be rebuilt, the effect on the conduct of business of not having records available and the legal requirement for some records (e.g. tax records) to be maintained. 4. BUSINESS ORGANISATION AND MARKETING 4.1 THE CHANGING NATURE OF ORGANISATION STRUCTURES In section 1. of this text, we mentioned that most businesses except the very small have hierarchical pyramid-shaped organisation structures and that these structures are tending to become flatter. This theme has been further developed in section 2 of this chapter, as the key topic; information, technology and organisation structure and to discuss why and how change can take place in the structure of a business organisation. The prime objective of any business, for example the maximization of market share or shareholders profits, is established by those with the highest level of authority in the organisation. Thus in a public company, the shareholders choose a board of directors who then appoint a chief executive or managing director. In theory at least, the shareholders will support the board and the team of top executives they employ, providing that through their management decisions, the team deliver a satisfactory performance in terms of the required business objectives laid down by the shareholders. In order to attain these objectives, the top executives and decision-makers must establish a pattern of responsibility within the organisation. For the business to be successful over an extended period, the organisation structure needs to combine and display a number of ingredients. These include: unity of purpose; effective leadership; flexibility; operation efficiency; and clearly defined lines of authority and communication so that each individual in the organisation understands his (or her) responsibilities and duties with regard to other members of the organisation. Within the organisation, individuals will be given varying levels of authority and responsibility, and they are then accountable to the person or persons who have given them responsibility. Each member of the organisation from the chief executive down to the humblest maintenance worker or cleaner has a job to do and must be given sufficient authority to carry out that job. The organisation structure must ensure that each employee is accountable for his (or her) success or failure. But accountability is a twoway process requiring two people: the person undertaking the business task and the person who checks whether the job has been done. In any business organisation other than the very small, it is impossible for the chief executive to check on all the other employees; hence the need for a pyramidal organisation structure. Most organisations have a pyramid structure in which authority and responsibility extend downwards in a hierarchical pattern. Senior managers make the overall strategic policy and executive decisions, and have authority vested in them to carry out these decisions. They accept overall responsibility for the success or failure of the business to achieve its objectives. Moving down the pyramid, status, responsibility and authority decrease. We shall now look at a number of problems with a pyramid-shaped organisation structure, which in recent years have caused some of the more flexible businesses to

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change their organisation structures. On the whole this has meant retaining but adapting the pyramid structure, rather than abandoning the structure altogether. In many businesses, particularly those which are fairly rigidly bureaucratic organisations, status and the pay structures of executives tend to be tied to the level of the manager in the organisational hierarchy. Managers may have a vested interest in creating additional management levels in the vertical hierarchy so as to maximize promotion prospects and other features of their managerial career structure. However, these extra management levels are unlikely to have a rationale in terms of efficiency and genuinely increased areas of responsibility. The result is unnecessarily tall organisation structures. (The height of a pyramid-shaped organisation structure depends partly on the size of the organisation and the number of its employees, and partly on the span of control allotted to managers. The span of control refers to the number of people directly responsible and reporting to a manager. A span of control of 4 to 8 more junior managers is often regarded as optimal at higher management levels, extending to 8 to 15 at the lower levels within the management pyramid). We saw earlier in this text how the application of information technology is leading to flatter organisation structures. Supporters of flatter structures argue that the shedding of management layers makes businesses leaner and fitter, more flexible and better able to cope with a rapidly changing business environment. The emergence of flatter business organisations can also be related to the advantages of organic organisation structures over more traditional mechanistic and bureaucratic structures. Organic structures are more open to the influence of informal relationships established by workers and managers at different levels in the pyramid. They are less rule-bound and hierarchical, and have a less rigid division of labour. There is more emphasis on teamwork and communication that can be done laterally across the organisation, with team members sharing responsibility and power, or empowerment. In the more mechanistic organisation pyramids, it is generally much easier for information to pass vertically upwards and downwards between manages and employees who are directly responsible for, and accountable to, each other, than it is for effective horizontal and diagonal communication to take place. Horizontal communication involves staff who are within different departments but at the same level within the organisation exchanging information. For a business department to function effectively, staff in that department must know what other departments within the organisation are doing. Without effective horizontal communication, serious damage may be caused to the entire organisation. By contrast, diagonal communication occurs when managers and staff at different levels and in different departments in the organisation exchange information and ideas. One way of encouraging a greater degree of horizontal communication between the departments of a business is to organize the business on a matrix basis. Usually businesses are divided up into departments in a simple way, for example by function or by product type. In the former case, the organisation is divided up into major functional areas of management such as production, personnel and marketing, each of which is treated as a cost centre. Product departmentalization groups together people responsible for the same product or range of products. A matrix organisation structure seeks to bring together functional and product departmentalization. In the matrix, there are two chains of command rather than just one: a vertical chain of command based on specialist function and a horizontal chain linking people working in a project team.

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