Examining Corporate Organizational Structure: Types, Examples, and Benefits
The corporate organizational structure of a company significantly influences its communication, decision-making processes, and overall functionality. In this essay, we will explore various types of corporate organizational structures, providing contemporary examples and highlighting their respective benefits.
The functional organizational structure divides a company into departments based on function. Common departments include marketing, finance, human resources, and production.
Example 1: Apple Inc.
Apple employs a functional structure, enabling it to focus intensely on innovation and quality in product development.
Example 2: Google (Alphabet Inc.)
Google adopts a functional structure for its core business, where functions like engineering, product management, and marketing are distinctly separated.
Specialization and Expertise: Employees develop expertise within their function.
Efficiency: A clear hierarchy and distinct responsibilities promote operational efficiency.
In the divisional structure, companies are split into divisions that operate somewhat autonomously. Each division often represents a particular product line or geographical market.
Example 1: General Electric (GE).
GE is known for having a divisional structure, with different business units focusing on various sectors like healthcare, aviation, and power.
Example 2: PepsiCo.
PepsiCo operates with a divisional structure, having separate divisions for beverages, snacks, and nutrition products.
Focus: Each division concentrates on its specific market or product.
Flexibility: Divisions can respond quickly to market changes.
The matrix structure combines aspects of both functional and divisional structures. Employees have dual reporting relationships – they report both to the functional manager and the product manager.
Example 1: Philips.
Philips employs a matrix structure to balance the needs of its global organization with the need for product specialization.
Example 2: Nestle.
Nestle uses a matrix structure to manage its global operations effectively and efficiently, providing a regional and product-based perspective.
Responds effectively to dynamic market conditions.
Balanced Decision Making:
It provides a more comprehensive view of the company’s performance and challenges.
Flatarchy structure is a more modern, flat organizational structure that promotes open communication and decentralization.
Example 1: Valve Corporation.
Valve is known for its flat organizational structure, which eliminates traditional management roles.
Example 2: Gore-Tex (W. L. Gore & Associates).
Gore-Tex uses a flatarchy structure to encourage innovation and employee engagement.
Employees have more responsibility and decision-making power.
With fewer hierarchical levels, communication is faster and more effective.
Network structure operates more openly, with companies outsourcing many of their functions to external firms while retaining core responsibilities.
Example 1: Uber Technologies Inc.
Uber heavily relies on a network structure by outsourcing its driver positions.
Example 2: Alibaba Group.
Alibaba employs a network structure to connect buyers and sellers without managing inventories.
Cost Efficiency: Companies can significantly reduce operational costs.
Focus on Core Competencies: It allows companies to concentrate on their primary business functions.
Understanding the strengths and weaknesses of different corporate organizational structures is crucial for the functionality and success of a business. Whether a company chooses a functional, divisional, matrix, flatarchy, or network structure depends on its size, industry, and strategic objectives. Each structure offers unique benefits, with companies often adopting a combination of different structures to navigate the complexities of the modern business environment efficiently.
Corporate Organizational Structure
The various corporate structures highlighted in the previous lesson each organized in different forms designed to maximize efficiency.
The Organization of Partnerships
There are essentially two different types of partnerships.
General Partnership – Each partner is equal in stature and risk. While different partners may have invested different amounts each has accepted equal risk. Reward, or profits are distributed equally amongst the partners.
Limited Partnership – Each partner has assumed a different element of control, investment and risk. The same is true for reward. Every partnership draws up a contract that dictates elements of control and reward. Typically a partner that assumes greater financial risk corresponding with greater investment demands greater control. Usually in this type of partnership there is someone called the managing partner. This is the partner who has assumed managerial control. While the managing partner typically has invested the most, this may not be so.
Silent Partnerships – A silent partner may exist in either a general or limited partnership. Essentially the silent partner is an investor who is putting up money but who wishes no control over operations. The questions always remains, how long while a silent partner remain silent?
There are two basic types of corporations; private corporations and public corporations.
Private Corporations – Corporations that are owned by an individual or group of individuals that do not offer ownership shares for purchase by the general public.
Public Corporations – Corporations that are owned by large numbers of investors. Ownership shares known as “stock” are offered for sale to the general public. These shares can be purchased through a licensed broker or trader at a stock exchange.
There are two different types of stock offered for sale:
Common Stock – Most shares are common stock. Common stock holders are entitled to a voting share in the company and a portion of the dividend (a percentage of profits) if the company pays dividends to stockholders.
Preferred Stock – Limited stock issues that have no voting share. These stock holders, however, are paid a dividend, if one is offered, before common stock holders. In some cases a dividend is paid to preferred stock holders and not common stock holders. In the event a company must divest (break apart) preferred stock holders are paid off before common stock holders.
Corporate Structure – Public Corporations are typically organized in a hierarchical manner. Typically the stockholders elect a board or directors. These boards run in an election as a “slate” much like the candidates of political parties in a political election. Most times slates are not opposed since the consist of the stock holders who own the most shares. Sometimes, however, an opposition slate will run for control of the corporation. This slate will be headed be a person who has begun purchasing large amounts of stock and is now trying to wrest control of the corporation away from the present directors. Such an attempt is called a hostile takeover.
The board of directors appoints a President who is also known as the CEO (Chief Executive Officer). The President then hires a treasurer known as a CFO (Chief Financial Officer) and a secretary. Sometimes they also appoint an operations officer known as the COO (Chief Operations Officer).
Underneath this level the officer level are Vice Presidents, then Managers and finally employees.
See the chart below for a schematic of a typical corporate hierarchy.
There are a variety of different corporations worth discussing. They are referred to as horizontal, vertical conglomerates.
Vertical Corporations (mergers) – These are corporations that have purchased the component businesses that make their product. For example, if Apple Computers bought Intel (the chip manufacturer), a plastics company (for the cases) a shipping company, a CD Rom maker, etc, they would be limiting their costs by purchasing the companies that they used to purchase component products from.
Horizontal Corporations (mergers) – These are corporations that have purchased competing companies in an attempt to eliminate the competition and gain market share. It would be like IBM purchasing Compaq, Dell and Gateway. The FTC (Federal Trade Commission) watches this very carefully to ensure that anti trust laws are not violated. Some horizontal mergers are illegal and are halted.
Conglomerates – This is when one company buys other companies that are unrelated to their core business in an attempt to diversify. Corporations may become conglomerates after becoming very large through mergers and acquisitions of a variety of businesses. Diversification is one of the main reasons for conglomerate mergers. By having component businesses each making unrelated products, the overall sales and profits will be protected. For example, isolated economic events, such as bad weather or the sudden change of consumer tastes, may affect some product lines at some point, but not all at one time. One classic conglomerate is ITT which at one point owned international long distance phone service (their original core business), the Sheraton Hotel chain, a large insurance company, a defense contractor and others.
Take a look at the graph below. The vertical merger expand the company upwards and down, the horizontal from side to side and the conglomerate moves off and does neither.
This attempt to grow larger and thus make more profit is known as the “economy of scale.”
The business of corporate mergers and acquisitions is an exciting and profitable one. Today giant mergers and acquisitions range in the tens of billions of dollars. Some mergers are hostile takeovers as we discussed earlier. These are more commonly known as LBO’s (Leveraged Buy Outs). In an LBO one company buys out the outstanding stock of another. Some mergers are mutual mergers and corporate spin offs. Either way, there is alot of money at stake.
Some corporations become so large that they do business in many countries. These are known as multinationals, or MNC’s.
A multinational corporation is a very large firm with a head office in one country and several branches operating overseas.Advantages of Multinationals
- Investment by multinationals creates jobs for the host country.
- The multinational will introduce new production techniques and managerial skills.
- New or better goods may now become available in the host country.
- Ability to move resources, goods, services, and financial capital across national borders
- Widespread market opportunities
- Help spread new technology worldwide
- Generate new jobs in areas where jobs are needed
- Produce tax revenues for the host country
- Help to improve the economies of developing
- Profits are returned to the overseas head office.
- The multinational may operate against the interest of the host country.
- The multinational may force its overseas branches to buy supplies from the head office.
- Because they are large and wealthy, they may influence the political life of a host nation
- May exploit the economy of the host nation by paying low wages to workers, by exporting scarce natural resources or by adversely interfering with the development of local businesses
- Workers in major industrialized nations argue that building a plant abroad takes away jobs at home
Back To Class Page
Frequently Asked Questions about Corporate Organizational Structures
The choice of a corporate organizational structure is impacted by multiple factors. Firstly, the company’s size and diversity of operations play a pivotal role. Larger corporations handling various products or services often adopt a divisional or matrix structure to manage different operations effectively. For instance, multinational corporations (MNCs) may need a more complex structure compared to small businesses due to their broader scope of activities and geographical presence.
Organizational objectives and strategy also substantially influence the decision. If a company aims to foster innovation and open communication, a flatarchy might be the most appropriate. Conversely, a firm prioritizing efficiency and specialization might prefer a functional structure.
The environment in which a company operates is another crucial factor. Organizations functioning in stable and predictable environments may adopt a simple structure, while those in dynamic markets require more flexibility, which might be offered by a matrix or network structure.
An organization’s structure significantly affects its performance by influencing its decision-making processes, communication, and operational efficiency. A well-designed structure aligns with a company’s goals, facilitating the implementation of its strategies effectively.
For example, a functional structure may promote specialization and efficiency but might create silos within departments, potentially hindering communication and collaboration. In contrast, a matrix structure might foster better coordination but can lead to confusion due to dual reporting relationships.
Reevaluation of the organizational structure should occur periodically or when significant changes happen in the business environment or the company itself. As businesses grow, expand, or change their strategic objectives, their initial structure may no longer support their current needs effectively.
Typically, organizations reassess their structure every three to five years, but it could be sooner if they face rapid growth, technological changes, market evolution, or leadership modifications. Constant reevaluation ensures that the organizational structure adapts and aligns with the changing business landscape.
The organizational structure directly influences employees’ roles, responsibilities, and work dynamics. A hierarchical structure may provide clear career progression paths but might limit employees’ decision-making authority, fostering a dependence on upper management.
On the other hand, flat structures tend to empower employees, giving them more responsibility and autonomy, which might enhance job satisfaction and innovation but may also lead to role ambiguity and potential overlaps in responsibilities.