Organizational Structure

Learning Objectives

  • Differentiate between functional and divisional organization

What is Organizational Structure?

Organizational structure is the built-in hierarchy that defines roles, responsibility, and supervision. It’s the plan that outlines who reports to whom and who is responsible for what, and it falls between two ends of a spectrum:

  • A centralized structure that gives most of the authority and decision-making power to the team at the top, or
  • A decentralized structure distributes authority and decision-making power at lower levels, which might include departments, groups, or business units.

In addition, structure can be classified as either functional or divisional.

Functional Structure

Most small to medium-sized firms structure themselves around basic business functions such as marketing, operations, and finance and accounting. For instance, a sole proprietor performs all the functions all the time, and even a small partnership of two or three people will end up being functionally organized. But to fully understand the functional form of organization, it helps to look toward the other end of the spectrum, to divisional structure.

Divisional Structure

CalPortland Company (CPC), one of the largest building materials providers on the West Coast, is a privately-held company that employs over 2,000 people, operating 3 cement plants, 10 cement terminals, 76 ready mix plants, 4 asphalt plants and over 2500 ready mix trucks. It has operations in Alaska, Washington, Oregon, California, Nevada and Arizona as well as in British Columbia and Alberta. Rather than a functional structure, that would have one accounting department, one sales department, and one production department for all locations, CalPortland is organized regionally. The greater Seattle and western Washington state forms a division with it’s own safety manager, accounting staff, sales staff, and management. British Colombia forms another division, and Oregon another. CPC organized itself geographically, but that’s not the only way divisions can form. Other companies may form divisions around product lines, or service types.

Functional Structure, revisited

A centralized accounting function across all the product lines, geographic locations, and other divisional kinds of structures, can take advantage of both economies of scale (to a certain point) and centralization of information without having to pry it from the alternative, many divisional accounting departments with sometimes competing interests. On the other hand, too many transactions processed in one centralized department can bog down the system, making it slower to react, adjust, and even provide information. If you’ve ever waited six weeks for some simple paper work to be processed, like a loan application or a refund check from the IRS, you’re probably dealing with a huge organization that is organized functionally, rather than by divisions.

Culture

Business people often say that culture trumps mission. Culture develops organically over time from the cumulative traits of the people the company hires. It encompasses the everyday social interactions among employees that transcends formal jobs and job interrelationships, effectively altering a company’s intended formal structure. Great managers and leaders can cultivate a strong, affirmative organizational culture, but culture can also reinforce office politics that put the interests of individuals ahead of those of the firm and can disseminate distorted or inaccurate information.

Wells Fargo

A picture of the outside of a Wells Fargo bank.How does this related to sales management and accounting? Let’s examine Wells Fargo’s now notorious account proliferation fiasco as an example of how structure can affect management, and as a lesson of culture trumping stated mission, vision, and values.

Although Wells Fargo doesn’t have a formal mission statement, it does have Vision and Values statements. Here’s the company vision:

Our vision

We want to satisfy our customers’ financial needs and help them succeed financially.

This unites us around a simple premise: Customers can be better served when they have a relationship with a trusted provider that knows them well, provides reliable guidance, and can serve their full range of financial needs.

And the five values:

Our values

Five primary values guide every action we take:

What’s right for customers. We place customers at the center of everything we do. We want to exceed customer expectations and build relationships that last a lifetime.

People as a competitive advantage. We strive to attract, develop, motivate, and retain the best team members — and collaborate across businesses and functions to serve customers.

Ethics. We’re committed to the highest standards of integrity, transparency, and principled performance. We do the right thing, in the right way, and hold ourselves accountable.

Diversity and inclusion. We value and promote diversity and inclusion in all aspects of business and at all levels. Success comes from inviting and incorporating diverse perspectives.

Leadership. We’re all called to be leaders. We want everyone to lead themselves, lead the team, and lead the business — in service to customers, communities, team members, and shareholders.

Take special note of the first and the third values, along with the vision – to help customers succeed, to be a trusted provider, to do what is right for customers, and to be committed to the highest ethical standards. And yet, in 2017, news broke that sales staff in the Community Bank division had been opening accounts for more than a half decade without customers’ permission. In addition, the firm’s consumer operations revealed that the bank had charged as many as 500,000 customers for auto insurance they didn’t need. Seventy senior managers and 5,300 employees lost their jobs and the firm was charged a fine of $185 million.

Learn More: Wells Fargo by the numbers.

The sales-driven business model, coupled with the de-centralized divisional organizational structure allowed sales managers to run unfettered by higher management, who maintained a “run it like you own it” deference to the divisional managers. Divisional organizational structure itself isn’t inherently bad, and neither is functional organization. Each has to be assessed and used according to its strengths and weaknesses. Understanding those opportunities and challenges is an essential part of the management function.

Functional and divisional organizational structures comprise two ends of a vast spectrum. In between are variations like virtual, international, matrix, learning, and team structures, each with certain strengths and weaknesses. The one thing all these structures have in common is that they are always subject to the effects of company culture. Remember, culture can trump mission, vision, values, and even formal organizational structures.

Practice Questions