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The Big Picture
- A business’s hierarchy defines how people within the organization report and relate to one another, as well as what duties they are responsible to complete or oversee. An organizational chart is a graphical depiction of the hierarchy that indicates the reporting structure, roles and responsibilities of the entire business.
- The corporate structure of a business embodies how it is organized—such as tall or flat. The structure indicates how people work together and who has the authority to make various decisions.
- The human resources cycle captures the path that an individual takes through an organization. The cycle depicts a business’s progression with each employee, starting with recruit and employ, moving to reward, manage, and development, and ending with transition or exit.
At the end of the week, you’ll be able to apply these insights to your own career and the business where you work.
Why is this important?
Imagine this: you have a question about your work, but you don’t know whom to ask. Or you need someone to do something for you, but you aren’t sure who can help you. Or you need to make a decision, but you don’t know if you have the power to make that decision. Or you’d like to advance in the company, but you don’t know what opportunities are available to you. Understanding your business’s hierarchy and structure and the role of the Human Resources team can help you figure out how to answer these questions.
How does this connect to the other parts of business?
Actually, corporate structure, and the human resources team that helps support it, explains how all of the parts of the business connect to one another. In other words, you have seen many of the pieces of the puzzle: product development, operations, finance, accounting, and others. But how do these jigsaw pieces fit together to make a business? And how does each individual find his or her way into and through a business? That’s what we’re talking about this week.
Now, let’s get started with an Explore Activity to give you an opportunity to jump right into this week’s materials.
The business of hierarchy
Every employee should be able to answer these basic questions: To whom do I report? Who reports to me? Which decisions do I make, and which decisions are reserved for others to make? These questions all get to the issues of business hierarchy and structure.
This week’s Strayer Talk explained that every business has a hierarchy of some kind: a pyramid or a series of management tiers that indicates who reports to whom. Just like pyramids, a business’s hierarchy may be tall or flat.
A tall hierarchy is a traditional way to organize management. There are many levels of employment, and a few employees at each level report up to a manager at the next level. For example, at Starbucks, baristas report to store managers, and store managers report to regional managers, and regional managers report to executives at headquarters. This works really well for Starbucks! Baristas are carefully and consistently trained and supervised so that you can count on the same cup of coffee at any store. Employees who want to advance can work hard and make their way up the chain to gain more management responsibilities. Business is efficient and quality is consistent.
On the other hand, some businesses prefer a flat hierarchy. When Paul and Ari founded Zingerman’s Delicatessen, they wanted to make sure that every employee felt empowered to make decisions to improve the customer experience. In their service-oriented business, Paul and Ari’s employees get their jobs done in creative and collaborative ways. A flat hierarchy makes this possible.
Quick Question
Think of an interaction you’ve had recently with a business employee, such as buying a meal at a restaurant or a shirt at a clothing store. What kind of power did that employee appear to have to help you in various ways? What does that tell you about the hierarchy or structure of the business?
Corporate structures
When you think about how many people there are between an entry-level employee and the CEO, that’s a question of hierarchy. When you think about who can make which kinds of decisions, that’s a question of corporate structure.
Corporate structures describe how power is organized in a business. There are several types of structures, and they fall on a spectrum from centralized to decentralized.
In centralized organizations, very few people hold most of the power. A great example of a centralized organization is the military. The commander-in-chief, or President of the United States, has a huge amount of authority. Generals have a great deal of authority. There is a long chain of command, with individuals at each level mostly carrying out the orders of those above them, and individual soldiers have very little decision-making authority. That makes sense in the military! You need everyone to be on the same page and to know whose orders to follow quickly and without question.
At the other end of the spectrum are decentralized organizations, where a lot of people in the company hold decision-making power. Paul and Ari have made Zingerman’s a decentralized organization, because they want all of their employees to have a voice, to bring their own experiences to the table, and to feel like they can address issues that arise.
Most businesses don’t live at one end or the other of the spectrum—they are neither fully centralized nor completely decentralized. Instead, they find a place somewhere along the spectrum that suits the business depending on the type of product the business sells and the processes required to make that happen. And many businesses evolve their structure over time, adapting to meet the changing needs of the company. There are four main types of corporate structures, ranging from centralized to decentralized. They are functional, divisional, network, and team-based. We’ll take a look at each one in turn.
Functional Structure
A traditional approach to organizing a company—and still the most common one—is a functional structure. In this kind of business, each department owns a main function of the business. The departments often include operations, finance, research and development, information technology, human resources, customer service, and sales and marketing. Sales and marketing usually manages the various product lines. A director or manager runs each unit and controls the budget of the department. The directors, or managers, report up to the CEO, who has ultimate responsibility for all of the departments.
A functional structure works very well for manufacturers that make just a few goods for sale. Employees have a clear sense of their responsibilities as well as their career paths. Each department can specialize in its subject area and develop expertise. Clear divisions promote efficiency and economies of scale. And employees have clear ideas about how to advance in their departments—and their careers.
Functional structures are not always appropriate, however. The formalities can prevent employees from thinking outside the box. When decisions have to be made by senior employees, figuring out next steps can take additional time. And sometimes departments forget to share information or work together to solve problems, which can cause delays.
This problem results from a silo mentality. When a business is not set up to allow departments to interact and share information, people lose sight of the big picture, and that causes inefficiencies. For example, if the sales and marketing department decides to offer a discount, but communication between departments is not optimal, lack of coordination hurts the business. Finance might not give the customer the sale price, and customer service might not be prepared to handle frustrated customers. All this can be avoided if employees remember that the business works best when departments share information, resources and support.
In 2013, Microsoft famously shifted to a functional structure. Microsoft had been criticized for a divisional structure (discussed below) that caused its product lines to fail to communicate and share resources. The goal of the shift to a functional structure was to find synergies and increase coordination among product lines. Whether the shift will lead to greater success for Microsoft—already a very successful company—remains to be seen.
Divisional Structure
One alternative to a functional structure is a divisional structure. In a divisional structure, staff is arranged into divisions that focus on a specific product or market. For example, divisions might focus on a particular geographic region (such as the U.S., the rest of North America, Europe, and developing markets), a customer type (such as consumers, businesses, and institutions), or a product (such as clothing, shoes, and accessories). Each division has a full team that handles all of its business functions, such as operations, finance, and sales and marketing. The directors or managers of each division still report up to a single CEO.
A divisional structure works well because it is nimble and can respond quickly to changes. Each division can focus closely on its particular segment, and it is easy to hold divisions accountable for their results. Because of the separations, each division is protected from the failures of other divisions.
By the same token, there are some disadvantages to a divisional structure. Because each division is self-sufficient, there are some redundancies, such as marketing and finance personnel. Divisions don’t have opportunities to share expertise and experience. Employees might have a hard time advancing because it can be hard to change to a different division. And there might be unnecessary competition between divisions.
One example of a divisional structure is DuPont. Originally, DuPont had a functional structure, with isolated business units, such as finance and sales. When DuPont diversified its product offering from just gunpowder to include paint, it lost money, because the manufacturing and sales teams were unable to coordinate smoothly. So it switched to a divisional structure, with divisions arranged around products. The divisional structure returned DuPont to profitability and remains its business structure to this day.
Matrix Structure
Some businesses, such as Starbucks, combine the features of functional and divisional structures to make a matrix structure. This approach combines a functional structure with a divisional structure. The CEO oversees functional directors or managers, who supervise their respective departments. At the same time, employees are assigned to particular projects, regions or markets, and they report to project managers for those aspects of their jobs.
A matrix structure offers many advantages. Decisions may be made quickly and the organization maintains its flexibility to respond to changes in the market and conditions in the particular project. Specialization of projects can result in increased productivity.
However, the matrix structure is complex and expensive, both to set up in the first place and to manage on an ongoing basis. Sometimes employees may be confused about their reporting requirements. And prioritization may be difficult, because people are members of more than one team, each with separate goals.
Starbucks is a company that has successfully deployed a matrix structure. It has a functional structure at the top, with leaders for each functional department, such as human resources and sales and marketing. At the same time, Starbucks maintains geographic divisions, so that the manager of each coffee shop reports to a functional head as well as a geographic head. This allows the various shops to respond quickly to changes in local markets. Starbucks also has product divisions, such as coffee, food products, and merchandise. This carefully thought out and well-managed matrix works well for Starbucks.
Network Structure
In a team-based organization, employees form teams on a project basis. There is a CEO, but little other organizational hierarchy. Teams make decisions by consensus instead of relying on decisions by team leaders.
A team-based structure offers lots of advantages. Decisions can sometimes be made quickly because they do not need to be run up a chain of command. Communication tends to be open and honest because of the focus on the value of each team member’s contributions. Overhead may be lower because of reduced management. And employees might have greater ownership of decisions made by consensus.
However, consensus-based decision-making—where team members decide by general agreement—can take more time if the team is divided on the best approach. If the team does not have appropriate expertise or a good composition, the decisions might not be optimal. And limited sharing between teams may mean the organization misses out on opportunities for shared learning and efficiency.
Holacracy
One special type of team-based structure is a holacracy. Here, self-organization is layered over the traditional corporate hierarchy. Employees form teams that set their own goals and responsibilities, and leaders are chosen democratically or by consensus. Those teams, or circles, are then layered among one another, much like a traditional corporate hierarchy. A holacracy relies on an enormous amount of trust and responsibility, and employees choose to follow their leaders. Holacracy is sometimes called distributed management because one of the roles of managers is to ensure that power is distributed throughout the organization. Because a holacracy combines self-organization with hierarchy, empowerment and accountability are balanced—employees can make meaningful decisions and lead, and they are also held responsible for their successes and failures.
Holacracy is very rare in corporate America. Some companies have adopted a holacratic structure in recent years. The Internet content provider Medium transitioned to holacracy in order to make the organization more productive, role-centric, and nimble. Medium has seen healthy growth since its change.
Quick Question
Think of the six structures we’ve discussed: functional, divisional, matrix, network, team-based, and holacracy. Which one appeals to you the most? Can you think of a company where you’d like to work that uses that structure?
As we’ve discussed, a business’s structure depends on its products, its size, and a lot of other priorities. The right structure can make all the difference in helping a business succeed. And when a business is failing, one thing to consider is whether the structure does not serve the business and needs to be changed.
The human resources cycle
We’ve been talking about how people within a business interact with each other, both in terms of hierarchy and structure. There’s another important piece to consider, and that is the role of each person individually and his or her relationship to the organization. Each individual employee is on a journey within the business, which we’re calling the human resources cycle. This path starts when the business recruits a person, and it continues as the person works at the business, earns rewards, improves her performance, develops professionally, and transitions into new roles or exits the company.
Why does human resources matter? Well, no matter how good a business concept is, it’s nothing if you don’t have the people who can make it a reality. In the words of one business thought leader, “Great vision without great people is irrelevant.” But a business doesn’t just need smart people. It needs the right people in the right jobs, getting the right opportunities, support, and development. All of that is the function of human resource teams.
The human resources cycle captures the six steps or stages of human resources: recruit, employ, reward, manage, develop, and transition or exit. We’ll look at each of these in turn.
Recruit
Once a business realizes it needs to hire someone, it must define the role that needs to be filled. That means figuring out the purpose, duties, and deliverables of the job—and drafting the job description. After the job description, the human resources team writes the person specification, which summarizes the knowledge, skills, experience, and education of an ideal candidate. It should guide both applicants and the business in determining whether an applicant is an appropriate hire.
Once the job description and person specification are finalized, the search begins. There are a few sources of applicants. First, a business often looks internally to existing employees who may be seeking advancement or a change across departments, known as a lateral change. Second, a business might encourage its current employees to recommend friends. Finally, a business may seek external applicants. For a broad external search, businesses may use traditional venues like career fairs, job boards, or recruiters, but it’s very common now to also seek applicants through social media and networking sites such as LinkedIn, Facebook and Twitter.
Employ
After collecting applications, the HR team reviews each applicant’s curriculum vitae, also referred to as a resume, and cover letter, compiling a shortlist of the most promising candidates. Interviews and other assessments often help to identify the best candidate. In some cases, references are also required so that the human resources team can verify the accuracy of the information provided by the candidate and hear from those who know her best. When the team agrees on the best candidate, an offer is made, typically in the form of a formal letter referred to as an offer letter or an employee contract. If the candidate is not satisfied with the terms of the offer letter, there are sometimes negotiations regarding salary and benefits. When an agreement is reached, the employment contract is signed and the candidate is hired—and becomes a new employee.
Reward
We all know that people work in order to earn a living. But there are lots of other reasons to work as well! Non-monetary rewards can often do an even better job of motivating workers than money can.
Extrinsic rewards are essentially monetary rewards, and include pay and benefits, such as holidays and health insurance. Intrinsic rewards are non-monetary and come from the way a person thinks and feels about the job. Intrinsic rewards might include an employee’s sense of purpose in getting the job done, ownership and responsibility, and the satisfaction of making progress and a job well done.
Although intrinsic rewards relate to the employee’s thoughts and feelings about the job, businesses can have a significant impact on those intrinsic rewards for each of their individual employees in the following ways:
- Purpose: A clear mission and vision for the organization, and clear expectations for the employee
- Recognition: Praise and constructive feedback for the employee
- Development: Education, mentoring, and opportunities for advancement
- Culture: A team-oriented, transparent organization
Manage
The job of taking care of a business’s people doesn’t end when the people are hired and rewarded. After that, everyone still needs ongoing management. Why? To make sure everyone is working together well to meet the organization’s goals—and their own.
The traditional performance management cycle has five steps. First, an employee sets goals for herself based on what she wants to accomplish and what the business needs. Second, the employee and the HR team have an ongoing dialogue about what the organization expects of the employee and what the employee’s work looks like. Third, HR team members and others in the organization provide feedback and coaching on the employee’s work and decisions to help her become more efficient and effective. Fourth, a formal review involving the employee’s manager and possibly others gives the employee insight into how she can improve. Finally, high-performing employees receive promotions and pay raises.
Develop
Hand-in-hand with management comes development. A business can invest in its people by providing additional training opportunities, both on the job and outside the business. Development can include classes, books, trainings, and even formal education or degrees. That’s good for individuals, who continue to get better at their own jobs and become more qualified for promotions. It’s also good for the business, which reaps the benefits of having workers who are continually learning about their fields, the business, and the changing world in which they operate.
Transition or exit
There are two ways that an employee’s human resources cycle ends—although, as you’ll see, the cycle never really ends. One possibility is that the employee transitions to a new job in the same business. This can happen when the employee undergoes enough development that he or she is qualified for a promotion. It can also happen when the employee decides she is interested in a different business unit and wants to make a lateral move—not a promotion, but not a demotion either. In either of these cases, the human resources cycle starts again with that individual—usually with a streamlined recruitment process.
The other way an employee’s human resources cycle ends is on exit—when the person leaves the business completely. A person can leave a business for many reasons: he finds a job he likes better at a different company, the business no longer needs her at the company, or he retires and leaves the workforce entirely. Except in the case of retirement, the human resources cycle just begins again when that person joins a different business.
Quick Question
After learning about all of the steps of the human resources cycle, what do you think are the stages that come most naturally to you? Where do challenges lie for you as an employee? How can the human resources team help you and your career?
Conclusion
How people fit into a business is an important consideration in understanding how business works. As we’ve discussed, there are several ways to look at how people interact with each other and with businesses themselves.
- Hierarchy indicates who reports to whom, and might be tall with many tiers of management, or flat with few tiers.
- Corporate structure tells us how the business is organized, how people interact with one another, and who can make various decisions.
- The human resources cycle explains a person’s path into, through, and eventually out of a business.
Now that you’ve mastered these concepts you can apply them in your own career.