ACCA Applied Knowledge · Business and Technology

The formal and informal business organisation: formula sheet

Full chapter guide

Key formulas

Formal organisation: Formal = planned + official + position-based authority + written rules; Created by management to meet organisational objectives. Shown on the organisation chart.
Informal organisation: Informal = unplanned + unofficial + personal influence + social relationships; Created by staff. Not shown on the organisation chart. Includes the grapevine.
Source of authority: Formal: authority from position. Informal: influence from personal standing.; A frequent test point. An informal leader may have no official title.
Communication channels: Formal: official channels (memos, reports, meetings). Informal: grapevine, conversations.; Informal communication is usually faster but less reliable.
Functional structure: Grouping by activity (finance, marketing, production, HR); Best for small or single-product firms. Strength: specialisation. Weakness: silos and poor cross-functional coordination.
Divisional structure: Grouping into semi-autonomous units by product, geography or customer; Best for large, diverse firms. Strength: accountability and focus. Weakness: duplication and weaker central control.
Product-based structure: One division per product or product line; Suits different products needing specialist knowledge. Risk: duplicated functions and divisional rivalry.
Geographical structure: One division per region or country; Suits differing local needs, laws or languages. Risk: duplication and inconsistent brand or standards.
Matrix structure: Two reporting lines: function and project/product; Strength: shared skills and flexibility. Weakness: dual authority, conflict, slow decisions. Breaks unity of command.
Five building blocks: Strategic apex + Middle line + Operating core + Technostructure + Support staff; Learn all five and be able to say what each does. Technostructure standardises work; support staff do not.
Simple structure: Dominant part: strategic apex | Coordination: direct supervision; Small, young, entrepreneurial firms with a simple environment.
Machine bureaucracy: Dominant part: technostructure | Coordination: standardised work processes; Large, mature, stable, routine work.
Professional bureaucracy: Dominant part: operating core | Coordination: standardised skills; Skilled professionals who work with autonomy, for example hospitals and universities.
Divisionalised form: Dominant part: middle line | Coordination: standardised outputs; Large organisations split into divisions, each with performance targets.
Adhocracy: Dominant part: support staff (with the operating core in project teams) | Coordination: mutual adjustment; Innovative, complex, dynamic environments. Often shown as the project-based, flexible form.
Span of control: Span = number of subordinates reporting directly to one manager; Count direct reports only. Not the total staff beneath the manager.
Span and levels: Wider span → fewer levels (flat). Narrower span → more levels (tall).; Holds when total staff is fixed. Use it to link the two ideas in any question.
Scalar chain: Top management → middle management → supervisors → operatives; Authority flows down; accountability and information flow up.
Unity of command: One employee = one superior; Breached in matrix structures, where staff report to two managers.
Centralisation: Decision authority held at the top of the organisation; Strong control and consistency, but slower decisions and less local responsiveness.
Decentralisation: Decision authority spread to lower levels; Faster local decisions and motivation, but weaker control and risk of inconsistency.
Delegation vs decentralisation: Delegation = task plus authority passed to a subordinate, accountability retained; Decentralisation = organisation-wide policy of dispersed authority; Delegation is individual and specific. Decentralisation is structural and general.
Factors favouring decentralisation: Large size, geographic spread, diverse products or markets, fast-changing environment, capable local managers; The opposite factors favour centralisation.
Handy: power culture: Power culture = central control, often one dominant leader, like a web; Typical of small entrepreneurial firms. Few rules, quick decisions, depends on one person. Can struggle as the firm grows.
Handy: role culture: Role culture = rules, procedures and defined job roles, like a Greek temple; Typical of bureaucracies and large stable organisations. Efficient in stable conditions, slow to change.
Handy: task culture: Task culture = teams formed to solve problems, like a net; Focus on getting the job done. Expertise matters more than position. Common in project and consultancy work.
Handy: person culture: Person culture = organisation exists to serve the individuals in it, like a cluster; Found in groups of professionals such as partnerships or chambers. Hard to control individuals.
Schein's three levels: Artefacts → Espoused values → Basic underlying assumptions; Artefacts are visible (dress, layout, logos). Espoused values are stated beliefs. Assumptions are taken for granted and hardest to change.
Hofstede's dimensions: Power distance; Individualism v collectivism; Masculinity v femininity; Uncertainty avoidance; Long-term v short-term orientation; Describes national culture. Later work added indulgence v restraint. Know the first four or five well; these are the ones usually tested.

Quick revision

The formal organisation is the official structure of roles, reporting lines and rules.
The informal organisation is the unofficial network of relationships and norms that grows within the business.
Span of control is the number of subordinates reporting directly to one manager.
A wide span gives a flat structure; a narrow span gives a tall structure.
The scalar chain is the line of authority from top to bottom of the organisation.
Centralisation keeps decision-making at the top; decentralisation passes it down.
Decentralisation can speed decisions and motivate managers, but may reduce consistency and control.
Functional structures group by activity; divisional structures group by product, region or customer.
A matrix structure creates dual reporting, which can cause conflict over authority.
Mintzberg's model has five basic parts of the organisation: strategic apex, middle line, operating core, technostructure and support staff.
Mintzberg's coordinating mechanisms are mutual adjustment, direct supervision, standardisation of work processes, standardisation of outputs and standardisation of skills, plus standardisation of norms.
Culture is the shared values, beliefs and ways of working in a business.
Informal groups can support or work against the formal goals of the organisation.

Common mistakes

Saying the informal organisation is always bad for the business. Fix: Remember it can help: it speeds up communication, builds morale and fills gaps in the formal structure. It can also harm. Give both sides.
Saying the informal organisation can be abolished by management. Fix: Informal groups form naturally wherever people work together. Management can only understand and influence them.
Confusing divisional with functional structure. Fix: Ask whether the parts are by activity (functional) or self-contained units with their own functions (divisional).
Treating product-based and geographical as separate from divisional. Fix: Remember they are both ways of forming divisions. The base differs: product or region.
Confusing machine bureaucracy with professional bureaucracy. Fix: Ask who controls the work. Machine bureaucracy standardises processes, set by the technostructure. Professional bureaucracy standardises skills, held by the operating core.
Mixing up technostructure and support staff. Fix: Technostructure designs and standardises work, such as planners and analysts. Support staff provide services to the whole organisation, such as legal or catering.
Counting all staff under a manager as the span. Fix: Count only people who report directly to that manager.
Saying a narrow span gives a flat structure. Fix: Remember narrow span needs more layers, so the structure is tall.
Treating delegation and decentralisation as the same thing. Fix: Delegation is a specific task given to a subordinate. Decentralisation is an organisation-wide policy on where decisions are made.
Saying the delegator is no longer responsible after delegating. Fix: Authority can be passed on, but the delegator remains accountable for the outcome.

Exam tips

Read the first signal word in the scenario: official, written or position means formal; friendship, gossip or unwritten means informal.
Avoid absolute statements. Options that say informal groups are always harmful or can be eliminated are usually wrong.
In multiple response questions, select the stated number only. Check each option against the plan or people test separately.
Be ready to give both advantages and disadvantages of each type, since questions often ask for one of each.
Link this topic to communication and culture. Informal networks and the grapevine often appear in related questions.
Look for the grouping clue in the scenario first. It usually gives away the structure type.
Remember strengths and weaknesses mirror each other: specialisation versus silos, accountability versus duplication, flexibility versus dual authority.
In Section B multi-task questions, tie each point to facts in the scenario to earn the mark.