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Principles of an Effective Organization Chart

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We are all familiar with organizational charts that provide the traditional “pyramid” structure. But why do we use this in the first place? Here’s a quick guide to understanding the organizational chart and why it is useful in the first place.

Heirarchy

Too many cooks spoil the broth. This is why organizations are better off when they have one manager who makes the decisions for his subordinate team.

This is the basic premise behind the organizational chart. It is all about accountability and the power of centralization. If a point person is clearly identified per unit of the organization, then there is less confusion as to who should be responsible for the team, on who should be coordinating the efforts, and on who is eventually accountable for the success—or failure—of the team beneath him or her.

This is why the pyramid structure of organizational charts has emerged. At the very top is the Chief Executive Officer (usually the owner and/or founder of the business in the case of small and medium enterprises). The CEO should serve as the visionary who knows what direction he or she wants the company to take towards the future.

Below the CEO are the functional experts, with such official titles as VP for Marketing, SVP for Operations, or Chief Financial Officer. Whatever the title, the important thing is that these are people who are experts in their particular fields.

This expertise is important because the premise behind the pyramid type of chart is that the CEO can rely on his experts in order to bring his vision to fruition. They know the ins and outs of their respective fields. Therefore, they can find ways to achieve what the CEO wants to achieve.

Below the experts are their staff, who are essentially the frontliners in the operations of the business.

Decision making

The pyramid structure won’t work if the person above the others does not have authority to make decisions for his or her group.

Unfortunately, many small businesses end up in this kind of a rut: the CEO makes ALL the decisions for the company. And even if there are roles for VP positions for the key functional areas of the business, they have no authority to make decisions and still have to channel everything to the CEO.

This kind of a setup, which sadly is fairly common, leads to the following: a crimping of the company’s growth potential; lack of innovation from the ranks; overburdening of the CEO in terms of decision-making load, and demoralization among managers who are not given the right to really manage their people.

For the pyramid organizational structure to work, make sure that people who are given managerial positions are really given decision-making powers for most operational matters pertaining to the people below them. Without this authority, they become merely assistants of the CEO rather than agents of growth for the company.

Planning horizon

The higher you are at the pyramid, the longer-term your planning horizon must be.

Thus, frontliners are involved with day-to-day operations. But their managers must be involved with a longer term, such as monthly results. In turn, the higher management that these managers report to may perhaps be concerned with annual results.

At the top of this chain of command resides the CEO. Ideally, it is the CEO who is responsible for planning the long term of the firm, which could be anywhere from three to five years, or even decades in the case of certain businesses.

This is why it is very important that the jobs of higher management should be decongested by those below. This allows higher management levels to focus more on the long term.

In many small businesses, however, it is unfortunate that top management (the owners, usually) become so busy being involved with the day-to-day operations that they no longer have time to plan out their company’s future. When this happens, growth for the company becomes stifled. At worse, they no longer grow at all and are stuck running at a particular level of business for many years to come.

Summary

The organizational chart tracks who is responsible for what in the organization. It helps to decongest the work load of the people at the top and, in so doing, allow for greater growth, all while ensuring that the goals that have been established from the top are followed down the line.

And now a word about family businesses

In the Philippines, family businesses still dominate the SME scene. And while there is nothing wrong with running a business “the family way,” one must be aware of the differences between functionally-run organizations and traditional family businesses.

Unlike functional organizations, families tend to assign management roles according to trustworthiness rather than competence. Thus, it is not uncommon to find the son of the owner being the VP for Marketing, for instance… even if he may not know a thing about marketing. The net effect of this practice? The company’s technical capabilities will tend to suffer. On the plus side, the owner can probably trust his or her management team very much (because they are, after all, family!).

If you have a family enterprise such as the one depicted here, then you can improve your company’s technical competence by hiring consultants to bring your management up to par with best practices. You may be tempted to bring in professionals, of course, such as MBA graduates, but bear in mind that there may not be that much of an incentive for them to stay in your company for too long once they notice that there is no way that an outsider would get to replace a family member in a prime position up the company ladder! So don’t expect them to stay long unless you give them decent professional incentives to stay put.

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