Description
While the owners of farms and small businesses are often portrayed as self-reliant individuals working against overwhelming odds, the reality is that often several people make important contributions to the success of the business. These people may be a spouse, family members, unrelated employees, or business associates such as a lender, technical consultant, or market advisor.
PURDUE EXTENSION
EC-729
Principles for Structuring
Small Businesses and Farms
Craig Dobbins and Cole Ehmke
Department of Agricultural Economics
While the owners of farms and small businesses are often
portrayed as self-reliant individuals working against over-
whelming odds, the reality is that often several people make
important contributions to the success of the business. These
people may be a spouse, family members, unrelated employ-
ees, or business associates such as a lender, technical consul-
tant, or market advisor.
In any small business, there is always plenty of work to be
done. This work includes the physical labor—doing
things—as well as planning, organizing, and evaluating—
thinking about things. What are the jobs that need to be
done? How are these jobs going to be divided up? Who is
responsible for what? If problems or questions arise, who
does the person go to for help or to get answers?
All of these questions and others about personnel get answered
by someone. But in many cases, the answers are not explicitly
stated. Often, a problem arises, and you decide on a solution
without giving much attention to the long-term implications
of your quick-fix solution or the message that your solution
may be sending to other family members or business employees.
Organization Structure
Small businesses have a small number of employees, so there
is not a great deal of formality associated with the development
of an organizational structure. Often this lack of formality is
accompanied by a high level of secrecy or just assumptions
that people know what is happening and why changes are
being made. The reasons that a particular organizational
structure is being used are seldom communicated.
Audience: Owners and managers of a family
business or other small business
Content: Introduces five principles used for
guiding the organizational structure of a
small business and provides three common
organizational structure examples
Outcome: Users will understand the importance
of organizational structure and be able to draw
an organizational chart for their business.
As changes are made in the business, especially when a new
employee is added, reviewing the organizational structure of the
business can be helpful. Rather than hoping people will learn
to fit in and get along, it is often more productive to give careful
thought to the responsibilities associated with each position in
the business and the relationships among these positions.
No two small businesses are organized identically because
managers, employees, families, and the work involved vary
from one business to another. However, there are five key
organizational structure principles to keep in mind. These
principles have two uses. First, these principles are helpful in
the actual design of the organization’s structure. Second,
these principles can serve as a check list for evaluating and
improving the current organization structure. (The informa-
tion provided here on key organizational principles is from
Bernard Erven’s Organizational Structure of the Family
Business <http://aede.osu.edu/people/erven.1/HRM>.)
2 Purdue Extension • Knowledge to Go
1. Exception Principle
Someone must be available to handle the exceptions to the
usual, i.e., someone must be in charge. When an employee or
worker has a problem he or she can’t handle, the organiza-
tional structure should provide for someone higher in the
organization to give assistance.
To illustrate, a tractor driver on a grain farm hearing an
unexpected noise in an engine should be able to discuss the
noise with his or her supervisor. This discussion should either
reassure the driver that the problem is not serious or lead to
repair work to solve the mechanical problem. If the noise
appears to the supervisor to be an early indication of a major
engine problem, the supervisor may want to discuss the
problem with the owner of the business. The discussion may
lead either to a decision to wait until the problem becomes
more serious or repair the engine immediately.
Note that both the driver and supervisor had a person higher
in the organization to consult about the unusual engine noise
problem. Hoping that the driver would solve the problem does
not substitute for application of the exception principle.
2. Decentralization
Decisions should be pushed down to the lowest level possible
in the organization. The more routine a decision, the lower
the level in the organization on which it should be handled.
To illustrate, workers waiting each morning to be told what to
do and where to do it can be a great waste of manager and
worker time. Decentralization means that workers have been
provided the training that allows them to handle decisions
within their job descriptions confidently.
The objective is to overcome the waste of time stemming from
too much centralization of decision making. Working
managers rather than managed workers should be the goal.
3. Parity Principle
Decentralization requires delegation. With delegation comes
responsibility. Authority should be delegated along with
responsibility.
To illustrate, assume the 18-year-old son of the owner of a
landscape firm has been given the responsibility of taking a
crew of three people, each over 25 years old, to a landscaping
site to plant five trees and 30 bushes. Further assume that the
son has no authority to decide how hard it has to be raining
before the crew stops working, no authority to correct a person
who is digging the holes for the trees and bushes too deep,
and no authority to reward the crew member who is doing by
far the best job. It is easy for the three workers to ignore the
son if they have been accustomed to taking orders only from
the owner and the owner has given the workers no indication
of what authority the son does and does not have.
4. Span of Control
The span of control is the number of people a manager
supervises. The organizational decision to be made is the
number of subordinates a manager can effectively lead. The
typical guideline is a span of control of no more than five to
six people. However, a larger span of control is possible
depending on the complexity, variety, and proximity of jobs.
The ability, experience, and style of the manager also affect
the desirable span of control. Finally, worker characteristics
affect the span of control. Well-trained, motivated, experi-
enced, and satisfied workers require relatively little supervision.
Owner/managers of family businesses often have span of
control problems because of a “me” attitude. As a family
business grows and people are added, the manager still may
want everyone reporting to him or her rather than delegate
responsibility and authority to a middle manager.
5. Unity Principle
Ideally, no one in an organization reports to more than one
supervisor. Having more than one supervisor often results in
an employee receiving conflicting instructions and assign-
ments. Some business owners think that they can develop a
level of communication between supervisors that is good
enough to prevent this conflicting message problem. However,
supervisors typically lack the time for the necessary coordination
and communication. This requires the employee to decide
which set of supervisor instructions he or she will not follow.
To illustrate, imagine a cashier in a roadside fruit market
being told by the market manager to read a new bulletin, “A
Baker’s Guide to Apple Varieties.” The manager suggests that
the cashier read it during slack times in customer traffic. The
market manager wants the cashier to take initiative in helping
customers select apples. The same afternoon, the owner of the
market stops by for the first time in four days and catches the
cashier “wasting time” reading. The owner quickly orders the
cashier to find a broom and get busy cleaning.
3 Purdue Extension • Knowledge to Go
Employees should not have to decide which of their supervi-
sors to make unhappy because of the impossibility of follow-
ing all the instructions they get.
The Organization Chart
An organization chart is a useful tool to illustrate and
understand the organizational structure of a business. Such a
chart typically lists the title of each person’s position and, by
means of connecting lines, who is accountable to whom and
who is in charge of what area.
The organization chart shows the chain of command between
the top of the organization and the lowest positions in the
chart. The chain of command represents the formal path a
directive should take in traveling from the president to
employees at the bottom of the organization chart or from
employees at the bottom to the top of the organization chart.
One thing the organization chart does not show is the
informal organization—the informal, habitual contacts,
communications, and ways of doing things that employees
develop. In the case of the cashier at the roadside fruit market,
the owner thought it was quicker to just issue orders to the
employee rather than consult with the market manager.
Actions that do not follow the agreed on structure are a
common occurrence in businesses, especially in small closely
held businesses where management employees have several
roles. While eliminating all such events may not be possible,
developing a formal organizational structure and resisting the
temptation to violate the organizational structure can help
the business and family operate more smoothly.
Simple Organization Structure
A common structure used in small entrepreneurial businesses
is a structure that identifies two groups, management and
workers (Figure 1). Decision making is usually highly
centralized, with the owner-manager making all the important
decisions and being involved in every detail and phase of the
business. Workers usually have little decision-making
authority, and the owner-manager supervises the activities of
every employee. Managers and workers tend to be generalists
and jacks-of-all trades.
This organizational structure provides the business flexibility
and dynamism. Decisions can be made quickly. When the
owner-manager decides that a change is needed, he or she
can communicate this decision directly to the workers.
Functional Organization Structure
As the business grows, oversight becomes too large a task for
only one person. The owner-manager needs to delegate some
responsibilities and authority to other individuals. As respon-
sibilities are delegated, how should they be organized? One
approach is to organize activities around common business
functions. This approach is illustrated in Figure 2. In this
situation, someone specializes in production or operational
aspects of the business, another person specializes in market-
ing, and a third is responsible for the financial aspects of the
business. Finally, someone is responsible for being the general
manager.
With this type of structure, managers are able to specialize
and often will become more efficient at performing their
duties. This structure reduces duplication of managerial
effort. And it allows the general manager to concentrate on
overseeing the entire business, develop and maintain impor-
tant relationships with suppliers and customers, and establish
an overall strategy for the business.
Although this structure has advantages, there can be disad-
vantages. While managers in the various areas can develop
expertise in their functional area of responsibility, they may
lose sight of how the various parts fit into a whole. It is also
easy to fall into the trap of thinking that the responsibility for
overall business performance rests with one person, the
general manager.
Figure 1. Simple Organization Structure
Owner/Manager
Employees
Financial Manager
Figure 2. Functional Organization Structure
General Manager
Marketing Manager Production Manager
4 Purdue Extension • Knowledge to Go
Enterprise or Product Organization
Structure
A third common organizational structure is illustrated in
Figure 3. This structure is organized around the enterprises or
products produced by the business. In the Figure 3 example,
the commodity crop manager would be responsible for all the
activities required for producing and selling the commodity
crops. The hog manager would be responsible for all the
activities required for producing and selling hogs.
In this situation, each of these managers is expected to give
continuous, undivided attention to the enterprise or product
for which they are responsible. This means that the manager
is likely to develop expertise in production methods, resource
acquisition, and marketing the particular product. Because
the product manager is responsible for all product aspects,
some of the decision making commonly done by the top
manager can be shifted to the product manager.
Because the duties of general management involve more
thinking than doing, these duties often get overlooked.
Final Comment
The organizational structure of your business is important. No
two family businesses are organized alike. Keys to effective
organizing include:
1. Proper planning of the organization,
2. Clear relationships among the people in the organization,
3. Delegation of responsibility and authority, and
4. A structure that is neither too complex nor too simple.
If your business is to continue beyond the current managers,
one responsibility of the current management is to develop
the next generation of managers. In this situation, the
organizational structure needs to be one that assists in the
development of these new managers.
What is the current organizational structure of your business?
Sketch out the current reporting relationships in your business.
Draw boxes for each family member and employee involved in
the business. Connect these boxes with lines to show to whom
each person reports. Now examine the structure, and ask
yourself the following questions:
• Does the organization structure follow the key
organizational structure principles?
• Does anyone report to more than one person?
• Is it clear to everyone in the business who has
responsibility for what?
• Will this organizational structure help accomplish
your business vision?
• Does the organizational structure aid in training the
new generation of management?
If you think changes are needed in the organizational
structure, sketch out a new organizational structure. Keep in
mind the key organizational structure principles as you
develop your new structure.
A disadvantage of this organizational structure is that there is
duplication of effort. Each manager is responsible for procuring
the needed inputs, managing employees, and selling the products
produced. This duplication can reduce efficiency. This organi-
zational structure also has the disadvantage that the person in
charge of each specific enterprise or product may not give much
consideration to the business as a whole. This is the role of the
general manager—making sure that the parts work together.
Herdsman Employees Crew Leader
Figure 3. Enterprise or Product Organization Structure
General Manager
Hog Manager Commodity Crop Manager Specialty Crop Manager
Employees Seasonal Employees
It is the policy of the Purdue University Cooperative Extension
Service, David C. Petritz, Director, that all persons shall have
equal opportunity and access to the programs and facilities
without regard to race, color, sex, religion, national origin,
age, marital status, parental status, sexual orientation, or
disability. Purdue University is an A?rmative Action employer.
This material may be available in alternative formats.
New 3/05
You can order or download materials on this and other
topics at the Purdue Extension Education Store.
www.ces.purdue.edu/new
Purdue Partners for Innovation in Indiana Agriculture
Agricultural Innovation & Commercialization Center
New Ventures Team
Center for Food & Agricultural Business
Visit Us on the Web
Agricultural Innovation and Commercialization Center
www.agecon.purdue.edu/planner
New Ventures Team
www.agecon.purdue.edu/newventures
doc_221864737.pdf
While the owners of farms and small businesses are often portrayed as self-reliant individuals working against overwhelming odds, the reality is that often several people make important contributions to the success of the business. These people may be a spouse, family members, unrelated employees, or business associates such as a lender, technical consultant, or market advisor.
PURDUE EXTENSION
EC-729
Principles for Structuring
Small Businesses and Farms
Craig Dobbins and Cole Ehmke
Department of Agricultural Economics
While the owners of farms and small businesses are often
portrayed as self-reliant individuals working against over-
whelming odds, the reality is that often several people make
important contributions to the success of the business. These
people may be a spouse, family members, unrelated employ-
ees, or business associates such as a lender, technical consul-
tant, or market advisor.
In any small business, there is always plenty of work to be
done. This work includes the physical labor—doing
things—as well as planning, organizing, and evaluating—
thinking about things. What are the jobs that need to be
done? How are these jobs going to be divided up? Who is
responsible for what? If problems or questions arise, who
does the person go to for help or to get answers?
All of these questions and others about personnel get answered
by someone. But in many cases, the answers are not explicitly
stated. Often, a problem arises, and you decide on a solution
without giving much attention to the long-term implications
of your quick-fix solution or the message that your solution
may be sending to other family members or business employees.
Organization Structure
Small businesses have a small number of employees, so there
is not a great deal of formality associated with the development
of an organizational structure. Often this lack of formality is
accompanied by a high level of secrecy or just assumptions
that people know what is happening and why changes are
being made. The reasons that a particular organizational
structure is being used are seldom communicated.
Audience: Owners and managers of a family
business or other small business
Content: Introduces five principles used for
guiding the organizational structure of a
small business and provides three common
organizational structure examples
Outcome: Users will understand the importance
of organizational structure and be able to draw
an organizational chart for their business.
As changes are made in the business, especially when a new
employee is added, reviewing the organizational structure of the
business can be helpful. Rather than hoping people will learn
to fit in and get along, it is often more productive to give careful
thought to the responsibilities associated with each position in
the business and the relationships among these positions.
No two small businesses are organized identically because
managers, employees, families, and the work involved vary
from one business to another. However, there are five key
organizational structure principles to keep in mind. These
principles have two uses. First, these principles are helpful in
the actual design of the organization’s structure. Second,
these principles can serve as a check list for evaluating and
improving the current organization structure. (The informa-
tion provided here on key organizational principles is from
Bernard Erven’s Organizational Structure of the Family
Business <http://aede.osu.edu/people/erven.1/HRM>.)
2 Purdue Extension • Knowledge to Go
1. Exception Principle
Someone must be available to handle the exceptions to the
usual, i.e., someone must be in charge. When an employee or
worker has a problem he or she can’t handle, the organiza-
tional structure should provide for someone higher in the
organization to give assistance.
To illustrate, a tractor driver on a grain farm hearing an
unexpected noise in an engine should be able to discuss the
noise with his or her supervisor. This discussion should either
reassure the driver that the problem is not serious or lead to
repair work to solve the mechanical problem. If the noise
appears to the supervisor to be an early indication of a major
engine problem, the supervisor may want to discuss the
problem with the owner of the business. The discussion may
lead either to a decision to wait until the problem becomes
more serious or repair the engine immediately.
Note that both the driver and supervisor had a person higher
in the organization to consult about the unusual engine noise
problem. Hoping that the driver would solve the problem does
not substitute for application of the exception principle.
2. Decentralization
Decisions should be pushed down to the lowest level possible
in the organization. The more routine a decision, the lower
the level in the organization on which it should be handled.
To illustrate, workers waiting each morning to be told what to
do and where to do it can be a great waste of manager and
worker time. Decentralization means that workers have been
provided the training that allows them to handle decisions
within their job descriptions confidently.
The objective is to overcome the waste of time stemming from
too much centralization of decision making. Working
managers rather than managed workers should be the goal.
3. Parity Principle
Decentralization requires delegation. With delegation comes
responsibility. Authority should be delegated along with
responsibility.
To illustrate, assume the 18-year-old son of the owner of a
landscape firm has been given the responsibility of taking a
crew of three people, each over 25 years old, to a landscaping
site to plant five trees and 30 bushes. Further assume that the
son has no authority to decide how hard it has to be raining
before the crew stops working, no authority to correct a person
who is digging the holes for the trees and bushes too deep,
and no authority to reward the crew member who is doing by
far the best job. It is easy for the three workers to ignore the
son if they have been accustomed to taking orders only from
the owner and the owner has given the workers no indication
of what authority the son does and does not have.
4. Span of Control
The span of control is the number of people a manager
supervises. The organizational decision to be made is the
number of subordinates a manager can effectively lead. The
typical guideline is a span of control of no more than five to
six people. However, a larger span of control is possible
depending on the complexity, variety, and proximity of jobs.
The ability, experience, and style of the manager also affect
the desirable span of control. Finally, worker characteristics
affect the span of control. Well-trained, motivated, experi-
enced, and satisfied workers require relatively little supervision.
Owner/managers of family businesses often have span of
control problems because of a “me” attitude. As a family
business grows and people are added, the manager still may
want everyone reporting to him or her rather than delegate
responsibility and authority to a middle manager.
5. Unity Principle
Ideally, no one in an organization reports to more than one
supervisor. Having more than one supervisor often results in
an employee receiving conflicting instructions and assign-
ments. Some business owners think that they can develop a
level of communication between supervisors that is good
enough to prevent this conflicting message problem. However,
supervisors typically lack the time for the necessary coordination
and communication. This requires the employee to decide
which set of supervisor instructions he or she will not follow.
To illustrate, imagine a cashier in a roadside fruit market
being told by the market manager to read a new bulletin, “A
Baker’s Guide to Apple Varieties.” The manager suggests that
the cashier read it during slack times in customer traffic. The
market manager wants the cashier to take initiative in helping
customers select apples. The same afternoon, the owner of the
market stops by for the first time in four days and catches the
cashier “wasting time” reading. The owner quickly orders the
cashier to find a broom and get busy cleaning.
3 Purdue Extension • Knowledge to Go
Employees should not have to decide which of their supervi-
sors to make unhappy because of the impossibility of follow-
ing all the instructions they get.
The Organization Chart
An organization chart is a useful tool to illustrate and
understand the organizational structure of a business. Such a
chart typically lists the title of each person’s position and, by
means of connecting lines, who is accountable to whom and
who is in charge of what area.
The organization chart shows the chain of command between
the top of the organization and the lowest positions in the
chart. The chain of command represents the formal path a
directive should take in traveling from the president to
employees at the bottom of the organization chart or from
employees at the bottom to the top of the organization chart.
One thing the organization chart does not show is the
informal organization—the informal, habitual contacts,
communications, and ways of doing things that employees
develop. In the case of the cashier at the roadside fruit market,
the owner thought it was quicker to just issue orders to the
employee rather than consult with the market manager.
Actions that do not follow the agreed on structure are a
common occurrence in businesses, especially in small closely
held businesses where management employees have several
roles. While eliminating all such events may not be possible,
developing a formal organizational structure and resisting the
temptation to violate the organizational structure can help
the business and family operate more smoothly.
Simple Organization Structure
A common structure used in small entrepreneurial businesses
is a structure that identifies two groups, management and
workers (Figure 1). Decision making is usually highly
centralized, with the owner-manager making all the important
decisions and being involved in every detail and phase of the
business. Workers usually have little decision-making
authority, and the owner-manager supervises the activities of
every employee. Managers and workers tend to be generalists
and jacks-of-all trades.
This organizational structure provides the business flexibility
and dynamism. Decisions can be made quickly. When the
owner-manager decides that a change is needed, he or she
can communicate this decision directly to the workers.
Functional Organization Structure
As the business grows, oversight becomes too large a task for
only one person. The owner-manager needs to delegate some
responsibilities and authority to other individuals. As respon-
sibilities are delegated, how should they be organized? One
approach is to organize activities around common business
functions. This approach is illustrated in Figure 2. In this
situation, someone specializes in production or operational
aspects of the business, another person specializes in market-
ing, and a third is responsible for the financial aspects of the
business. Finally, someone is responsible for being the general
manager.
With this type of structure, managers are able to specialize
and often will become more efficient at performing their
duties. This structure reduces duplication of managerial
effort. And it allows the general manager to concentrate on
overseeing the entire business, develop and maintain impor-
tant relationships with suppliers and customers, and establish
an overall strategy for the business.
Although this structure has advantages, there can be disad-
vantages. While managers in the various areas can develop
expertise in their functional area of responsibility, they may
lose sight of how the various parts fit into a whole. It is also
easy to fall into the trap of thinking that the responsibility for
overall business performance rests with one person, the
general manager.
Figure 1. Simple Organization Structure
Owner/Manager
Employees
Financial Manager
Figure 2. Functional Organization Structure
General Manager
Marketing Manager Production Manager
4 Purdue Extension • Knowledge to Go
Enterprise or Product Organization
Structure
A third common organizational structure is illustrated in
Figure 3. This structure is organized around the enterprises or
products produced by the business. In the Figure 3 example,
the commodity crop manager would be responsible for all the
activities required for producing and selling the commodity
crops. The hog manager would be responsible for all the
activities required for producing and selling hogs.
In this situation, each of these managers is expected to give
continuous, undivided attention to the enterprise or product
for which they are responsible. This means that the manager
is likely to develop expertise in production methods, resource
acquisition, and marketing the particular product. Because
the product manager is responsible for all product aspects,
some of the decision making commonly done by the top
manager can be shifted to the product manager.
Because the duties of general management involve more
thinking than doing, these duties often get overlooked.
Final Comment
The organizational structure of your business is important. No
two family businesses are organized alike. Keys to effective
organizing include:
1. Proper planning of the organization,
2. Clear relationships among the people in the organization,
3. Delegation of responsibility and authority, and
4. A structure that is neither too complex nor too simple.
If your business is to continue beyond the current managers,
one responsibility of the current management is to develop
the next generation of managers. In this situation, the
organizational structure needs to be one that assists in the
development of these new managers.
What is the current organizational structure of your business?
Sketch out the current reporting relationships in your business.
Draw boxes for each family member and employee involved in
the business. Connect these boxes with lines to show to whom
each person reports. Now examine the structure, and ask
yourself the following questions:
• Does the organization structure follow the key
organizational structure principles?
• Does anyone report to more than one person?
• Is it clear to everyone in the business who has
responsibility for what?
• Will this organizational structure help accomplish
your business vision?
• Does the organizational structure aid in training the
new generation of management?
If you think changes are needed in the organizational
structure, sketch out a new organizational structure. Keep in
mind the key organizational structure principles as you
develop your new structure.
A disadvantage of this organizational structure is that there is
duplication of effort. Each manager is responsible for procuring
the needed inputs, managing employees, and selling the products
produced. This duplication can reduce efficiency. This organi-
zational structure also has the disadvantage that the person in
charge of each specific enterprise or product may not give much
consideration to the business as a whole. This is the role of the
general manager—making sure that the parts work together.
Herdsman Employees Crew Leader
Figure 3. Enterprise or Product Organization Structure
General Manager
Hog Manager Commodity Crop Manager Specialty Crop Manager
Employees Seasonal Employees
It is the policy of the Purdue University Cooperative Extension
Service, David C. Petritz, Director, that all persons shall have
equal opportunity and access to the programs and facilities
without regard to race, color, sex, religion, national origin,
age, marital status, parental status, sexual orientation, or
disability. Purdue University is an A?rmative Action employer.
This material may be available in alternative formats.
New 3/05
You can order or download materials on this and other
topics at the Purdue Extension Education Store.
www.ces.purdue.edu/new
Purdue Partners for Innovation in Indiana Agriculture
Agricultural Innovation & Commercialization Center
New Ventures Team
Center for Food & Agricultural Business
Visit Us on the Web
Agricultural Innovation and Commercialization Center
www.agecon.purdue.edu/planner
New Ventures Team
www.agecon.purdue.edu/newventures
doc_221864737.pdf