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PEST analysis
PEST analysis is a strategic management tool used to analyze the external macro-
environmental factors that can impact an organization or industry.

P-E-S-T stands for:

Political: Factors related to government regulations, policies, and political stability that can
impact the organization or industry.

Economic: Factors related to the economy, such as inflation, interest rates, exchange rates,
and economic growth, that can impact the organization or industry.

Social: Factors related to the demographics, lifestyle, and cultural norms of the population
that can impact the organization or industry.

Technological: Factors related to technological advancements, research and development,

and innovation that can impact the organization or industry.

PEST analysis can help organizations identify opportunities and threats in their external
environment and guide their strategic decision-making.

Advantages of Privatization

• Increased Efficiency
• Reduced Government Spending
• Access to Capital
• Improved Quality of Service
• Innovation

Disadvantages of Privatization

• Reduced Accountability
• Reduced Access for Low-Income Individuals
• Job Losses
• Monopoly Power
• Social Inequity

Advantages of Nationalization:

• Increased Public Control

• Social Equity
• Job Creation

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BSc Business Management (University of London), Diploma Business Administration
(ICBT), PCM and DDM (reading) Sri Lanka Institute of Marketing
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• Strategic Prioritization
• Public Benefit

Disadvantages of Nationalization:

• Reduced Efficiency
• Reduced Innovation
• Bureaucracy
• Increased Government Spending
• Political Interference

Ways on how a government might try to control the law

1. Legal constraints on business activity
2. The law and employment practices
3. Recruitment, employment contracts and termination of employment
4. Health and safety laws

Changes in political and legal factors

1. Regulatory Changes: For example, stricter environmental regulations can increase

compliance costs for businesses, while changes in labour laws can affect the cost of
labour.
2. Taxation: For example, changes in corporate tax rates can affect a business’s
bottom line, and changes in personal income tax rates can affect consumer
spending.
3. Trade Policies: Such as tariffs or trade agreements, can affect the cost of raw
materials and finished goods, and can impact the ability of businesses to sell
products in certain markets.
4. Political Stability: Such as investment decisions, as businesses may be less likely to
invest in countries with high levels of political risk.
5. Legal Disputes: Legal disputes, such as lawsuits or regulatory investigations, can
impact a business’s reputation and financial health.
6. Business Opportunities: Changes in political and legal factors can also create new
business opportunities. For example, changes in laws or regulations can create new
markets or products, while changes in trade policies can create new opportunities
for international trade.

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Ways on how a government might intervene to help businesses and encourage

enterprise

• Providing Funding
• Offering Business Support Services – Training or support programs
• Offering Tax Incentives
• Investing in Infrastructure
• Providing Export Assistance

Ways on how a government might intervene to constrain business activity

1. Imposing Regulations
2. Enforcing Legal Penalties
3. Imposing Taxes or Levies
4. Restricting Trade - Through quotas and Tariffs
5. Nationalisation - Mainly done if the failing private firm is essential

Government intervention to counter market failure

Market failure occurs when the market mechanism fails to allocate resources efficiently and
leads to an inefficient allocation of goods and services. In such cases, governments may
intervene to correct the market failure and restore efficiency

1. Regulation - Environmental regulations can limit pollution, health and safety

regulations, can ensure that products are safe, and labor laws can protect workers'
rights.
2. Public Goods
3. Taxes and Subsidies
4. Price Controls - Governments can set price controls on goods and services to prevent
their prices from rising too high or falling too low. This can be used to prevent
monopolies from exploiting consumers or to ensure that essential goods, such as
food and water, are affordable for everyone.
5. Nationalisation

The macro-economic objectives of the government

1. Economic Growth - Governments aim to achieve sustained economic growth, which
means an increase in the production of goods and services over time. Economic
growth is essential for raising living standards, creating jobs, and reducing poverty.

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2. Price Stability - Governments aim to maintain price stability by keeping inflation low
and stable. Inflation erodes the purchasing power of money and can lead to
uncertainty and instability in the economy.
3. Full Employment - Governments aim to achieve full employment, which means that
everyone who wants a job can find one. This objective is important for reducing
poverty, promoting social cohesion, and improving the overall health of the
economy.
4. Balance of payment equilibrium - Governments aim to achieve a sustainable
balance in their external accounts, which means maintaining a healthy balance of
trade and avoiding excessive levels of debt. This objective is important for promoting
long-term economic stability and avoiding external imbalances that can lead to
financial crises.
5. Income Distribution - Governments aim to ensure that economic growth is shared
fairly across society and that the benefits of growth are not concentrated in the
hands of a few. This objective is important for promoting social justice and reducing
inequality.
6. Environmental Sustainability - Governments aim to promote sustainable
development by ensuring that economic growth is achieved in a way that does not
harm the environment or deplete natural resources.

Governments use various policies to achieve macroeconomic objectives. Here

are some examples:

1. Monetary Policy - Monetary policy involves controlling the money supply and
interest rates to achieve macroeconomic objectives. Central banks, such as the
Federal Reserve in the US, use monetary policy to influence economic activity. They
may increase interest rates to curb inflation or decrease interest rates to stimulate
economic growth.
2. Fiscal Policy - Fiscal policy involves the use of government spending and taxation to
achieve macroeconomic objectives. Governments may increase spending during a
recession to stimulate economic growth or decrease spending during times of
inflation. They may also adjust tax rates to encourage or discourage consumer
spending.
3. Supply-Side Policy - Supply-side policies aim to increase the production capacity of
an economy by improving productivity and efficiency. Governments may invest in
education and training to improve the skills of the workforce or reduce regulations
to make it easier for businesses to operate.
4. Exchange Rate Policy - Exchange rate policy involves managing the value of a
country's currency relative to other currencies. Governments may use exchange rate
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BSc Business Management (University of London), Diploma Business Administration
(ICBT), PCM and DDM (reading) Sri Lanka Institute of Marketing
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policies to promote exports by devaluing their currency or to reduce inflation by

increasing the value of their currency.

Corporate Social Responsibility (CSR) is a business approach that aims to contribute

positively to society and the environment. It involves the voluntary actions and initiatives
taken by companies to go beyond their legal obligations and address social, environmental,
and ethical issues.

Some examples of CSR activities include:

• Environmental sustainability initiatives such as reducing greenhouse gas emissions,

conserving energy, and using sustainable materials and practices.
• Philanthropy and charitable giving to support social causes such as education, health,
and poverty alleviation.
• Ethical business practices such as ensuring fair treatment of employees, avoiding
discrimination and corruption, and respecting human rights.
• Community engagement programs such as volunteering, supporting local businesses
and initiatives, and creating employment opportunities.

Businesses need to consider the needs of the community and pressure groups
for a number of reasons:

1. Social Responsibility: Businesses have a responsibility to contribute positively to the

society and the environment they operate in. Taking into account the needs of the
community and pressure groups is a way to ensure that businesses are fulfilling their
social responsibility.
2. Reputation and Brand Image: Businesses that are seen as socially responsible and
environmentally conscious are likely to have a better reputation and brand image.
This can translate into increased customer loyalty, positive word of mouth, and
ultimately, better financial performance.
3. Legal Compliance: Many pressure groups are focused on social and environmental
issues that are regulated by law. Ignoring the needs of these groups can lead to legal
issues and negative consequences for businesses.
4. Risk Management: Engaging with the community and pressure groups can help
businesses identify potential risks and opportunities. This can help them make
better-informed decisions and mitigate potential risks.
5. Innovation and Sustainability: By considering the needs of the community and
pressure groups, businesses can identify new opportunities for innovation and

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sustainability. This can lead to long-term benefits for both the business and the
community.

Demographic changes at a local, national and global level

Demographic changes refer to shifts in the size, structure, and distribution of populations
over time. These changes occur at the local, national, and global level and can have
significant social, economic, and political implications. Here are some examples of
demographic changes at each level:

1. Local Level
• Aging population: In many local communities, the population is aging as a result of
declining birth rates and improved life expectancy. This can have implications for
healthcare, social services, and the labor market.
• Migration: Local communities may experience an influx or outflow of people due to
changes in employment opportunities, housing costs, or cultural factors. This can
have implications for community cohesion and social services.
• Ethnic diversity: Local communities may become more ethnically diverse due to
migration or natural growth. This can have implications for social cohesion, cultural
practices, and political representation.

2. National Level

• Aging population: Many countries are experiencing an aging population due to

declining birth rates and improved life expectancy. This can have implications for
healthcare, pensions, and social services.
• Immigration: National populations may become more diverse as a result of
immigration, which can have implications for cultural practices, labor markets, and
political discourse.
• Urbanization: Many countries are becoming more urbanized as people move from
rural to urban areas in search of employment and other opportunities. This can have
implications for housing, transportation, and environmental sustainability.

3. Global Level

• Population growth - The global population is expected to continue growing, albeit at

a slower rate than in the past. This can have implications for food security,
environmental sustainability, and geopolitical stability.
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• Aging population - Many countries are experiencing an aging population, which can
have implications for labor markets, social services, and international relations.
• Migration - Global migration is increasing due to factors such as economic
inequality, conflict, and climate change. This can have implications for social
cohesion, cultural practices, and political discourse.

The impact of social and demographic change on business and business decisions
1. Customer behavior and preferences – A growing aging population may lead to an
increased demand for healthcare and other services targeted towards older adults.
Businesses need to be aware of these changes and adapt their products and services
accordingly.
2. Workforce diversity and inclusivity - Businesses may need to implement policies and
practices that promote diversity and inclusivity to attract and retain a more diverse
workforce.
3. Technological adoption: Demographic changes such as an aging population may also
drive the adoption of new technologies that cater to the needs of older adults.
4. Legal and regulatory compliance - Changes in the composition of the workforce may
lead to new anti-discrimination laws or changes in immigration policies.
5. Sustainability and environmental concerns - Businesses may need to adopt
sustainable practices and reduce their carbon footprint to meet changing consumer
expectations and regulatory requirements.

The impact of competitors and suppliers on business and business decisions

1. Competition - Competitors can impact a business's market share, pricing strategies,
and product development. Businesses need to monitor their competitors closely to
ensure that they are staying competitive in the market and adjusting their strategies
accordingly.
2. Innovation - Competitors can drive innovation in the market. Businesses may need
to invest in research and development to stay ahead of their competitors and bring
new products or services to market.
3. Supply chain management - Suppliers can impact a business's supply chain and
ultimately affect their ability to meet customer demand. Businesses need to ensure
that they have reliable suppliers and effective supply chain management to avoid
supply chain disruptions.
4. Cost management - Suppliers can impact a business's costs. Businesses may need to
negotiate with suppliers to obtain better pricing or find alternative suppliers to
reduce costs.
5. Sustainability and ethical concerns - Suppliers can also impact a business's
reputation and brand image. Businesses need to ensure that their suppliers meet
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BSc Business Management (University of London), Diploma Business Administration
(ICBT), PCM and DDM (reading) Sri Lanka Institute of Marketing
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ethical and sustainability standards and avoid working with suppliers who engage in
unethical or unsustainable practices.

The importance of international trading links and their impact on business and
business decisions
• Market expansion: International trading links can provide businesses with access to
new markets, which can help them grow their customer base and increase their
revenue streams.
• Competitive advantage: Businesses that have international trading links may have a
competitive advantage over those that do not, as they may be able to offer products
or services that are not available locally.
• Supply chain management: International trading links can impact a business's supply
chain, as they may need to source materials or components from overseas suppliers.
Businesses need to ensure that their supply chain is reliable and efficient to avoid
supply chain disruptions.
• Risk management: International trading links can also expose businesses to risks
such as currency fluctuations, political instability, and trade disputes. Businesses
need to have risk management strategies in place to mitigate these risks.
• Regulatory compliance: Businesses that engage in international trade need to
comply with regulations and laws in multiple jurisdictions. They need to ensure that
they understand the legal and regulatory environment of the countries they operate
in to avoid legal issues and reputational damage.

How international trade agreements might have an impact on businesses

1. Market access: Trade agreements can provide businesses with increased access to
international markets, which can help them expand their customer base and
increase their revenue.
2. Tariffs and trade barriers: Trade agreements can eliminate or reduce tariffs and
other trade barriers between countries, making it easier and less costly for
businesses to export and import goods and services.
3. Regulatory convergence: Trade agreements can promote regulatory convergence
between countries, which can help businesses streamline their operations and
reduce compliance costs.
4. Intellectual property protection: Trade agreements can provide stronger protections
for intellectual property rights, which can benefit businesses that rely on intellectual
property to develop and market their products and services.

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5. Competition: Trade agreements can increase competition between businesses in

different countries, which can be both a benefit and a challenge for businesses. It
can lead to increased innovation and better products and services, but it can also
increase competitive pressure and potentially reduce profit margins.
6. Dispute resolution: Trade agreements can provide mechanisms for resolving
disputes between countries or between businesses and governments, which can
help businesses to resolve issues and protect their interests.

The role of technology in international trade

1. E-commerce: E-commerce platforms and digital marketplaces enable businesses to
reach customers worldwide and conduct transactions online, without the need for
physical stores or offices in every country they operate in.
2. Logistics and supply chain management: Technology helps businesses manage and
optimize their logistics and supply chain operations, from real-time tracking of goods
in transit to inventory management and automated warehouse systems.
3. Communication: Technology enables businesses to communicate and collaborate
with suppliers, partners, and customers around the world in real-time, through video
conferencing, messaging apps, and other digital channels.
4. Digital payments: Technology has made it easier and more secure for businesses to
receive and make payments across borders, through digital payment platforms,
online banking, and mobile payment systems.
5. Data analytics: Technology enables businesses to collect, analyze, and use data from
multiple sources to make informed decisions about pricing, inventory management,
and supply chain optimization.
6. Automation: Technology has also led to increased automation of many trade-related
processes, such as customs clearance, document processing, and compliance checks,
making them faster and more efficient.

Multinational corporations (MNCs) can bring both advantages and disadvantages to a

country. Here are some of the main advantages and disadvantages:

Advantages:

1. Investment: MNCs can bring significant investment to a country

2. Job creation: MNCs can create jobs in the countries where they operate,
3. Technology: MNCs can bring advanced technologies and expertise to a country,
4. Access to markets: MNCs can provide local businesses with access to international
markets, through their global networks of suppliers, customers, and partners.

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5. Corporate social responsibility: Many MNCs have programs in place to support local
communities and promote sustainable development, which can benefit the
environment, social welfare, and education.

Disadvantages:

1. Exploitation: MNCs can be accused of exploiting local labor and resources, by paying
low wages, engaging in environmental degradation, or extracting natural resources
without adequate compensation to the local community.
2. Competition: MNCs can put local businesses at a disadvantage, by using their scale
and resources to dominate markets and drive smaller competitors out of business.
3. Tax avoidance: MNCs can use complex structures and tax havens to avoid paying
their fair share of taxes in the countries where they operate
4. Loss of sovereignty: MNCs can exert significant influence on local governments and
policymakers, which can limit their ability to make decisions in the best interests of
their citizens.
5. Cultural imperialism: MNCs can promote a homogenized global culture, by
promoting their brands and products at the expense of local traditions and customs.

Relationships between multinationals and governments

1. Regulation: Governments regulate MNCs through laws, regulations, and policies that
govern their activities in areas such as taxation, employment, environment, and
trade. MNCs often lobby governments to shape these regulations to their advantage.
2. Investment: Governments seek to attract foreign investment from MNCs to
stimulate economic growth and create jobs, often offering incentives such as tax
breaks, subsidies, and access to infrastructure.
3. Trade: MNCs and governments negotiate trade agreements that govern the terms of
international trade, including tariffs, quotas, and other barriers to trade.
4. Diplomacy: MNCs can influence foreign policy and diplomacy, by using their
economic power and influence to shape government policy in areas such as human
rights, environmental protection, and international development.
5. Corporate social responsibility: MNCs often engage in corporate social responsibility
activities, such as philanthropy and community development projects, which can
support government priorities in areas such as education, health, and social welfare.
6. Corruption: In some cases, MNCs may engage in corrupt practices, such as bribery
and other forms of illegal influence, to gain favorable treatment from governments.

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How physical environmental issues might influence business behavior

1. Resource availability: Scarcity or degradation of these resources can increase costs
or limit the availability of inputs, leading businesses to seek out alternative sources
or adopt more sustainable practices.
2. Environmental regulations: Governments often enact environmental regulations
that require businesses to comply with emissions standards, waste disposal rules,
and other environmental protection measures.
3. Consumer demand: Consumers are increasingly interested in purchasing products
and services that are environmentally sustainable and socially responsible.
4. Climate change: natural disasters can damage infrastructure and disrupt supply
chains, while changing weather patterns can affect agricultural productivity and
natural resource availability.
5. Reputation and brand image: Businesses that are seen as environmentally
irresponsible or unsustainable may face negative publicity, boycotts, and damage to
their reputation, which can harm their bottom line.

How a business and its stakeholders may use an environmental audit

An environmental audit is a comprehensive review of a business's environmental
performance and impact, covering areas such as energy use, water consumption, waste
generation, and emissions. The audit is conducted to identify potential environmental risks
and opportunities for improvement, and to develop strategies for minimizing the company's
environmental footprint.

Here are some ways in which a business and its stakeholders may use an environmental
audit:
1. Business decision-making
2. Risk management
3. Regulatory compliance: such as emissions standards or waste disposal rules. By
identifying potential compliance issues, the audit can help a business take corrective
action before problems arise.
4. Stakeholder engagement: By engaging with stakeholders and addressing their
concerns, a business can build a positive reputation and enhance its social license to
operate.
5. Reporting and disclosure: This can help enhance transparency and accountability,
and provide a basis for benchmarking and comparison with industry peers.

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The impact of the growing importance of sustainability on business and

business decisions
1. Risk management: Companies that fail to address these risks face reputational
damage, legal and regulatory action, and potential financial losses.
2. Competitive advantage: Businesses that can demonstrate a commitment to
sustainability may gain a competitive advantage in the marketplace, attracting
customers and investors who value sustainability.
3. Innovation: Sustainability challenges are driving innovation in many industries, as
businesses seek to develop new products, technologies, and business models that
reduce environmental impacts and promote social responsibility.
4. Stakeholder engagement: Companies that engage with stakeholders on
sustainability issues can build trust and legitimacy, enhancing their social license to
operate.
5. Regulation: Businesses that fail to comply with these regulations may face fines,
legal action, and reputational damage.

Relationship between business objectives and an organizational structure

The purpose of an organizational structure is to define how work is organized, managed,
and distributed within a company. A well-designed structure should support the company's
mission and objectives, facilitate communication and collaboration, and provide a
framework for growth and development. Here are some key attributes of an effective
organizational structure:

1. Flexibility: An effective organizational structure should be flexible enough to

accommodate changes in the business environment, such as market conditions,
technology, and customer needs. This requires a willingness to adapt and evolve
over time to meet changing demands.
2. Meeting the needs of the business: The organizational structure should be designed
to meet the specific needs of the business, including the size, scope, and complexity
of the operations. It should align with the company's goals and objectives, and be
adaptable to changing business priorities.
3. Allowing for growth and development: An effective organizational structure should
provide a clear path for career growth and development for employees, as well as
allowing for the expansion of the business as it grows. This requires careful planning
and coordination to ensure that resources are allocated appropriately.
4. Encouraging intrapreneurship: An effective organizational structure should
encourage innovation and creativity by giving employees the autonomy to take risks

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and pursue new ideas. This can be achieved by creating a culture of experimentation
and learning, and providing resources to support new ventures.

Organizational structure

The purpose of an organizational structure is to define how work is organized, managed,

and distributed within a company. A well-designed structure should support the company's
mission and objectives, facilitate communication and collaboration, and provide a
framework for growth and development. Here are some key attributes of an effective
organizational structure:

1. Flexibility: An effective organizational structure should be flexible enough to

accommodate changes in the business environment, such as market conditions,
technology, and customer needs. This requires a willingness to adapt and evolve
over time to meet changing demands.
2. Meeting the needs of the business: The organizational structure should be designed
to meet the specific needs of the business, including the size, scope, and complexity
of the operations. It should align with the company's goals and objectives, and be
adaptable to changing business priorities.
3. Allowing for growth and development: An effective organizational structure should
provide a clear path for career growth and development for employees, as well as
allowing for the expansion of the business as it grows. This requires careful planning
and coordination to ensure that resources are allocated appropriately.
4. Encouraging intrapreneurship: An effective organizational structure should
encourage innovation and creativity by giving employees the autonomy to take risks
and pursue new ideas. This can be achieved by creating a culture of experimentation
and learning, and providing resources to support new ventures.

Types of organizational structures

A functional organizational structure is one where employees are grouped according to their
specific functions, such as marketing, finance, operations, and human resources. Here are
some advantages and disadvantages of using a functional organizational structure:

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Advantages:
1. Expertise: Employees in a functional structure are organized by their specific area of
expertise, allowing them to develop deep knowledge and skills in their respective
fields
2. Clear career paths: This can help to attract and retain talent, as well as improve
employee satisfaction and motivation.
3. Cost-efficient: The functional structure is cost-efficient because it reduces
duplication of effort and resources.
4. Able to learn much quickly due to similar level of skills from the others

Disadvantages:

1. Silos: A functional structure can create silos, where employees focus solely on
their own functional area and may not be aware of how their work impacts other
areas of the organization.
2. Slow decision-making: Decision-making can be slow in a functional structure
because it requires input from multiple functions. This can result in delays,
missed opportunities, and an inability to respond quickly to changing market
conditions.
3. Limited perspective: Employees in a functional structure may have a limited
perspective of the company as a whole and may not be able to see the bigger
picture. This can result in a lack of innovation and creativity.

Hierarchical structures
Hierarchical structures can be flat or narrow, depending on the number of levels of
authority and the scope of control within the organization. Here are some advantages and
disadvantages of each type of hierarchical structure:

Flat Hierarchical Structure

Advantages
Flat hierarchical structure, also known as a flat organization, is a management approach that
has few or no levels of middle management between staff and executives. In a flat
structure, employees have a greater degree of autonomy and decision-making authority
than in a traditional hierarchical structure

• Fast Decision-making: In a flat hierarchical structure, there are fewer layers of

management, and decisions can be made quickly without having to go through
multiple levels of approval.
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• More Autonomy: Employees have more autonomy in their work as there are fewer
levels of management to report to.
• Flexibility: Flat structures can adapt to change more quickly as they have less
bureaucracy.

Disadvantages:
• Limited Career Growth: With fewer levels of management, there are fewer
opportunities for promotion and career growth.
• Overworked managers: With fewer managers, they may be overworked and unable
to provide adequate supervision and support to employees.
• Lack of specialization: There may be a lack of specialization, and employees may
have to perform multiple roles, leading to a potential lack of expertise in specific
areas.
Narrow Hierarchical Structure:
Narrow hierarchical structure, also known as a tall organization, is a management approach
that has several levels of management between the staff and the executives. In a narrow
structure, there are many levels of management, with each level having a smaller number of
employees reporting to a manager at the level above

Advantages:

• Specialization: In a narrow hierarchical structure, there are more levels of

management, leading to more specialized roles and responsibilities.
• Clear Hierarchy: A clear hierarchy can make it easier to understand roles and
responsibilities, and who to report to.
• More Control: With more levels of management, there is more control over
operations.

Disadvantages:

• Slow Decision-making: With more levels of management, decisions may take longer
to be made.
• Bureaucracy: A narrow hierarchical structure can lead to more bureaucracy, with
more layers of approval needed for decision-making.
• Limited Autonomy: Employees may have limited autonomy in their work as there
are more levels of management to report to, leading to potential micromanagement.

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Matrix structure
A matrix structure is a type of organizational structure where employees are grouped by
both function and project or product. Here are some advantages and disadvantages of using
a matrix structure:

Marketing Operations Finance HR

Marketing Operations Finance HR manager

manager manager manager

Project team 1

Project team 2

Project team 3

Project team 4

Advantages:

• Efficient Resource Utilization

• Enhanced Collaboration
• Greater Flexibility
• Motivation improves

Disadvantages:

• Complexity
• Conflict - With dual reporting lines functional managers over resources, priorities,
and decision-making.
• Coordination is difficult
• Time-Consuming
• Costly

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BSc Business Management (University of London), Diploma Business Administration
(ICBT), PCM and DDM (reading) Sri Lanka Institute of Marketing