20 Organization structure

Dr. Sulakshna Dwivedi

1.       Learning Outcome

2.      Introduction

3.      Meaning and definition of organization structure

4.      Key elements of organization structure

5.      The basis of organization structure-Differentiation and integration

6.      Features of good organization structure

7.      Types of organization structures

8.      Summary

1.  Learning Outcome

After completing this module the students will be able to:

• Understand the concept of organization structure and basis of organization structure.
• Understand meaning and definitions of organization structure. Understand the key elements of organization structure.
• Understand the basis of organization structure-Differentiation and integration To know various features of a good organization structure.
• Understand various types of organization structure and their prominent features.

2. Introduction

Organization structure is the basic building block of an organization. Just like the structure of brain which indicates about how a person thinks, feels and behaves, the structure of an organization or the so called organization structure guides us about the working of organization’s processes and systems. It provides information about work division; Departmentalization; authority- responsibility relationships(Delegation of authority); reporting relationships; decision making (Centralization and decentralization) etc.

Organization architecture/ organization chart/ organogram are the different terms used interchangeably for organization structure. It is the outcome of organizational design. Management function includes planning, organizing, directing and controlling and the activity of organizational design comes under organizing function.

Organization structure presents how individual and team work is coordinated to achieve organizational goals. Moreover it provides information about

• Reporting relationship
• Formal communication channels
• How separate actions of individuals are linked

Organization structure depicts the relationship between hierarchy of people and its functions. Organization structure patterns the interrelationship and interconnected among various components. Therefore it tells us relationship among various activities and positions. As positions are held by people in the organization thus it may also be called pattern of relationship among people in the organization.

Since organization structure is different from human and engineering structure as it lacks anatomy, therefore, can only be inferred with its operation. In this regard Katz and Kahn observed that, “A social system is a structuring of events or happenings rather than of psychological parts and it, therefore, has no structure apart from its functioning.

Depending upon the size of organization, volume of sales, type of ownership, type of industries (people intensive and technology intensive); manufacturing and service industries, the structure of an organization varies.

3.  Meaning and definition

Organization structure is a basic framework within which the managerial decision-making behavior takes place. –Prasad (1995)

Organization structure is a framework which involve grouping of jobs into various departments, the hierarchy of people, chain of command, workflow, and the reporting system in an organization.

According to Child (1984), there are three components in the definition of organization structure

1. Organization structure designates formal reporting relationship, including the number of levels in the hierarchy and the span of control of managers and supervisors.
2. Organization structure identifies the grouping together of individuals into departments and of departments into the total organization
3. Organization structure includes the design of systems to ensure effective communication, coordination and integration of efforts across departments.

(Cited in Daft (2011) in the book Organizational theory, Change, and design)

According to Pierce, Gardener and Dunham (2011), “Organization structure includes the interaction patterns that link people to people and people to work and these patterns are continually evolving.

An organization structure specifies the various job tasks and shows how the same are formally divided, grouped and coordinated.-Robbins (1999).

Organization structure provides an appropriate framework for authority relationships.

It is a means to help the management to achieve the organizational objectives.

4. Key elements of organization structure

Following are the key elements of an organization structure Work specialization

• Departmentalization
• Coordination through chain of command Unity of command
• Span of control/ span of management/ Span of supervision Delegation of authority
• Line and staff relationship Formalization
• Centralization and decentralization

(a)   Work specialization: work specialization implies that work is divided into small activities and these sub-activities are further divided into sub-activities so that a complex task can be converted into simplest task. This is based on the assumption that more a particular job is broken into simplest part, more specialized a person can become in doing that part of job. For this purpose, first of all, all the activities are identified then these activities are divided into sub-activities (simplest job task) and work is assigned to perform these simplest tasks so that it can facilitate specialization of labour as it enhances efficiency in the organization.

(b)   Departmentalization:  Generally  division  of  work  or  specialization  is  achieved through Departmentalization. It  is   the   process   whereby   the   work   of  the organization is divided into various units or departments. Departmentalization can take place in any of the following forms.

• Function Product
• Geography Process
• Customer

There can be vertical, horizontal and spatial differentiation in different organizations. Horizontal differentiation is all about no. of different functional departments or units at the same level and vertical differentiation is no. of hierarchical levels in the organization. Spatial differentiation is geographic dispersion of an organization’s offices, facilities and manpower.

(c)    Coordination through chain of command: After Departmentalization according to different forms, next jobs, departments, functions, divisions and hierarchical work specialization and thing is to coordinate the levels.

This can be achieved through chain of command. Chain of command is the line of authority in the organization chart which explains who reports to whom (reporting relationship).

Coordination can be personal as well as impersonal. In personal there is direct contact between managers and employees and in impersonal, contact between manager and employees rely on written rules, regulations and Standard Operating procedures (SOP)

Unity of command: Unity of command in simple terms is one subordinate –one superior relationship. Principle of unity of command states that a subordinate should have only one superior to whom he /she should report. When one subordinate is accountable and answerable to one boss then there are less chance of communication gaps, hence better coordination and effective organizing.

(d) Span of control/ span of management/ Span of supervision: Span of refers to number of employees (Volume of interpersonal relationships) that a manager can manage effectively and efficiently. It can also be defined as control single number of jobs to be considered under a specific group.

According to span of control height of the organization structure is determined e.g.

Wider span of control- Flat structure

Narrow span of control-Tall structure

What should be ideal span of control?

According to A.V. Graicunas

Formula for number of interactions

I= N (2N/2 + N-1)

Where I = No. of interactions

N= No. of subordinates

According to Ralph Davis

Executive span (Middle and top level managers) at 3 to 9

And operative span (for lower level managers)- up to 30 workers

Factors affecting span of control:

• Competency and preference of subordinates and superiors: If both are competent enough then wider span of control can work well.
• Nature of work
• If nature of work is repetitive in nature then wider span of control and if work is intricate and need close supervision then narrow span of control. Nature of work will further depends upon following factors
• Extent of standardized procedure Similarity of functions
• Complexity of functions
• Geographical dispersion of employees.

(e) Delegation of authority: Once the individuals are assigned with different activities that make him responsible for achieving the target or completing those activities, authority is conferred to them to discharge their duties. Authority is a power to manage the subordinates according to rules, procedures and standards of an organization.

According to Henry Fayol, “Authority is right to give orders and provides to exact obedience. It is an authorization to an individual for decision- making”. Responsibility without authority is of no use. Authority comes from various sources e.g. Legal/Formal (Position); Competence (Skills/abilities); Acceptance (acceptance from subordinates). As a manager or person at a particular position cannot handle all the activities on his own, therefore, he needs to transfer his authorities to employees in the next level of hierarchies. This process of transferring of authority to next level of employees is called delegation.

Delegation and re-delegation process helps in distribution of authority at various positions in the organization (points in the organization structure)

(f)    Line and staff relationship:

In organization structure some relationship are depicted through straight line with a arrow and some are shown with he help of dotted lines. This is a depiction of line and

staff relationship.

Line relationship-  Staff relationship- ———

Line relationship: Indicates superior is authorized to give orders to subordinates and subordinates are obliged to obey those orders.

Staff relationship: Indicates tendering advice to line managers by staff members. It is not mandatory for line managers to carry their work according to advice tendered by staff personnel. In organizations generally, Human resource management Manager and Information technology Manager acts in the capacity of line managers as well as staff (advisory to other line managers).

Fig.1: Line and Staff authority in Organization structure

(g) Formalization: The degree to which job expectations are standardized or in black and white. There is strict adherence of rules, policies and standard operating procedures. Higher the degree, higher will be formalization and lesser the degree, lesser will be formalization.

(h) Centralization: centralization is the degree to which decision- making authority is concentrated with top level management. In smaller organizations, generally all the major decisions are taken by CEO or M.D. But as the size of organization increases the complexity in managing the business also increases. Therefore top level management or CEO delegate powers to lower levels in the hierarchy to take decisions because it is not possible for him to take all the decisions albeit some major decisions remain in the hand of top level. According to Louis A. Allen,

“Decentralization refers to the systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central points”. Centralization and decentralization both have their advantages and disadvantages

Advantages of centralization:

• Centralization helps in taking quick decisions. Good in case of smaller organizations
• Centralization leads to efficiency if organization is operating under stable environment but this is generally not the case these days.

Disadvantages of centralization:

• Difficult in case of large organizations
• Employees’ development is hampered because they are not involved in decision making.
• Decentralization overcomes the disadvantages of centralization as in good in case the size of organization is large and promotes development of employees.

5. The basis of organization structure-Differentiation and integration

• Organization structure refers to the differentiation and integration of activity and authority, roles and relationship in the organization” (Prasad)
• The basis of organizational design is differentiation and integration
• Differentiation: refers to differences in activities, functions, roles and cognitive abilities, skills required to perform those differentiated functions. Differentiation can take any of the three forms as in Horizontal, Vertical and spatial differentiation.

Horizontal Differentiation: Horizontal differentiation is often referred to as departmentalisation as it entails the way various activities are merged into groups. Departmentalization is the basis on which jobs will be grouped together. In an organization there are various activities which can be grouped together to form separate functions e.g. HR, Finance, production, marketing, sales, customer care, quality control Research and Development etc.

Vertical Differentiation: Vertical differentiation is measured in terms of the number of hierarchical levels. As the organization becomes larger and complex, there is a need for greater vertical differentiation. Different hierarchical levels may include top level management (CEO/MD, Board of Directors, Vice president, General Managers); Middle level manager (Sr.Managers/ Managers/Assistant Mangers) and Lower level hierarchy (operating staff, workers etc.)

Spatial Differentiation: It is the geographic dispersion of an organization’s offices, facilities and manpower e.g. different business units or divisions etc.

These different functions require different skills, abilities and talents to perform those functions effectively. Each functional unit interacts with other unit at different hierarchical levels in a unique manner. Hence, each functional unit has its own level of differentiation. But as all the departments or functional units or the divisions are the part of one organizational unit and their work is interrelated, interconnected and interdependent upon each other hence cannot be treated as isolated differentiated units rather efforts are need to be directed and integrated to achieve one common organizational goal.

Therefore despite differentiation, integration is the aim of organizational design.

6.  Features of good organization structure

1. Simplicity: an organization structure should be basically simple. The concept of the simplicity implies that various roles, positions and reporting relationship should be clear enough that could facilitate smooth functioning.
2. Flexibility: an organization structure should be flexible so that minor change in internal and external environment should not cause organization structure to be redesigned from the scratch. Therefore, the structure should be designed proactively and scope for changes should always be there.
3.  Minimum hierarchical levels: In the recent scenario taller structures are not preferred as this result in lot of procedures and delay in decision –making. Hence, hierarchical levels should be kept at minimum levels so that employees can work in cohesive groups and teams and drawbacks of taller structures can do away with.
4. Principals of unity of command: Principle that an employee should get orders from only one boss unless violation is absolutely essential. In matrix organization, employee gets command from more than one boss but there it is ensured that employees are competent enough to handle two commands.
5. Clear line of authority: There should be clear lines of authority running from top to bottom or in horizontal directions. Line and staff relationship should be presented well and comprehensive to all the employees.
6. Proper delegation of authority: the concept of ultimate responsibility is feasible only with proper delegation of authority. Delegation of the authority refers to authorization a manager to make certain decisions.
7. Responsibility and accountability should be clear: The concepts of the ultimate responsibility suggest that although a superior manager assigns some of the work of his subordinates. He is ultimately responsible for performance of total work.

7.  Different types of organization structures

Depending upon following factors organization structures are designed

Formalization: Organization structure is outcome of formal system in an organization where rules /policies are explicit in nature. All the rules are in black and white and everyone is supposed to obey those rules. This formalization leads to more standardized and predictive behaviours from employees.

Departmentalization: Work activities are divided according to specialized functions e.g. finance, human resources, marketing, production, quality control, research and development, purchase, materials, sales, customer care etc.; according to different products; process (people involved in similar processes) or projects (members of a project); geography (people dispersed at particular geographical location) etc. Each and every department is different from each other in terms of functions and their managers are different in their skills, aptitudes and cognitive orientations. Different design structures on the basis of Departmentalization are as follows:

Functional Departmentalization:

This structure is based on different functional areas of business. Horizontal and vertical differentiation is displayed in the Fig.2 (Functional Departmentalization)

Fig.2: Functional Departmentalization

Divisional Departmentalization:

This structure is based on different divisions or Strategic Business Units (SBUs) of an organization. In Fig.3 (Divisional Departmentalization), every division has its own functional departments which would further consists of vertical layers.

Fig.3: Divisional Departmentalization

Geographical Departmentalization:

This structure is based on different geographically dispersed positions/Jobs/employees of an organization that are catering to diverse spread of the business. In Fig.4 (Geographical Departmentalization), Manager-Sales at different locations are reporting back to General Manager-Marketing at the headquarter.

Fig.4: Geographical Departmentalization

Project Departmentalization:

Organizations where work is undertaken on the project basis, project structures are best suitable. Projects have some unique feature e.g. these are for specific time and purpose. Projects are contracted from outside, unique and unfamiliar to present organization. Once the project is finished then the team moves on to the next project. This structure allows specialised skills of teams. This allows flexible and proper utilization of resources by allowing them to different projects

Fig.5: Project Departmentalization

Process Departmentalization: In this structure group of activities are coordinated according to a particular process. For example in an automobile Industry chief Plant manager is looking after five processes viz. Design, Machine Shop, Engine Assembly, Chassis and other accessories and Inspection and Quality control (Fig.6: Process Departmentalization).This structure facilitates more efficient flow of work activities but only some industries have such a specialised processes.

Fig.6: Process Departmentalization

Customer Departmentalization: In some Industries work is organized according to customers. Customers are service receivers. In a hospital industry, there are various patients like inpatients, outpatients etc. and everyone has their different set of needs. So to better cater to their needs, customized service approach is used in this particular type of departmentation. Plus point in this type of departmentalization is individual customer are taken care of by specialists. But disadvantage is that there is duplication of functions and restricted view of overall organizational goals

Fig.6: Customer Departmentalization

Hierarchical Levels: Hierarchical levels deal with layers through which authority will be delegated to get the work done. Once the jobs are assigned to different individuals and teams they become responsible to their jobs. But all the jobs are not to be done by the manager. Although he/she is discharged with authority but as he has to get the work done from others so he must delegate the authority to junior staff. Authority structure explains who will interact with whom or reporting relationship. Depending upon the authority structures and delegation of authority hierarchical levels are decided and thus cause the formation of taller, flat and flatter structures.

Centralization/ Decentralization: By considering advantages and disadvantages of centralization and decentralization of authority and the organizational factors (strategy, processes, technology and size etc.) an organization structure is designed. Detail of centralization and decentralization is discussed in Section 4 of this module

Types of organization structures

Traditional Structures

• Simple structures
• Bureaucratic structures
• Matrix Structures

Contemporary Organization structures

• Team structures
• Network Structure
• Boundary-less
• Virtual structures
• Learning structures

Simple (Pre-bureaucratic structures):

Simple structure can be observed in small scale units or start up units. Usually due to small level of business, activities are manageable and are managed by a single person and decision- making power is centralized to him.

Departmentalization: Low degree

Span of control: Wider (Flat structure)

Centralization: centralization of authority in a single person

Formalization: Little

Bureaucratic structures:

Bureaucratic structures are characterized by certain degree of standardization. These are rigid structures. These structures have tight procedures, rules and regulations. These are suitable for large and complex organizations. Strict and many hierarchical levels are there and chain of command is followed. Span of control is narrow, therefore, have taller structure.

Departmentalization: High

Standardization: High

Hierarchical structures: Many

Span of control: Narrow (Tall structures)

Formalization: High

Bureaucratic structures follow strict rigid procedures thus doesn’t promote creativity and innovation. Decisions are made through an organized process. Bureaucratic structures make an organization hard to adapt to changing environment. Good for managers who have command and control style of managing.

Matrix organization structure:

Matrix organization structure combines functional and divisional /project Departmentalization. This structure creates dual lines of authority or it has dual authority system. This structure violates the principle of unity of command as one employee has to report back to two bosses. Complex and interdependent activities are coordinated with the help of matrix organization structure. It is useful in case organization faces HR and financial constraints.

In case organization is facing uncertain environment and it has to respond quickly to changes it can use matrix organization structure.

Matrix structure doesn’t construe only multiple commands but calls for related support mechanism and culture

According to Davis and Lawrence

Matrix Organization= Matrix structure+ Matrix system+ Matrix culture+ Matrix Behavior

Main features

• Dual focus
• Shared resources
• Pressure of high information processing
• Emphasis is on professional competence by elaborating authority of knowledge rather authority of position.

Fig.4: Matrix Structures

 

Fig.5: Matrix Structures

Problems in matrix structure:

• Due to dual command, there is problem of power struggle. Balance of power is the key for effective functioning of matrix organization structure
• Initially it is a costly affair
• If not managed properly can result in delayed decision making.
• Depending upon different levels of centralization, Formalization, Hierarchical levels, Departmentalisation

Contemporary Organization structures

Team structures: Team structures are the contemporary structures organizations are using these days where the focus is on teams to coordinate the activities. Team organization  structures  cater  to  competencies  of  teams  as  a  whole.  Therefore employees  need  to  be  competent  enough  for  high  horizontal  coordination  and therefore cost of human resources is high in this structure. Departmental barriers are removed with use of teams and especially Self managed teams (SMTs). As SMTs are used hence employees need to be both generalist as well as specialists. Decision making power is decentralized to team level and rigid bureaucratic structures can be eased with flexibility of teams thus tries to create “flexible bureaucracy”. Motorola,Daimler Chrysler and Xerox are the companies using team structures to coordinate their activities.

Network Structure:

In network structures, managers coordinate the work by networking between internal and external relations via electronic means. External relations include outsourced work given to outsourcing agencies so that it can better focus on its core area. This is done to achieve low cost strategy of the firm.

Boundary-less structures: This term was coined by Jack Welch during his stint with General Electric (G.E.) as C.E.O. As the very name suggests these structures have no boundaries as it eliminates traditional barriers between departments as well as barriers between the organization and the external environment (Ashkenas et al., 1995). In these structures departments are substituted by empowered teams and effort is made to make the structures more flexible and organic. To remove the obstacles of bureaucratic or mechanistic structures, hierarchical levels are removed and chain of command is eliminated. Span of control is kept limitless, hence flatter structure. These are the structure where SMTs (Self Managing teams) are used who creates their own roles according to situations as opposed to traditional and hackneyed jobs.

Boundaries less organization are of two types

• Modular organization
• Strategic Alliance

Modular organization:

In modular organization, non- essential functions are outsourced and organization just focussed on value generating functions.

Strategic Alliance:

In strategic alliance two companies or competitors identify an area of collaboration and work towards a partnership or Joint venture and in this way traditional boundaries between the two may be broken.

Boundary less organizations may involve eliminating the barriers separating employees –Physical and intangible barriers both. Physical barriers involve removing cubicles among employees. Intangible barriers involve eliminating the management layers.

Virtual structures: A special form of boundary less organization is virtual. Hedberberg et al. (1999) opined that virtual organizations not exist physically but enabled by software. Like network organization, these organization outsource its major business functions and is connected with its agents through internet. There is hardly any Departmentalization and highly centralized structures. Although organization can be small yet operating globally through internet and can be market leader in its niche. E.g. Amazon.com.

Learning structures:

Concept of learning organization was developed by Peter Senge (1990) in his book

“The Fifth Discipline”. Learning organization is an organization where experimenting, learning new things and reflecting on new learning are the norms.

It is an organization which has developed the capacity to continuously learn, change and adapt by adopting knowledge management practices. Learning organization has team based organization design that empowers employees and there is open sharing of knowledge. These organizations have strong culture of trust, openness and shared values.

3M facilitates learning organization concept by allowing its employees to work one day in a week on personal project.

In IBM, learning spirit is encouraged by putting successful business managers into EBO (Emerging Business Opportunities). In IBM mistakes and failures are tolerated and risk taking is encouraged and this way they build a learning capacity.

Thus, overall we have seen that there various design structures which range from structured and standardized bureaucracy to loose and limitless boundaries. Rest all other designs ranges between these two extremes. These two extremes can be re conceptualized and redefined in terms of the organic and the mechanistic models

Depending upon different levels of centralization, formalization, hierarchical levels, departmentalisation two extreme forms of structural models are the organic and the mechanistic models (Burns and Stalker)

Summary:

Organization design which is a specialised function under organizing is concerned with designing of organization structure. Organization structure is the architecture of an organization. It is arrangement of individual and team jobs to show that how entire work is coordinated in the organization. It depicts jobs, departments, positions, authority-responsibility relationship, line and staff relationship, chain of command, span of control, centralization/decentralization, formalization etc.

Organization structures are of various types. There are simple structure, bureaucratic structures and matrix structures. Based on different levels of formalisation, centralisation, departmentalization, hierarchical levels various structures are designed. In the recent years, new and contemporary structures have evolved among these are learning structures, network structures, virtual structures. Depending upon various departmentalizations various structures are created e.g. functional, divisional, geographical, product, customer, process and project structures. Overall, there are two extremes in which all the designs exists which is called organic and mechanistic structures. Structures are designed according to strategy, size, technology and environment of an organization. Structural relationship affects the employee attitudes and behaviours which further leads to individual performance and satisfaction. Thus by taking into considerations advantages and disadvantages of factors on which it is based, structures should be shaped, assessed and reshaped so that it helps organization meet it purposes and increase the organizational success.

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