32 Foundations of Organization Structure

Dr. Radha Kanwal Sharma

1.      Learning Outcome

2.      Introduction

3.      Need of organisation structure

4.      Elements of organisation structure

5.      Determinants of organizational structure

6.      Summary

1.  Learning Outcomes:

After completing this module the students will be able to:

·  Understand the concepts of organization structure.

·  Need of organization structure.

·  Elements playing decisive role in choosing the structure.

·  To know the determinants of organization structure.

2.  Introduction

The organizational structure tells us about the character of an organization and the values it believes in. It is the framework around which the organization as a group is organized, the foundation which keeps it functioning. Structure describes how members are accepted, how leadership is chosen, and how decisions are made. It represents the authority and responsibility relationships between various positions in the organization by showing who reports to whom. Thus the structure is the relationships among people in the organization. Structure is designed to determine the channel of communication and flow of authority and responsibility.

3. Need of the organisation structure:

Basically an organization structure is needed due to following factors:

·         To divide and allocate work,, authority and responsibility;

·         To ensure efficiency and effectiveness of activities in accordance with the common objectives of the organization.

·         To establish working relationships and operating mechanism

·         To establish the means of control

·         To establish patterns of management and supervision;

·         To establish means of employee retentions i.e. retention of knowledge, experience and expertise;

·         To give meaning and identity to the people who join the organization, as well as to the organisation itself.

·         To specify the areas of responsibility, authority and accountability;

·         To meet the expectations of the stakeholders;

·           To provide the basis of fair and equitable reward system.

·         Structure gives the group a means to maintain order and resolve disagreements.

3.1 Features of a good organisation structure

A good organisation structure should be able to meet different needs and requirements of the business enterprise. It should possess following features:

1.    Simplicity: An organization structure should be basically simple. The concept of the simplicity implies that various organizational relations should be kept minimum possible.

2.    Flexibility: An organization structure should be flexible enough so that changes can be incorporated whenever needs arise. The structure is designed for a long period of time. As such permanence must be maintained in the organization structure over the period of time.

3.   Clear line of authority: Whatever the form of structure is adopted, there should be clear lines of authority running from top to bottom or in horizontal directions.

4.  Application of ultimate responsibility: The concepts of the ultimate responsibility suggest that although a superior manager assigns some of the work of his subordinates, h e is ultimately responsible for performance of total work.

5.    Proper delegation of authority: The concept of ultimate responsibility can work only when there is proper delegation of authority at various levels of the organization. Delegation of the authority refers to authorization of a manager to make certain decisions.

6.  Minimum possible managerial levels: As far as possible, there should be minimum managerial levels. Greater the number of managerial levels, longer is the line of communication in the chain of command; as a result the communication has to travel along the line creating problems of the delay and distortion.

7.  Principals of unity of direction and command: Unless absolutely essential, principals of unity of the direction and the unity of command should be followed.

8.    Proper emphasis on staff: Line functions should be separated from staff functions and adequate emphasis should be placed on important staff activities.

9.    Provision for top management: In the organization, it is imperative to provide some means by which the share holder and members of the brand of the broad of directors are able participate in management process. Normally the share holders are indifferent so far as day to day management affairs of the company are concerned.

3.2 Mechanism for designing organisational structure

There are three approaches which ought to be considered while designing the organization structure.

Process approach: The main emphasis is put on three aspects:

i)        Identification of various activities for implementing the strategy

ii)      No duplication in performance of activities

iii)    Performance of all activities in synchronised way.

This approach is suitable for small organizations only.

Result approach: This approach is suitable when strategy innovation is the prime need. This approach involves following steps:

i)        Business is defined on the basis of potential areas of market opportunities;

ii)      The objectives to be achieved are fixed;

iii)   The requirements for success and functional skills needed to meet these requirements are determined.

iv)   The degree of authority is determined keeping in view the degree of centralisation best suited to decision making.

This approach is suitable only if the organization has one or few market opportunities. Decision approach: This approach is based on certain questions like

i)     What are the decisions required to obtain the results for achieving the organizational goals and objectives?

ii)      What is the nature of such decisions?

iii)    Such decisions should be made at what levels of organization?

iv)    What are the activities involved in or affected by such decisions?

The answers to these questions will determine the degree of authority in a position, its interaction with other positions and the placement of position in organizational hierarchy.

4. Elements of organisational structure

There are six key elements that need to be addressed while designing an organizational structure:

· Work specialization – This is the degree to which tasks in the organization are subdivided into separate jobs.

· Departmentalisation – The basis by which jobs are grouped together.

· Chain of command – The unbroken line of authority that extends from the top of the organization to the lowest rank and clarifies who reports to whom.

· Span of control – The number of subordinates a manager can direct efficiently and effectively.

· Centralization/Decentralization – The degree to which decision making is concentrated at a single point in the organization. Decentralization is when decision discretion is pushed down to lower-level employees.

·  Formalization – The degree to which jobs within the organization are standardized. Let us discuss these in detail:

4.1 Work Specialisation: This principle states that the whole work of the organization should be divided amongst the subordinates on the basis of qualifications, abilities and skills. To achieve this, the work of the organization is divided into tasks or functions (also called jobs). These activities are assigned to different people to be accomplished. This leads to division of work. Division of work leads to specialization.

Work specialization enables a manager to take complex tasks and break them down into smaller more precise tasks that individual workers can complete. Each employee is trained explicitly on how to best perform one small, specific task. Over time, that employee becomes extremely proficient and effective at performing that task. This allows every employee in the organization to be an expert to some degree. Work specialization is particularly beneficial in manufacturing especially in an assembly line where each individual employee completes one repetitive step in the product development process.

4.2 Departmentalisation

Departmentalisation is the process of classifying and grouping all the activities of an enterprise into different units and sub-units. This is done to facilitate the functioning of the activities efficiently for achieving overall results. Departmentalisation aims for:

· Specialization of activities;

· Simplification of task of management within a workable span;

· Maintaining coordination and control of various activities.

4.2.1 Importance of Departmentalisation

· Specification: Departmentalisation helps to develop specification in various activities which leads to improving the efficiency of operation.

· Autonomy: Departmentalisation provides independent charges of respective departments to managers. This autonomy brings satisfaction and increases their efficiency.

· Fixation of responsibility: As the authority and responsibility of each department is defined precisely, through departmentalisation, responsibilities of the work can be precisely and accurately fixed.

· Fixation of accountability: As the activities are well defined and responsibilities are clearly laid in a department, it becomes easy to fix the accountability for results.

·  Development of Managers: The managers of each department perform specialized functions. Due to autonomy, they are able to take independent decision and thus develop themselves for higher positions.

·  Facilitates Appraisal: Departmentalisation facilitates good supervision and administrative control. This makes appraisals easier.

·   Conducive environment: Departmentalisation facilitates successful operation of activities and creates an environment for effective performance. Grouping of activities and employees into departments also makes it possible to expand an organization to a large extent.

·  Increases  effectiveness:  It  enables  the  organization  to  recapture  some  of  the advantages of the small functional organization while minimizing the disadvantages of that which comes with increasing size, diversity and dispersion.

Departmentalisation though necessary, poses following dangers to the organization:

1.   As the number of departments and hierarchical levels increases, the task of coordination gets more difficult.

2.  Communication across different departments usually gets difficult, making functions like control, supervision and planning even more difficult.

3.  The possibility of direct contact between top management and operative personnel becomes remote because of the layering of executives at different levels. This leads to communication gap.

4.2.2 Bases of Departmentalisation: There are six bases on which departments can be created in an organization:

4.2.2.1. Functional Departmentalisation: This is the simplest form of functional departmentalisation. The grouping of departments is done on the basis of functions such as production, finance, marketing, purchase and personnel etc.

Fig.31.1 Functional Departmentalization

Advantages: It promotes specialization; facilitates easy control; identifies training needs of managers; and is very simple, natural and logical way of grouping activities.

Disadvantages: It may lead to overspecialization in one field only, increase conflicts and coordination problems, excessive centralization and lack of responsibility for the end result

4.2.2.2. Product wise Departmentalisation: It is done when there are several product lines and each line has a variety of items. In this the grouping of activities is done on the basis of products manufactured in the organization. It is suitable in large organizations where different products are made.

Fig.31.2 Product wise Departmentalization

Advantages: It ensures better customer service, makes control and coordination effective. It is flexible and new product line can be added easily.

Disadvantages: It is expensive as duplication of service functions occurs in various product divisions.

4.2.2.3. Territorial / geographical Departmentalisation: When activities of an organization are physically dispersed in different locations, territorial departmentalisation is adopted. All activities related to a particular area are grouped together. Most useful where business is on national or international level. E.g. Unilever India is geographical department of Unilever.

Fig.31.3 Territory wise Departmentalization

Advantages: Help to cater to the needs of local people better and facilitates effective control Disadvantages: Communication problems may occur between head office and regional office due to lack of means of communication at some location, coordination between various divisions may become difficult and there is duplication of activities.

4.2.2.4. Customer wise Departmentalisation: When departments are formed to cater different kind of customers it is known as customer wise departmentalisation. Customers may be classified according to buying capacity or nature like whole sale, retail and export or government or general public.

Fig 31.4 Customer wise Departmentalization

Advantages: Better service to customer having different needs and tastes; Development in general managerial skills.

Disadvantages: Sales being the exclusive field of its application, co-ordination may appear difficult between sales function and other enterprise functions.

4.2.2.5. Process or equipment wise Departmentalisation: When the activities are grouped under the basis of production process/ equipment involved, it is called process wise/ equipment wise Departmentalisation. It is generally used in a manufacturing unit and lower level of enterprise such as textile, oil, engineering and production industry. The main objective of this type of departmentalisation is to achieve efficiency and economy in operation.

Figure 31.5      Process wise Departmentalization

Advantages: There is no duplication of activities; there is economy in operation and there is no interruption of departments or processes.

Disadvantages: Coordination of departments is difficult and more specialists are needed for each process.

4.2.2.6. Combined or composite departmentalisation: It is a hybrid which tries to combine the advantages of different types of departmentalisation. e.g. a combination of functional and product departmentalisation. The combination depends upon the suitability of organization.

4.3 Chain of Command:

It is the hierarchy of authority in which those at the top of the organization direct and control the activities of the organizational members below them. Chain of command permits coordination of different individuals and groups engaged in task specialization in order to accomplish organizational goals. The chain of command is usually depicted on an organizational chart, which identifies the superior and subordinate relationships in the organizational structure. The organizational chart allows one to visualize the lines of authority and communication within an organizational structure and ensures clear assignment of duties and responsibilities. By utilizing the chain of command, and its visible authority relationships, the principle of unity of command (each subordinate report to one and only one superior) is maintained.

While a properly functioning chain of command can establish effective coordination, accountability, and efficiency in organizational operation, there are some drawbacks too. Some theorists argue that since a chain of command tends to give lower-level individuals little or no control, there may be little job satisfaction, which may result in low motivation. Organizations often respond by providing monetary rewards and encouraging competition for top-level positions. However, according to Argyis, these solutions create problems of their own, such as low personal involvement at work or destructive competition between employees.

4.4 Span of Control

The number of subordinates which should be put under one superior so that these can be handled and controlled effectively by a single manager is span of control/management. It helps to determine the degree of complexity of a manager’s job and defines the shape of an organization. Fewer are the number of people reporting to a manager, larger is the number of managers required.

There are two types of span of management:

4.4.1Wide span of control: In wide span a manager supervises and controls a large number of subordinates. Wide span leads to flat organizational structure with lesser number of management levels.

4.4.2 Narrow span of control: In narrow span of control, a manager supervises a selected number of employees at one time. The work and authority is divided amongst many subordinates. Narrow span leads to tall organization structure with many level of management.

4.4.3 Tall Structure: Tall structure is the result of narrow span. It provides close supervision, control and faster communication between superior and subordinates. It facilitates to develop specializations.

On the flip side the superior tends to get involved in subordinate’s work; many levels of management result into higher cost; excessive distance exist between top level and lowest level leading to communication issues; and co-ordination becomes difficult.

4.4.4 Flat Structure: Flat structure is the result of wide span. In this superiors are forced to delegate resulting in less of supervision. It facilitates better communication, supervision, coordination and quick communication.

Flipside  of  flat  structure  is  that  superior  are  overloaded  with  work  and  there  is tendency of superiors to become bottlenecks in decision making due to work overload

4.4.5  Factors  influencing  span  of  management:  Following  factors  are  responsible  in

determining span of control:

1.   When managers are capable and aggressive, wide span is always helpful. When managers are submissive by nature, narrow span is preferred.

2.    When the subordinates are capable and competent, efficient and trained, wide span is suitable.

3.  If the work is of repetitive nature, wide span of supervision is more helpful. If work requires tight control and supervision, narrow span is more helpful.

4.   When degree of decentralization is high, wider span is preferred and a flat structure is helpful. But if degree of decentralization is low, narrow span is preferred.

5.  More is the prevalence of face to face communication, more time will be consumed, lesser people will be handled, and narrow span shall be preferred. Likewise, lesser extent of face to face communication will lead to requirement of wider span.

6.   More use of staff assistance means more free time available with manager. Hence he can handle number of people. Here wider span will be more useful.

7.    If a subordinate is receiving supervision from several other persons besides his direct superior, the work load of manager will lessen and he will have more time for disposal, hence wider span of control will be more suitable.

4.5 Centralisation/decentralisation

In centralization decisions regarding the work are made not by those doing the work, but by higher authorities in the organization. An enterprise following centralization need not have highly skilled subordinates Centralization brings standardization of procedures and systems. It facilitates smooth working as it facilitates quick decisions making. It helps to keep all the departments of a company integrated .Centralization of decision-making is indispensable in case of multi-units of an organization, to sustain uniformity of action. If all units are required to do the same thing in the same way, there must be centralization. But there are certain limitations too. It increases the burden on the top executives and little time is left for attending to other important functions of administration. It hampers the growth and development of subordinates due to lack of authority to take independent decisions. Centralization tends to slow up the operations and reduces the scope for specialization.

Decentralization is an extension of delegation. Decentralization is concerned with the handing over of decision-making authority to the lower levels in managerial hierarchy. Decentralization relieves the top executives of the burden of performing various functions. It lessens their burden by giving decision-making power to the subordinates. The executives in the organization get the opportunity to develop their talents by taking initiative for decision making. This improves their morale. Decentralization ensures better control and supervision. Decentralization leads to quicker decision-making of lower level since decisions do not have to be referred up through the hierarchy. Decentralization grants more autonomy to lower level. This helps the subordinates to do the work in the manner best suited for their department. As all the managers and employees share the decision-making powers, this sharing of integrates the employees as one team and develop team spirit among them.

But under decentralization, uniform policies and standardized procedures can not be followed as each manager according to his requirements and talent. It creates problems of co-ordination and control. It can be exercised when people in the organization are intelligent, capable and competent. Decentralization puts more pressure on divisional heads to realize profits at any cost. This creates stress and brings conflicts among managers.

4.6 Formalisation

Formalisation is the extent to which an organization’s policies, procedures, job descriptions, and rules are written and explicitly articulated. Formalized structures have many written rules and regulations. Employee behaviour is controlled by using written rules, and the employees have little autonomy to decision making. Formalization is makes employee behaviour more predictable. In case of a problem, employees know to turn to a procedure guideline. This leads to consistency of behaviour.

Even as formalization reduces ambiguity and provides direction to employees, it suffers from drawbacks. A high degree of formalization leads to reduced innovativeness because employees are used to behaving in a certain manner. And a formalized structure is associated with reduced motivation and job satisfaction as well as a slower pace of decision making. Lower-level employees have limited power to resolve a customer problem and are constrained by stringent rules that outline a limited number of acceptable responses.

5. Determinants of Organization Structure

There are five determinants of organization structure:

5.1 Strategy: Strategy and structure are closely linked. Ideally the structure should follow strategy. Structure should be designed for strategy implementation.

5.2 Size: An organization’s size considerably influences its structure. Large organizations tend to have more specialisation, more departmentalisation, more vertical levels and more rules /regulations than small organizations.

5.3 People: Skilled and professional people can be better managed by a structure that satisfies their need for autonomy, less direct control and power of decision making. This structure will be different from traditional one.

5.4 Technology: Large batch productions have mechanistic structure. The organic structure is more suitable for firms having unit and small batch technology.

5.5 Environment: firms operating in static environment tend to have rigid structure while firms operating in dynamic environment tend to have flexible and adjustable structure.

6. Summary

Organization structure is the formal configuration between individuals and group with respect to the allocation of tasks, responsibilities and authority within organizations. Structure has six core elements viz. Work specialisation, departmentalisation, chain of command, span of control, centralisation/decentralisation and degree of formalisation. Strategy, size, people, technology and environment are five determinants of structure. A good organization structure should be simple and flexible.

Learn More:

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5.      http://kalyan-city.blogspot.in/2011/04/bureaucratic-theory-of-management-by.html

6.      http://www.yourarticlelibrary.com/management/max-webbers-bureaucratic-model/

7.      http://pmstudycircle.com/2012/08/what-is-a-matrix-organization-structure/

8.      http://www.wisegeek.com/what-is-a-horizontal-organizational-structure.htm

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