Chapter Nine

Organizational Structure and

Design
 Definition
 According to Koontz and Donnel organizational structure as ‘the
establishment of authority relationships with provision for
coordination between them, both vertically and horizontally in the
enterprise structure’.
 Vertical structure indicates the line authority and reporting channel.
Horizontal structure indicates the division of work and
specialization.
 Tiers of organizational structure are indicative of power structure,
positions and its interrelationship, roles, channels of reporting,
delegation and accountability.
 Good organizational structure indicates the following:
 The structure must lay down formal reporting hierarchy right
from the lowest level of worker to the highest level of board of
directors.
 Coordination of various activities be laid down and coordinating
authority specified.
 Individual, group and departmental goals should be laid down
with specific time frame.
 Standing orders, policies, procedures, drills, rules and regulations
should exit in an organization.
 Bureaucracy Basics
 A bureaucracy is a form of organization based on logic, order, and the
legitimate use of formal authority.
 Bureaucracies are meant to be orderly, fair, and highly efficient. Their
features include a clear-cut division of labor, strict hierarchy of authority,
formal rules and procedures, and promotion based on competency.
 Max Weber, a German Sociologist has introduced a mechanistic form of
organizational structure. The system is based on logic, a systematic order
of delegation of authority.
 In bureaucratic model every individual has an equal chance of personal
growth based on performance.
 The model is highly rigid, that creates inflexibility in the organization.
 Bureaucracy promotes politics in an organization. This system tends to
serve interests of few elite personalities.
 Forms of organization Structure
a) Mechanistic form of organizational structure:
 It is organizational structure based on formalized system that is relatively rigid in
nature.
 This is generally applicable to those organizations that are not influenced by
technological, product, market changes and generally maintains a constant
pattern.
 Authority is centralized at the top level of management, emphasizes achieving
high level of production and efficiency through extensive use of rule and
procedures and has a rigid hierarchy of authority.
 The structure is characterized by plenty of written orders and instructions.
b) Organic form of organizational structure:
 Organizations those are subject to change due to environmental factors like
technology, market changes and product development generally adopt organic
form of organizational structure.
 Decentralized decision making is practiced that allows people to make their own
decisions
 There are very few levels of organizational hierarchy and existence of flexible
 Factors Affecting Organizational Design
i. Organizational size:
 The larger an organization becomes, the more complicated its structure.
ii. Organization life cycle:
 Organizations, like humans, tend to progress through stages known as a life cycle.
Like humans, most organizations go through the following four stages: birth, youth,
midlife, and maturity.
iii. Strategy:
 How an organization is going to position itself in the market in terms of its product is
considered its strategy.
iv. Environment:
 The environment is the world in which the organization operates, and includes
conditions that influence the organization such as economic, social-cultural, legal-
political, technological, and natural environment conditions. Environments are often
described as either stable or dynamic.
v. Technology:
 Advances in technology are the most frequent cause of change in
organizations since they generally result in greater efficiency and lower
costs for the firm. Technology is the way tasks are accomplished using
tools, equipment, techniques, and human know-how.
 Guidelines for Organizational Structure and Design
 There should be clear definition of the duties and responsibilities of personnel and
employed in the organization.
 The structure must be directed towards promoting effective work at all levels of
management.
 Adequate decentralization of decision making through the delegation of
responsibilities
 Clear line of responsibility linking the chief executive to the various points of
decision operations
 The span of responsibility of a manager should be limited to a reasonable number
of subordinates
 The structure should make accountable each manager in every level for his/her
actions and the action of his/her subordinates
 The organizational structure should define the policies, procedures, and rules that
guide the activities and relationship of people in the organization.
 Steps in the Structure Designing Process
 The following steps need to be followed while designing an
organizational structure:
 Review plans and objectives

 Determine work activities that are necessary to accomplish the objectives

 Classifying and grouping activities in to manageable work units/departments

 Assigning work and delegating authority to accomplish the task

 Designing a hierarchy relationship to determine the vertical and horizontal

operating relationships of the organization as a whole
 Five Approaches to Organizational Design
 Managers must make choices about how to group people together to
perform their work. Five common approaches functional, divisional,
matrix, team, and networking help managers determine departmental
groupings (grouping of positions into departments).
1. Functional structure:
 The functional structure group positions into work units based on similar
activities, skills, expertise, and resources.
 A functional structure features well-defined channels of communication and
authority/responsibility relationships.
 Not only can this structure improve productivity by minimizing duplication of
personnel and equipment, but it also makes employees comfortable and
simplifies training as well.
 The downsides of functional structure is decisions and communication are
slow to take place because of the many layers of hierarchy. Authority is more
centralized.
 The functional structure gives managers experience in only one field their
own.
2. Divisional structure:
 Because managers in large companies may have difficulty keeping track of all their company's
products and activities, specialized departments may develop.
 These departments are divided according to their organizational outputs. Examples include
departments created to distinguish among production, customer service, and geographical
categories.
 Divisional structure also makes performance easier to monitor. As a result, this structure is flexible
and responsive to change.
 However, divisional structure does have its drawbacks. Because managers are so specialized, they
may waste time duplicating each other's activities and resources. In addition, competition among
divisions may develop due to limited resources.
3. Matrix structure:
 The matrix structure combines functional specialization with the focus of divisional
structure.
 This structure uses permanent cross-functional teams to integrate functional expertise
with a divisional focus.
 Employees in a matrix structure belong to at least two formal groups at the same time a
functional group and a product, program, or project team.
 They also report to two bosses one within the functional group and the other within the
team.
 This structure not only increases employee motivation, but it also allows technical and
general management training across functional areas as well.
 As a drawback, the two-boss system is vulnerable to power struggles and members of
4. Team structure:
 Team structure organizes separate functions into a group based on one overall
objective.
 These cross-functional teams are composed of members from different
departments who work together as needed to solve problems and explore
opportunities.
 The intent is to break down functional barriers among departments and create
a more effective relationship for solving ongoing problems.
 The disadvantages include conflicting loyalties among team members and
increased time spent in meetings.
5. Network structure:
 The network structure relies on other organizations to perform critical
functions on a contractual basis. In other words, managers can contract out
specific work to specialists.
 This approach provides flexibility and reduces overhead because the size of
staff and operations can be reduced.
 On the other hand, the network structure may result in unpredictability of
supply and lack of control because managers are relying on contractual
workers to perform important work.
 Concepts of Organizational Structure
 The working relationships vertical and horizontal associations between
individuals and groups that exist within an organization affect how its activities
are accomplished and coordinated. Effective organizing depends on the mastery
of several important concepts:
A. Work specialization:
 It is the degree to which organizational tasks are divided into separate jobs.
 Employees within each department perform only the tasks related to their
specialized function.
 With too much specialization, employees are isolated and perform only small,
narrow, boring tasks.
B. Chain of command:
 The chain of command is an unbroken line of authority that links all persons in an
organization and defines who reports to whom.
 This chain has two underlying principles: unity of command and scalar principle.
 Unity of command: This principle states that an employee should have one and
only one supervisor to whom he or she is directly responsible and Scalar
principle: The scalar principle refers to a clearly defined line of authority that
includes all employees in the organization.
C. Authority:
 Authority is the formal and legitimate right of a manager to make decisions, issue
orders, and allocate resources to achieve organizationally desired outcomes.
 Authority comes in three types:
o Line authority gives a manager the right to direct the work of his or her
employees and make many decisions without consulting others.
o Staff authority supports line authority by advising, servicing, and assisting,
but this type of authority is typically limited.
o Functional authority is authority delegated to an individual or department
over specific activities undertaken by personnel in other departments.
D. Delegation:
 Delegation is the downward transfer of authority from a manager to a subordinate.
 Most organizations today encourage managers to delegate authority in order to
provide maximum flexibility in meeting customer needs. Managers need to take
four steps if they want to successfully delegate responsibilities to their teams:
o Specifically assign tasks to individual team members.
o Give team members the correct amount of authority to accomplish assignments.
o Make sure that team members accept responsibility.
o Create accountability.
E. Span of control:
 It refers to the number of workers who report to one manager.
 A wide span of management exists when a manager has a large number of
subordinates. Generally, the span of control may be wide when:
o The manager and the subordinates are very competent.
o The organization has a well-established set of standard operating
procedures.
o Few new problems are anticipated.
 A narrow span of management exists when the manager has only a few
subordinates. The span should be narrow when:
o Workers are located far from one another physically.
o The manager has a lot of work to do in addition to supervising workers.
o A great deal of interaction is required between supervisor and workers.
o New problems arise frequently.
F. Centralization versus decentralization:
 A centralized organization systematically works to concentrate authority at the
upper levels. In a decentralized organization, management consciously
attempts to spread authority to the lower organization levels.
 Factors that can influence the extent to which a firm is centralized or
decentralized are:
o The external environment in which the firm operates.
o The nature of the decision itself.
o The abilities of low-level managers.
o The organization's tradition of management
G. Power:
 Power is the ability to get someone to do something you want done or the
ability to make things happen in the way you want them to.
 Power is the force you use to make things happen in an intended way, whereas
influence is what you have when you exercise power, and it is expressed by
others’ behavioral response to your exercise of power.
 Managers derive power from both organizational and individual sources.
These sources are called position power and personal power:
i. Position power: three bases of power are available to a manager solely as
a result of his or her position in the organization.
 Rewards: This power source derives from the person’s control over resources, for
example power to control human resources, pay and promotion.
 Coercive: The power to punish or reward, the power to threaten and to use one’s
position to force others to take action.
 Legitimate power or formal authority is the extent to which a manager can use the
“right of command” to control other people.
ii. Personal power:
 Referent: This depends on charisma or personal attraction of the individual.
Referent power is the ability to control another’s behavior because of the
individual’s desire to identify with the power source.
 Expert: Power which derives from knowledge. Expert power is the ability to
control another’s behavior because of the possession of knowledge, experience, or
judgment that the other person does not have but needs.
 Information: Information about people, events or other facts assist prediction
about future behavior or events.