VOLUME NO. 7 (2016), ISSUE N O.

08 (AUGUST ) ISSN 0976-2183

HOW ORGANIZATIONAL STRUCTURE AIDS BUSINESS PERFORMANCE

MUSIBAU AKINTUNDE AJAGBE

HEAD
DEPARTMENT OF MANAGEMENT
RITMAN UNIVERSITY
IKOT EKPENE

NKAM MICHAEL CHO

RESEARCH SCHOLAR
DEPARTMENT OF BUSINESS ADMINISTRATION & SUSTAINABILITY
ICT UNIVERSITY
CAMEROON

EKANEM EDEM UDO UDO

SR. LECTURER
DEPARTMENT OF MANAGEMENT
UNIVERSITY OF CALABAR
CROSS RIVER STATE

OJOCHIDE FRED PETER

ASST. LECTURER
DEPARTMENT OF BUSINESS MANAGEMENT
COVENANT UNIVERSITY
OTA

ABSTRACT
This paper examined how organizational structure aids business performance. Existing studies have shown that it is nearly impossible for an organization to exist
without a defined organizational structure. Studies also revealed that the main purpose of organizational structure is the division of work among members of the
organization, and the co-ordination of their activities so they are directed towards the goals and objectives of the organization. The sources of data used for this
research are from secondary sources. The secondary sources are from journals and conference articles, the internet, newspapers, magazines and textbooks. This
research found that organizational structure has a significant impact on the performance of business organizations. Hence, the researchers recommend that busi-
ness organizations should endeavor to develop a properly defined structure for the organization so as to achieve set objectives.

KEYWORDS
organizational structure, business performance, business organization.

1. INTRODUCTION

N elson and Quick (2011) opined that profit making is among the cardinal reasons why business organizations are established, this is aside from other non-
profit related purposes. The profit and nonprofit objectives of business organizations are said to be realized when firms attain laid down goals and objec-
tives. Birkinshaw (2001) stressed that organizational goals and objectives are broken down into different tasks among the organizations employees. Such
responsibilities as shared among the employees are further grouped into departments (Nelson & Quick, 2011). However, departments in business organizations
may be grouped into different functional levels to enable employees to function effectively by having a vivid understanding of the command structure. The func-
tional levels in a typical business organization are marketing and sales, personnel and administration, production and logistics, finance and accounting and so on.
Maduenyi et al. (2015) argued that more distinction could be found within each department and between the jobs people perform. The authors emphasized
further that different departments are connected to form the existing organizational structure. Such organization’s structure gives the business entity the mech-
anism which helps in fulfilling its function in the geographical environment where it is situated (Nelson & Quick, 2011; Ajagbe et al., 2016). The structure of a
business organization is of no relevance unless it is supported by appropriate mechanisms and a consistent culture (Birkinshaw, 2001; Fadeyi et al., 2015). However,
organizational structure is among the major strategic priorities business managers should implement for firms to perform effectively. The type of organizational
structure to be adopted would depend to a large extent on the nature of the particular industry in question. Adegbuyi et al. (2015) concluded that the form which
the organizational structure should take may be periodically represented in form of an organizational chart. As a result of the importance of organizational struc-
ture to business organizations, this study examines how organizational structure aids business performance. In view of this, this study will be arranged in the
following manner. The next section will start by trying to understand the meaning of organizations, performance, and organizational structure. The concept and
variables to measure business performance will be explored. Then how organizational structure affects business performance will be considered. The study shall
conclude with a short conclusion and brief suggestions to policy makers in business organizations.

2. LITERATURE REVIEW
2.1 ORGANIZATION AND PERFORMANCE
Organization is a group of two or more people working co-operatively toward a common objective or set of objectives (Kaplan & Norton, 1992; Hodge & William,
2004; Lebans & Euske, 2006). In short, an organization is a group of people working together to achieve a purpose that cannot be achieved by an individual working
alone. Martinelli (2001) defines an organization as a set of elements in interaction, organized level and decision making units. While Carton and Hofer (2006)
describe Performance as a measure of the state of an organization, or the outcomes that result from management decisions and the execution of those decisions
by employees of the business organization. Lebans and Euske (2006) considered Performance as a set of financial and nonfinancial indicators which offer infor-
mation on the degree of achievement of objectives and results.

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VOLUME NO. 7 (2016), ISSUE N O. 08 (AUGUST ) ISSN 0976-2183
2.2 ORGANIZATIONAL STRUCTURE
Mintzberg (1983) argued that Organizational structure is how people are organized or how their jobs are divided and coordinated. The term organizational struc-
ture refers to the formal configuration between individuals and groups regarding the allocation of tasks, responsibilities, and authority within the organization
(Gerwin & Kolodny, 1992; Greenberg, 2011; Ajagbe et al., 2015). Organizational structure includes the nature of formalization, layers of hierarchy, level of hori-
zontal integration, centralization of authority (locus of decision-making), and patterns of communication (Damanpour, 1991; Fadeyi et al., 2015). Organizational
structure is the way responsibility and power are allocated, and work procedures are carried out, among organizational members. Andrews (2012) stated that
organizational structure consists of job positions, their relationships to each other and accountabilities for the process and sub-process deliverables.
2.3 BUSINESS PERFORMANCE
Ricardo (2001) posits that though the concept of business performance is common in the academic literature, its definition is difficult because it has various
meanings. The author mentioned that there is no widely acceptable definition of the concept. Daft (2000) described business performance as the organization’s
ability to attain its goals by using resources in an efficient and effective manner. Richardo (2001) defined business performance as the ability of the organization
to achieve its goals and objectives. Hefferman and Flood (2000) asserted that business performance has suffered from not only a definition problem, but also from
a conceptual problem. The term performance was occasionally confused with productivity. Ricardo (2001) confirmed that there was a difference between perfor-
mance and productivity. Productivity is a ratio indicating the amount of task accomplished in a given period of time. While Performance is a wider indicator that
could include productivity as well as quality, consistency and other factors. Productivity measures are often considered in a result oriented evaluation.
2.4 DETERMINANTS OF BUSINESS PERFORMANCE
Empirical findings have shown that several constructs have been adopted by previous researchers to determine business performance. Some of them are profita-
bility, gross profit, return on asset (ROA), return on investment (ROI), return on equity (ROE), return on sale (ROS), sales growth, export growth, revenue growth,
market share, stock price, liquidity and operational efficiency (Snow & Hrebiniak, 1980; Segev, 1987; Parnell & Wright, 1993; Thomas & Ramaswamy, 1996;
Gimenez, 2000). However, it is difficult to come up with a universally acceptable single set of measurement variables for the construct of business performance
(Snow & Hrebiniak, 1980). Some authors argue that contradictory measurements of business performance exist in literature, although many of them used quan-
titative data such as return on investments, return on sales and so forth to determine business performance (Kotter & Heskett, 1992; Denison & Maishra, 1990).
However, the meaning of performance has included both efficiency-linked mechanisms, which relate to the input/output connection, and effectiveness linked
mechanisms, which deal with issues such as business growth and employee satisfaction. Furthermore, performance has also been viewed adopting economic and
noneconomic indicators from both objective and perceptual sources. Venkatraman and Ramunujam (1986) stressed that objective measures include secondary
source of financial measures such as return on assets, return on investment, and profit growth. These measures are nonbiased and are often adopted for single-
industry research because of the uniformity in measurement across all organizations in the sample. Financial mechanism allows researchers to build trend analyses
and benchmarking analyses. Drew (1997) highlighted that perceptual sources include employee assessments of organizational effectiveness or financial health
and their total degree of satisfaction. These subjective evaluations of performance have often been adopted in organizational theory to assess organizational
effectiveness and overall employee satisfaction. Kirchhoff (1977) opine that the increasing pressure of organizations to satisfy multiple stakeholder groups neces-
sitated the urge for more complex determination of organizational effectiveness in which total simplistic single dimensions are inadequate expressions of the real
world, as a result of the multi-goal existence of business firms.
Stannack (1996) argued that the term business performance has been used by most practitioners to describe a range of measurements including input efficiency,
output efficiency and in some cases transactional efficiency. Doyle (1994) posits that no single mechanism has been agreed to be the most appropriate measure
of business performance. He added that organizations adopt various objectives and measurements for business performance. Nash (1993) stressed that profita-
bility was the best indicator in identifying whether an organization met its objectives or not. Other researchers such as Galbraith and Schendel (1983) supported
the adoption of return on assets (ROA), return on equity (ROE), and profit margin as the frequently used calculators for business performance. They further stressed
that ROA is obtained by dividing net income of the fiscal year with total assets. Return on Equity means the value of net income returned as a percentage of
shareholder’s equity. The concept determines a firm’s profitability by exposing the degree of revenue a business organization generates with the capital invested
by shareholders. However, there is no one measure that is better in measuring business performance than the others and the definition that a researcher uses
should be based on the punitive framework adopted for the study (Cameron & Whetten, 1983). In addition, Hofer (1983) suggested that various areas of study
should implement different measures of business performance because of the variations in their research questions. However, the perception of business perfor-
mance in strategic management research usually revolved around the application of financial indicators. Hence, indicators relying on financial determinants such
as profitability, sales growth, and earnings per share have been used by previous authors. In another dimension, market-reliant determinant such as variants of
stock market returns have been used in past researches. Barney (1991) concluded that none of these measures is flawed.
2.5 ORGANIZATIONAL STRUCTURE AND BUSINESS PERFORMANCE
Jackson and Morgan (1982) argued that several opinions and definitions on organizational structure are bound in empirical literature. For the authors, organiza-
tional structure is the arrangement of duties to enable an organizational task to be carried out. This arrangement could be represented by the organization chart.
They adopted a modified definition originally formulated by Child (1972). They defined structure “as the relatively enduring allocation of work roles and adminis-
trative mechanisms that creates a pattern of interrelated work activities and allows the organization to conduct, coordinate, and control its activities”. In another
sense, Wolf (2002) said that “structure is the architecture of business competence, leadership, talent, functional relationships and arrangement”. Wolf (2002)
further states that structure has a direct effect on the success of an organization’s operational strategy. “Good organization structure influences the execution
behaviors of a company. Structure not only shapes the competence of the organization, but also the processes that shape performance”. Walton (1986) perceives
structure as organization of job responsibilities in hierarchical levels and spans of responsibility, roles and positions, and instruments for incorporation and problem
solving. Thompson (1966) opines that “structure is the internal differentiation and patterning of relationships”. He stated that structure is an avenue for the
organization to set standards and boundaries for efficient performance by employees, by delegating roles, control over resources, and other matters. Kartz and
Kahn (1978) view “structure as an interrelated set of events which return to complete and renew a cycle of activities”. Lawrence and Lorsch (1967) stressed that
structure is “the technique in which the organization is differentiated and integrated”. They added that differentiation is linked to the scope in which top managers
act as quasi entrepreneurs, while integration is viewed in such a manner that every employee of the firm including middle level executives will do their best to
attain business goals. Oliveira and Takahashi (2012) highlighted that early organizational structures were often based either on product or function. The organiza-
tional behavioral dictionary (2012) defined the term as “the established pattern of relationships among the component units of a business organization. They
formally defined framework of an organization’s task and authority relationships”. Stroh et al. (2002) emphasized that organizational structure represents the
relationships among different roles played by units within an organization. These diverse points of views of definitions specify that the term organizational struc-
ture is not necessarily concentrated on any univocal characteristic, but rather, more likely to have various dimensions. Underdown (2012) asserts that organiza-
tional structure “is the formal system of task and reporting relationships that controls, coordinates, and motivates employees so that they cooperate to achieve
an organization’s goals”. Sablynski (2012) stated that the structure of a business entity is the manner work roles are officially grouped, divided, and coordinated”.
Herath (2007) posits that it directs the competence of work, the passion of workers and coordination among the chief executives and subordinates for flow of
plans and goals in the organization to sketch the future plans. Zheng et al. (2010) stated that the most important components of organizational structure include
formalization, centralization, and control. Zheng et al. (2010) concluded that there is a negative effect of structure on organizational effectiveness. Formalization
measures the extent to which an organization can use rules and procedures to prescribe behavior (Laio, 2011). The nature of formalization is the degree to which
the workers are provided with rules and procedures that deprive versus encourage creative, autonomous work and learning (Nahm, 2003). In organizations with
high formalization, there are explicit rules which are likely to obstruct the impulsiveness and flexibility needed for internal innovation (Chen and Huang, 2007).
Centralization also creates a non-participatory environment that reduces communication, commitment, and involvement with tasks among participants. Chen and
Huang (2007) suggested that decentralized and informal structure will lead to higher performance.
Research shows that the behaviours of organizational members are determined by the structure of the organization. Underdown (2012) argued that once a
business venture decides how it wants its employees to behave, the kind of attitudes it wants to promote, and what it wants its employees to attain, the structure

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is then designed to promote the development of cultural values and norms to achieve such desired attitudes, behaviors, and goals. Sablynski (2012) reported no
linkage between employee performance and span of control, but increased degree of job satisfaction was found in decentralized organizations because span of
control portion of organizational structure describes the number of workers an authority figure is responsible for. Sablynski (2012) opines that organizational
structure reduces worker’s ambiguity and helps prescribe and anticipate behavior. Brown (1995) states that the basis for organizational structure is alignment of
the organization’s purpose with necessary resources. He added that firms with speedy growth are those that make the best use of their resources, including
management talent. As a company grows, the impact on the structure of the organization is significant. This could be true when the organization begins to expand
to other geographic regions and the structure of the organization is spread out over many miles. Penguin (2003) stated that, organizational effectiveness and its
relation to structure is determined by a fit between information processing requirements so people have neither too little nor too much irrelevant information.
However, the flow of information is critical to an organization’s success. The organization’s structure should be designed to ensure that individuals and depart-
ments that need to coordinate their efforts have lines of communication that are built into the structure. Companies may use various organizational structures for
communication purposes. Large companies have many levels of management. Therefore, the most effective way to communicate is from top of the organization
down. Executives create certain operational procedures which they communicate to directors and managers. Managers, in turn, explain these operational proce-
dures to subordinates. Clemmer (2003) supported the idea that organizational structure shapes performance: Good performers, in a poorly designed structure,
will take on the shape of the structure. Many organizations therefore induce learned helplessness. People in them become victims of “the system”. This often
comes from a sense of having little or no control over their work processes, policies and procedures, technology, support systems and the like. These feelings are
often amplified by a performance management system that arbitrarily punishes people for behaving like the system, structure or processes they have been forced
into. Walton (1986) attached structure to effectiveness, asserting that management restructuring is designed to enhance not only the efficiency but also the
effectiveness of the management organization. Walton (1986) further associated quicker responses to problems, increased unity of functions, coherent and con-
sistent priorities, enhanced abilities, and career satisfaction with the performance benefits of structural alignment. A given structural alignment can only emphasize
a few of the interdependencies among activities. Therefore, appropriate structures must ensure that the most important types of coordination occur (Walton,
1986).
Previous studies indicate that organizational structure has multiple dimensions, and Damanpour (1991) provides a rather thorough list. Through an extensive
review of the organizational innovation literature, he documents that researchers have used specialization, functional differentiation, professionalism, formaliza-
tion, centralization, managerial attitude toward change, managerial tenure, technical knowledge resources, administrative intensity, slack resources, external
communication, internal communication, and vertical differentiation, in their probe into the relationships between organizational determinants and innovation.
Daft (1995) provides a list that includes formalization, specialization, standardization, hierarchy of authority, complexity, centralization, professionalism, and per-
sonnel ratios. Germain (1996) focuses on specialization, decentralization, and integration in describing the role of context and structure in adopting logistical
innovations. Koufteros and Vonderembse (1998) employ centralization, formalization, and complexity in describing the impact of structure on just-in-time attain-
ment. Lysonski et al. (1995) concentrated their focus on the degree of centralization of decision-making, formalization of rules and procedures, and structural
differentiation in their investigation of environmental uncertainty and organizational structure from a product management perspective. One of the most out-
standing researchers in the area of bureaucratic structure is the German sociologist Max Weber (1947), who specified four characteristics of bureaucratic structure.
Firstly, Weber concluded that an organization that has highly specialized jobs and where the division of labor is well defined, is typical for a bureaucratic structure.
Secondly, the roles of the management are hierarchically arranged, often with a single chain of command running through the whole organization from top to
bottom. Thirdly, a bureaucratic structure often has clearly defined impersonal rules that their employees are following in order to carry out their duties. Finally,
Weber stated that there often is an impersonal relationship between the employees due to the heavy dependency on the written rules of conduct; moreover, the
clear hierarchical structure dictates that the lowest common superior is the one to turn to. Senior and Swailes (2010) highlighted that these key traits characterize
Weber’s description of a bureaucratic structure in an organization. Andersson and Zbirenko (2014) discovered that structure, leadership, and communication
affect efficiency and productivity. Structure defines how productive the operational processes are; leadership affects the whole personnel and the way they strive
for achieving their goal; communication affects how fast things get done and how happy and willing personnel are. Additionally, they spotted two areas affecting
the relationship between structure, communication, leadership, and organizational performance: development issues and personal issues. The authors concluded
that leadership and organization are the most problematic spots in the organization.

3. CONCLUSION
The objective of this article is to find out how organizational structure aids business performance. However, review from previous research has shown that effective
organizational structure facilitates proper working relationships among various sub-units in the organization. This may definitely improve company efficiency
within the organizational units. The findings reveal that organizational structure aids business performance. It also indicated that there is a relationship between
specialization of work process and labor productivity which implies that organizational structure affects the behavior of employees in business firms. Relying on
findings from this study, it can be said that business performance depends to a substantial extent on the organizational structure. When a clear structure exists,
people perform better, tasks are divided and productivity is increased. Indeed, having a suitable organizational structure in place, one that recognizes and ad-
dresses various human and business realities of the company in question is a prerequisite for long term success. It was therefore recommended that management
should critically analyze the effectiveness and efficiency of the organization by ensuring proper structures are put in place and implemented with the aim of
achieving set goals. Organizations should also endeavor to have well-structured mechanisms in order to achieve laid down objectives.

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