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Ch-3

Organisational Structure

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Organisational structure

An organizational structure is
▪ the formal arrangement within an organization
▪ that defines how activities and tasks are formally divided
▪ and how processes and information would flow within this structure
▪ in order to achieve the goals and objective of an organization.

Purpose of
Organizational Structure
▪ Divides work to be done into specific jobs and departments.
▪ Assigns tasks and responsibilities associated with individual jobs.
▪ Coordinates diverse (varied) organizational tasks.
▪ Clusters (Group) jobs into units.
▪ Establishes relationships among individuals, groups, and departments.
▪ Establishes formal lines of authority.
▪ Allocates and deploys organizational resources.

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Importance of
Management Structure
▪ Choosing the correct management structure ensures
✓ organization’s continued growth,
✓ content (happy) employees
✓ profitable returns for the shareholders.
▪ Choosing the wrong structure creates
✓ tensions between employees and managers,
✓ allows inefficient work practices to flourish and
✓ reduces company profitability.
▪ In the worst case an incorrect management structure can lead to
company closure.
▪ A dynamic management structure makes it easier providing a flexible
and ready means for growth.

BASIS OF ORGANIZATIONAL STRUCTURES

Nature of work Skilled, Unskilled, Specialized, Management

Traditional Functional (finance, operations, marketing)

departmentalization Product (credit cards, mortgages, auto loans)
Process (assembly, shipping)
Customer (auto, airline, military)
Geographic (Europe, USA, Canada)
Contemporary and team- Matrix (also known as project management approach)
based Committee (executive risk committee, business
continuity committee, audit committee)
Outsourcing
Virtual network of
independent companies

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Organizational
Structure

Entrepreneurial functional divisional matrix

structure structure structure organization

Entrepreneurial organizations
An entrepreneurial organization is an entity that is managed by its
entrepreneurial owner.
Features
a) the entrepreneur takes all the main decisions and does not delegate
decision-making to anyone else.
b) the entity is therefore organized around the entrepreneur and there is
no formal management structure.
c) operations and processes are likely to be simple, and the entity will
probably sell just a small number of products or services.
An entrepreneurial organizational structure is appropriate when an entity
is in the early phase of its life. The entrepreneur has a direct connection
with its employees. As it grows larger, however, an entrepreneurial
structure will become inefficient, and a formal management structure is
needed.
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Advantages
▪ There is only one person taking decisions - this should lead to decisions
being made quickly.
▪ As soon as an element of the market alters, the entrepreneur should
recognise it and act quickly.
▪ A lack of a chain of command and the small size of the organisation should
mean that the entrepreneur has control over the workforce and all
decisions within the organisation leading to better goal congruence.
Disadvantages
▪ This type of structure is usually suited to small companies where due to
the size; there is no career path for the employees.
▪ If the organisation grows, one person will not be able to cope with the
increased volume of decisions etc.

Functional organizations
Groups employees according to a specialised or similar set of roles or tasks.
▪ Accounting department.
▪ Corporate department.
▪ Engineering department.
▪ Facilities department.
▪ Human resources department.
▪ Legal department.
▪ Production department.
▪ Sales department.

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▪ A functional organization groups together people who have comparable skills and
perform similar tasks.
▪ This form of organization is fairly typical for small to medium-size companies, which
group their people by business functions.
▪ Each unit is headed by an individual with expertise in the unit’s particular function.
Advantages to the functional approach.
▪ The structure is simple to understand and enables the staff to specialize in particular
areas.
▪ Everyone in the group would probably have similar interests and expertise. But
homogeneity also has drawbacks: it can hinder communication and decision making
between units and even promote interdepartmental conflict. The marketing
department, for example, might butt heads with the accounting department because
marketers want to spend as much as possible on advertising, while accountants want
to control costs.

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Divisional Structure
The divisional structure is a type of organizational structure that groups each
organizational function into a division.
Each division contains all the necessary resources and functions within it to support
that product line or geography

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Basis of
Division

Customer Geographical
Product division Process Division
Division Division

It means that
It means that a company is
a company is structured
structured according to
according to its product
its product lines
lines.

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Project structure.
▪ Project structure is created as a separate unit or division within a
permanent functional structure.
▪ Team of specialist workers are drawn from functional structure of the
organisation to work on a project
▪ Project team function under the leadership of project manager. During
the continuation of project functional manager gives up their authority
over subordinate in favour of project manager.
▪ When project is over project team go back to their respective
functional department.

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CEO

Production Research Finance Marketing

Department Department Department Department

Project A Production Research Finance Marketing

Manager Members Members Members Members

Project B Production Finance Marketing

Manager Members Members Members

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Matrix organisation
▪ Matrix organisation is a hybrid structure of functional structure
and project structure.
▪ It is suitable for large and complex organisation which require
flexible and technically oriented structure.
▪ Functional structure create a vertical chain of command while
project structure form horizontal line thereby forming a matrix.
▪ In this structure employees reports to project manager and also
to departmental head.

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CEO

Production Research Finance Marketing

Department Department Department Department

Project A Production Research Finance Marketing

Manager Members Members Members Members

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What is a Chain of Command

A chain of command refers to an organizational structure that indicates how each
member of a company or organization reports to one another.
▪ Chain of command clarifies who reports to whom within the organization.
▪ A chain of command establishes accountability, company’s lines of authority, and
decision-making power.
▪ Most organizations, including companies, nonprofit organizations, and the
military, use a chain of command.
▪ A good chain of command can make sure that every task and job position has
one person taking care of the responsibility for performance.
▪ It also eliminates the need for an employee to report to several bosses.
▪ If employee faces an issue, he or she can directly report to the appropriate
manager.

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What is a Span of Control

The span of control defines how many subordinates each manager or

supervisor is responsible for in an organization.
It indicates the number of employees each manager can effectively
manage.
Span of Control

Tall-narrow. Wide-flat.

Each manager supervises Each manager supervises

a small number of a greater number of
employees employees.
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Span of Control

Tall-narrow. Wide-flat.

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Span of Control

Tall-narrow. Advantages

▪ Close supervisory control.

▪ Clearly defined roles and responsibilities
▪ Obvious chain of command
▪ Decision making centralized at the top.
▪ Clear progression and promotion ladder

Disdvantages
▪ High management costs
▪ Slow decision making
▪ Ineffective and slow communication

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Span of Control

Advantages. Wide-flat.

More direct and effective communication.

Faster decision making.
Flexible and better able to adapt to changes.

Disadvantages.

High managerial work load.

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Chain of Command Span of Control

A chain of command refers to an The span of control defines how

organizational structure that many subordinates each
indicates how each member of a manager or supervisor is
company or organization reports responsible for in an
to one another. organization.

It indicates the number of

Indicate reporting order in the
employees each manager can
organisation
effectively manage

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Span of control depends on:

▪ Managers capabilities (physical & mental limitations)
▪ Nature of manager’s workload
▪ Nature of work undertaken (how routine it is)
▪ Geographical dispersion of subordinates
▪ Level of cohesiveness within the team.

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ABC Limited has shown poor performance during the preceding

five years in spite of the fact that the company owns substantial
physical assets, including modern machinery for manufacture of a
wide range of products. All the assets of the company are in good
working condition and marketing prospects for the products are
also promising. However, the company’s organizational structure is
designed inappropriately and therefore has serious shortcomings
and weaknesses which create impediments in its operations and
are responsible for the company’s unsatisfactory performance.

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Conflicts and lack of coordination: Lack of clarity of goals and individuals

working at cross-purposes give rise to conflicts and a non-conducive team
environment resulting in poor coordination between the planning and actual
operational levels.
Delays and inappropriate decisions: Lack of proper and timely
communication of information to the relevant individuals on account of
insufficient delegation of authorities and inappropriate reporting channels
resulting in delays and inappropriate decisions.
Low motivation and morale: Low level of motivation and poor morale
amongst the employees due to lack of clarity of job descriptions and
inappropriate or complex reporting lines.
Rising costs: Tall hierarchal structures at management positions and
excessive red-tape at the expense of genuine productive work resulting in
high operating costs.

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Inability to seize business opportunities: Lack of coordination and

communication among the various operating and planning and research
departments resulting in failure to identify and seize new business
opportunities as they emerge from time to time.
Inability to adapt to external changes in business environment: Lack of
coordination among the key management and the various departments
which prevents the company from foreseeing the changes in business
environment and utilize its physical assets at optimum levels.

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Who makes the decisions in an organization?

If decision-making power is
If decision-making power is
concentrated at a single point,
spread out, the structure is
the organizational structure is
decentralised
centralised

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Centralised – decisions are made by senior management (e.g. functional,

entrepreneurial).
Decentralised – decision-making is delegated to lower levels (e.g. matrix,
geographical).
In a centralized organization, senior management retain most (or all) of
the authority to make the important decisions.
In a decentralised organization, the authority to take major decisions is
delegated to the management of units at lower levels in the organization
structure, such as strategic business units (SBU) managers, and divisional
managers.
Strategic Business Unit (SBU) implies an independently managed division of a large
company, having its own vision, mission and objectives, whose planning is done
separately from other businesses of the company.

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Advantages of centralization ▪ Advantages of decentralisation

▪ Decisions by management are Tactical and operational decisions are
more likely to be taken with probably better when taken by local
regard for the corporate management, particularly in a large
objectives of the entity as a organization.
whole. There is a very strong ▪ Giving authority to managers at
argument in favor of making divisional level and below helps to
strategic decisions centrally. motivate the management team.
▪ Decisions by management should ▪ Decisions can be taken more quickly at a
be coordinated more effectively if local level, because they do not have to
all the key decisions are taken be referred to head office.
centrally. ▪ In a large and complex organization,
▪ In a crisis, it is easier to make many decisions have to be made –
important decisions centrally. probably too many for senior
management at head office

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1. Any organization that employs a multiple command system and

related support mechanisms including an associated
organizational culture is a:
(a) Factory organisation
(b) Functional organisation
(c) Matrix organisation
(d) All of the above

1C

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2. _______________refers to the number of subordinates a superior

can effectively manage. Fill in the blank.
(a) Span of control
(b) Tall structure
(c) Short structure
(d) Control ratio

2A

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3. TRUE OR FALSE: Tactical and operational decisions should be centralized

at the local management level, particularly in a large organization.
(a) TRUE
(b) FALSE

3A

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4. One World Limited has an organizational structure focused on its

different line of businesses such as Consumer Products, Industrial
Consumers, Retail Business and Customer Services. What type of
structure below best describes One World Limited’s structure?
(a) Matrix Organisation
(b) Narrow Organisation
(c) Functional Organisation
(d) Divisional Organisation

4D

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5. Which of the following is true for a Centralised decision making?

(a) Decisions by management are more likely to be taken with regard for
the corporate objectives of the entity as a whole. There is a very
strong argument in favor of making strategic decisions centrally.
(b) Decisions by management should be coordinated more effectively if
all the key decisions are taken centrally.
(c) In a crisis, it is easier to make important decisions centrally
(d) All of the Above

5D

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6. Which of the following can be an advantage of centralized decision

making in an organisation?
(a) Decisions by senior management are always correct junior
management cannot be trusted.
(b) Decisions by management could be coordinated more effectively if all
the key decisions are taken centrally.
(c) In a crisis, the management will have no-one to answer to.
(d) All of the Above

6B

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7. Which of the following, if any, can be a feature of a decentralized

organization structure?
(a) In many situations, junior (‘local’) managers have much better
knowledge than senior management about operational conditions.
(b) Giving authority to managers at divisional level and below helps to
motivate the management team.
(c) Decisions can be taken more quickly at a local level, because they do
not have to be referred to head office.
(d) All of the above

7D

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8. __________________an unbroken line of authority that extends from

the top of the organization (e.g. a CEO) all the way down to the bottom.
Fill in the blank.
(a) Chain reaction
(b) Chain of command
(c) Hierarchy
(d) Span of control

8B

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9. Which of the following stands true about the Chain of Command?

(a) Chain of command makes an organisation too complex
(b) Chain of command cannot exist in a functional organization
(c) Chain of command clarifies who reports to whom within the
organization.
(d) All of the above

9C

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10. The span of control is wide, and the shape of the organization
structure is flat, because of the small number of management levels.
This statement is true for:
(a) Wide-flat structure
(b) Tall-narrow structure
(c) Tall-flat structure
(d) Wide-short structure

10 A

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11. A ___________________organization groups together people who

have comparable skills and perform similar tasks. Fill in the blank.
(a) Matrix
(b) Functional
(c) Geographic
(d) Complex

11 B

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12. The English Food Co. has organized its workforce based on their
expertise. Which organizational structure does the company follow?
(a) Divisional Organisation
(b) Functional Organisation
(c) Matrix Organisation
(d) Cannot be determined from the given information

12 B

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13. TRUE or FALSE: The size and complexity of the entity influence the
extent to which decision-making, planning and control are centralized or
decentralized.
(a) TRUE
(b) FALSE

13 A

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