Organizational Structure and

Design: an Introduction
What is an Organization?
 Organization
• Organizing: Arranging the activities of the
enterprise in such a way that they systematically
contribute to the enterprise’s goals.
• A deliberate arrangement of people to accomplish
some specific purpose.
• An organization is a consciously coordinated social
entity, with an identifiable boundary, that
functions on a relatively continuous basis to
achieve a common goal or set of goals.
Organizational Structure
 Organizational Structure
• The formal system of task and authority
relationships that control how people
coordinate their actions and use resources to
achieve organizational goals.
• It defines how task are to be allocated, who
reports to whom, and the formal coordinating
mechanisms and interaction patterns that will
be followed.
 Components of Organizational
Structure
• Complexity: extent of differentiation within
the organization.
• Formalization: extent of rules and procedures
present to direct behaviour of the employees.
• Centralization: locus of decision-making
authority (concentration of formal authority).
Organizational Complexity
Organizational Design and Theory
• Organization Design: Concerned with constructing
and changing an organization’s structure to
achieve the organization’s goals.
• Organization Theory (OT): discipline that studies
structure , design and culture of organizations.

• Contrasting OB and OT :
– OB : takes a micro view – emphasizing individuals and
small groups.
– OT : takes a macro perspective. Unit of analysis is the
organization itself.
 The Organization

Strategy

Environment Technology

Structure
•Formalization
•Specialization
Culture Size
•Hierarchy
•Centralization
 Why organizations exist?
• Organizations exist to create value in society
by satisfying certain needs of its stakeholders.
 Creating Value
Increase specialization &
Division of labour

Use large
scale technology

Manage the external environment Which increases the

The use of an
value that an
organization allows
organization can
people jointly to:
create

Economize on transaction costs

Exert power and control

How an organization creates value
Inputs Conversion process
■Machinery
■Raw materials
■Money & capital
■Computers
■Human resources
■Information and knowledge
■Human skills & abilities

Environment Outputs
■Customers ■Finished goods
■Shareholders ■Services
■Suppliers ■Dividends
■Distributors ■Salaries
■Government ■Value for shareholders
■Competitors
 Perspectives on Organizations
• Rational entities
• Coalitions of powerful constituencies
• Capitalistic structures
• Instruments of domination
• http://www.youtube.com/watch?v=8SuUzmq
Bewg&feature=relmfu
• Open systems
 Systems Perspective
• A system is a set of interrelated and
interdependent parts arranged in a manner
that produces a unified whole. (e.g. societies,
automobiles, plants, human bodies).
• Subsystems within larger systems.
• Interrelationship of parts within the system.
• Differentiation Vs Integration .
• Closed systems and open systems.
 The Closed System
• Views system as self-contained
• Ignores effect of environment
• Receives no energy from outside, no energy
released to its surroundings
 Open systems

• Recognizes dynamic interaction of system

with its environment

Environment

System

Transformation
Inputs Outputs
process

Environment
 The organization as an open system

Goals & values

Technical subsystem
subsystems •Knowledge
•Culture
•Techniques
•Philosophy
Managerial •Facilities
•Overall goals
•Group goals subsystems •Equipment
•Individual goals •Goal setting Outputs
•Planning •Products
•Assembling •Services
Inputs •Human
resources
•Material satisfaction
•Organizing
•Money Structural •Org.survival
•Implementing
•Human effort Psychosocial subsystem
& growth
•Controlling Subsystem
•Information •Human resources •Social
•Tasks
•Attitudes benefit
•Perceptions •Workflow
•Motivations •Work groups
•Group dynamics •Authority
•Leadership •Information flow
•Communication •Procedures
•Interpersonal relations •Rules

Feedback
 An Industrial Organization as an Open System

Inputs Technical processing

- Materials Core Output:
(transforming r/m
- Labor Finished Customers
into finished product)
- Capital product

Lobbying
Regul-
ations Consumer
advocacy
Government Receipt of revenue

Repayment of
Financial institutions loans

Wages
Labour force

Payment to
Suppliers
creditors
 Characteristics of an Open System

• Environment awareness : concept of boundaries

– New organizational forms redefine concept of boundaries
• Feedback
• Cyclical character
• Negative entropy
• Steady state
• Movement towards growth and expansion
• Balance of maintenance and adaptive activities
• Equifinality

Importance of the systems perspective

 The life-cycle perspective

Life cycle stages:

▪ Entrepreneurial stage:
– Formation, ambiguous goals, high creativity, requires steady supply of resources
• Population ecology theory – “liability of newness”

▪ Collectivity stage:
– Mission clarified, communication & structure informal, high member commitment
• Institutional theory – “Organizational isomorphism”

▪ Formalization-and-control stage:
– Structure stabilizes, rules, procedures imposed, innovation de-emphasized, conservative decision
making, role clarity, organization exists beyond individual

▪ Elaboration-of-structure stage:
– Product diversification, growth opportunities sought, structure more complex, decentralization

▪ Decline stage
– Shrinking market, increased competition, employee turnover, increased conflicts, centralized
decision making under new leadership
 Organizational Life Cycle

maturity

Decline
Growth

Formation

Decline stage:
Collectivity F & C stage: E of S stage:
•High employee
Entrepreneurial stage: •Formalization of •More complex str turnover
stage: rules •decentralizn
•Informal •Increased conflict
communication •Stable structure
• Ambiguous goals •Diversified markets •centralization
•Emphasis on
•High
• High creativity efficiency
commitment
 Stages of corporate lifecycle:Adizes

1. Courtship stage

2. Infancy (infant mortality )

3. Go-go stage (founders’ trap )

4. Adolescence stage

5. Prime stage

6. Stability stage

7. Aristocracy stage

8. Recrimination stage

9. Bureaucracy

10. Death
 Greiner’s Model of Organizational Growth

Large
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6

5. Crisis of
??
4. Crisis of
red-tape

3. Crisis of
Size of organization

control

2. Crisis of Growth thru’

autonomy collaboration

Growth thru’
1. Crisis of coordination
leadership

Growth
thru’
delegation

Growth
thru’
Growth direction
thru’
Small creativity

Young Age of Organization Mature

 The changing paradigm of organization design:
from efficient performance to learning organization

• From vertical to horizontal structure

• From routine tasks to empowered roles

• From formal control systems to shared

information
– ‘Learning’ organization ‘teaching’ organization

• From competitive to collaborative strategy

• From rigid to adaptive culture

Organization Structure
Why Organizational Structure?
Organizational Structure
◻ Structure helps to control and coordinate the
activities to optimize value addition.
◻ Organizational structure has a strong influence on
people.
◻ There is no “right way” to design an organization.
 Dimensions of Structure

1. Administrative component – no. of line supervisors, managers, and staff

personnel relative to total number of employees
2. Autonomy
3. Centralization – concentration of power arrangements, locus of
decision-making
4. Complexity – no. of occupational specialties, professional activity,
professional training of employees
5. Delegation of authority
6. Differentiation – no. of specialty functions
7. Formalization – defining employees’ roles through formal documentation
8. Integration – extent of collaboration among departments, feedback and
coordination mechanisms
9. Span of control – no. of subordinates that an individual manager can and
should supervise
10. Standardization – range of variation tolerated within rules defining the jobs
11. Vertical span – no. of levels in the authority hierarchy from the top to the
bottom
Complexity
 Complexity
◻ Refers to the degree of differentiation that exists within an
organization.

Horizontal differentiation – degree of differentiation between units

based on orientation of members, nature of tasks, education and
training

Vertical differentiation – depth in structure, number in hierarchical

levels

Spatial differentiation – geographical dispersion of organization’s

offices, plants, personnel

Greater the differentiation, greater the complexity within the

organization.
■ Greater need and difficulty of coordinating activities of diverse
groups of employees
 Horizontal Differentiation

◻ Specialization: particular grouping of activities performed by

an individual
Functional : jobs broken down into simple and repetitive tasks
(division of labour)

Social : individuals, rather than their work, are specialized.

Possess professional skills that cannot be routinized.

Greater the specialization, greater the complexity

❖ Requires more sophisticated and expensive methods for
co-ordination and control
Horizontal Differentiation

◻ Departmentation: grouping of specialists; may be

based on simple numbers, function, product or service, client,
geography, or process.

Greater the departmentation, greater the complexity

Horizontal Coordination
◻ Linking of activities across departments at similar
levels
◻ Methods:
Common resources
Information systems
Lateral relations
■ Direct contact
■ Liaison roles
■ Task forces and teams
■ Managerial integrators
 Vertical Differentiation

◻ A response to an increase in horizontal

differentiation
◻ Span of control: number of subordinates that a manager can
effectively direct
Smaller the span, taller the organization

16 1
Span : 8
Span : 4 64 8

256 64

1024 512

4096 4096
Span of Control
Number of subordinates who report directly to a
specific manager.
Factors influencing span of control:
■ Low interaction requirements
■ High competence levels
■ Work similarity
■ Low problem frequency and seriousness
■ Physical proximity
■ Few non-supervisory duties of manager
■ Available assistance
■ High motivational possibilities of work
Vertical Coordination
◻ The linking of activities at the top level to middle
and lower levels
◻ Methods:
Formalization
Span of control
Centralization of power
Delegation
Line and staff positions
 Importance of complexity

◻ Greater the complexity, greater the need for

effective communication, coordination and control
devices.

◻ Hence, creates different demands and

requirements on managers’ time.

◻ Paradox : economies created by complexity

counterbalanced by the increased burden of keeping
organization together
Formalization
Formalization
◻ Written policies, rules, procedures, job descriptions
and other process documents
 Formalization
◻ Refers to the degree to which jobs within the organization
are standardized.
◻ Individual discretion on job inversely proportional to extent
of formalization.
◻ Formalization can be explicit (written), or implicit
(unwritten…perceived)
◻ Degree of formalization can vary among and within
organizations
◻ Greater the professionalization of the job, lesser the
likelihood of it being highly formalized
◻ Formalization inversely related to level in hierarchy.
◻ Extent of formalization differs with type of job (e.g.
production jobs more formalized than research, in same
organization)
Importance of Formalization

◻ Standardization reduces variability in behavior

◻ Standardization promotes coordination

◻ Formalization → economy

◻ Formalization :externalized behavior;

Professionalization : internalized behavior

◻ “make” or “buy” decision

◻ Socialization
Formalization Techniques
◻ Selection

◻ Role requirements

◻ Rules, procedures, policies

◻ Training

◻ Rituals
Formalization & Complexity
◻ Strong association between specialization,
standardization and formalization

◻ Horizontal differentiation : functional

High formalization

◻ Horizontal differentiation : social

low formalization
Centralization
 Centralization

◻ Refers to the degree to which the formal authority

to make discretionary choices is concentrated in an
individual, unit, or level (usually at the higher
level)
◻ Factors affecting centralization
Size
Geographical dispersion
Technological complexity
Environmental uncertainty
Main concerns
Formal authority
■ Centralization is concerned only with the formal structure, not the informal
organization
Policies and decentralization
■ Centralization looks at decision discretion
“Concentration at a single point”
■ Concentration at a single point can refer to a single individual, unit or level, but
the single point implies concentration at a high level.
IT and centralization
■ IT can improve top management's control, but decision choice still rests with
low-level member
Control of information by lower level members
■ Control of information input is a form of de facto decentralization
Importance of the centralization-decentralization
issue
◻ Decentralization helps counter information overload

◻ Decentralization facilitates speedy action and response

◻ Decentralization can provide more input into decision-making

◻ Decentralization motivates employees

◻ Decentralization provides training opportunities for lower level managers

◻ Centralization benefits whole organization, not any special-interest group

◻ Some activities are done more efficiently when centralized.

◻ Situational factors will determine the “right” amount of centralization

required
Centralization, Complexity and
Formalization

◻ Centralization and Complexity

Inversely related

◻ Centralization and Formalization

Ambiguous relationship
‘Superstructure’ :
◻ depicted by the organization chart depicting departments
and important reporting relationships in the organization
❖ hierarchy

‘Infrastructure’ :
- roles performed by various organizational members
❖ Extent of formal authority, extent of centralization, extent of
formalization, extent of specialization
Essential for ensuring reliability and quality of work, accountability of
various role performers
 Organizational Configurations

◻ Defined work activities

◻ Reporting relationships
Simple
■ flat hierarchy, single head for coordination
Organizational Configurations
(contd.)
Functional
Divisional
■ Self-contained autonomous unit groups, coordinated by a HQ unit
Matrix
■ Multiple reporting relationships
Ad Hoc
■ High horizontal diff, low vertical diff, high spatial diff, low forml,
decentralization, flexibility
Virtual
■ High spatial diff
International
■ Global versions of functional, divisional, matrix
Functional Structure
Divisional Structure
Project Structure
Matrix Structure
 Functional structure

◻ Activities grouped together by common functions from

bottom to top of the organization
Strengths
1. Allows economies of scale within functional departments
2. Enables in-depth knowledge and skill development
3. Enables organization to accomplish functional goals
4. Is best with only one or a few products

Weaknesses
1. Slow response time to environmental changes
2. May cause decisions to pile on top, hierarchy overload
3. Leads to poor horizontal coordination among departments
4. Results in less innovation
5. Involves restricted view of organizational goals
 Divisional structure
◻ Product structure, SBUs; grouping based on organizational
outputs
Strengths
1. Suited to fast change in unstable environment
2. Leads to client satisfaction because product responsibility
and contact points are clear
3. Involves high coordination across functions
4. Allows units to adapt to differences in products, regions,
clients
5. Best in large organizations with several products
6. Decentralizes decision making
Weaknesses
1. Eliminates economies of scale in functional departments
2. Leads to poor coordination across product lines
3. Eliminates in-depth competence and technical specialization
4. Makes integration and standardization across product lines
difficult