CHAPTER – 4

ORGANISATIONAL
STRUCTURE AND
DESIGN
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OBJECTIVES
After studying this chapter, you should be able to:

1.Concept of organizing and organization

2.Functions of organization
3.Types of organizations
4.What is Organizational Structure and Design ?
LEARNING

5.Why Organizational Structure Matters?

6.Identify the six key elements/Dimensions that define an
organization’s structure.
7. Types/Common Organization Designs.
8.Contrast mechanistic and organic structural models.
9.Organization Structure: Its Determinants and Outcomes.
10.Organizational Designs and Employee Behavior

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 Nature and Purpose of Organizing
 In the managerial function of planning, goals have been
established and the course of actions has been
determined. Now the manager wants to give a practical
shape to the work to be performed so as to achieve the
stated goals.
1. People who are willingly cooperative will be effective if
they know the role they are supposed to play.
2. Group performance will be meaningful if each member of
the group knows his/her duties and responsibilities,
otherwise confusion will arise.
 Designing and maintaining such system of roles is the
managerial function of organizing.
 The process of ORGANIZING—the second management
functions—is how an organization’s structure is created.
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 Purposes of Organizing
1. Divides work to be done into specific jobs and
departments.
2. Assigns tasks and responsibilities associated with
individual jobs.
3. Coordinates diverse organizational tasks.
4. Clusters jobs into units.
5. Establishes relationships among individuals, groups,
and departments.
6. Establishes formal lines of authority.
7. Allocates and deploys organizational resources.

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 Cont’d
 Organizing process consists of four basic steps. These are:
1. Identification of activities reflecting on plans and
objectives: - This step aims at Spelling out required activities
on the basis of the plan and objectives.
2. Grouping activities (Establishing major tasks):- group
activities in accordance with an appropriate grouping criteria.
This process is known as departmentation and the outcome
will be departments- work units.
3. Assigning the grouped activities to various positions:-
work units created would be assigned to different units such
as finance, marketing, production, personnel etc.
4. Delegation of Authority:- The position concerned must be
given required authority. Commensurate authority must be
granted to every position. This is known as delegation of
authority.
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 What is Organization?
 What is an organization?
 We can define the term organization as two or more
individuals who are interacting with each other within a
deliberately structured set up and working in an
interdependent way to achieve some common objective/s.
 Organization: a tool used by people to coordinate their
actions to obtain something they desire or value.
 Organizations provide goods and services.
 Organizations employ people.
 Organizations bring together people and resources to
produce products and services.
 Basically, organizations exist to create value
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How Does an Organization Create Value?

Value creation takes place at three stages:

input, conversion, and output
Each stage is affected by the environment
in which the organization operates
Environment – the set of forces and
conditions that operate beyond an
organization’s boundaries but affect its
ability to acquire and use resources to
create value

7
How an Organization Creates Value

8
 Types of Organisations

 Assume you’re an employee in a

company/organization of your choice. Now, you will
interact with a certain set of people, out of your duty
. Additionally, as you spend time here, you might
make friends out of your work relationships,
because humans are social animals. It is important
to realize how both of these relationships give rise
to types of organization.
 There exist two types of organisation:
1. Formal Organisation
2. Informal Organisation
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 (cont.)
1. Formal Organization: The management builds this
type of organization in order to induce certain rules
and procedures within the enterprise with regard to
work relationships. Effectively, it focuses on the
achievement of organizational goals by clearly
defining relationships among the members.
2. Informal Organization: This type of organization
arises out of the social nature of humans. Further,
the management cannot control the informal
organization. It allows different routes for the flow of
communications which are a result of frequent
interactions based on interpersonal relationships
and common interests.
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 THE NATURE OF ORGANIZATIONAL STRUCTURE

 Managers are seeking structural designs that will best

support and allow employees to effectively and efficiently do
their work in organizations.
 Organizing is the process of creating an
organization’s structure.
 An organizational structure is the formal framework
by which job tasks are divided, grouped, and coordinated.
When managers develop or change an organization's
structure, they are engaged in organizational design, a
process that involves decisions about six key elements:
work specialization, departmentalization, chain of
command, span of control, centralization and
decentralization, and formalization.
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 What Is Organizational Structure and Design ?
Organizational Structure
The structure of an organization can be
defined simply as the sum total of the
ways in which its labor is divided into Key structural Elements:
distinct tasks and then its coordination
is achieved among these tasks. • Work specialization
How job tasks are formally divided, • Departmentalization
grouped, and coordinated. • Chain of command
Organizational Design • Span of control
Is the process of developing an • Centralization and
organization structure. It involves decentralization
decisions about six key elements that
result in organizational structure. • Formalization

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 Designing an Organization Structure

1. Managers must decide how to divide the

overall tasks of the organization into
successively smaller jobs.
2. Managers must decide the basis by which to
group the individual jobs.
3. Managers must decide the appropriate size
of the group reporting to each supervisor
4. Managers must distribute authority among
the jobs.

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Why Organizational Structure Matters?
 Structure affects:
1. What employees pay attention to.
2. Ease of coordinating activities.
3. Speed of producing goods/services.
4. Cost of running the business.
5. Nature and extent of supervision
required.
6. Whom employees interact and build
relationships with.
14
 Symptoms of Structural Weakness

1. Delay in decision making ----Overloaded

hierarchy; information funneling limited to too
few channels.
2. Poor quality decision making----Right
information not reaching right people in right
format.
3. Lack of innovative response to changing
environment ---- No coordinating effort.
4. High level of conflict---- Departments work
against each other, not for organizational
goals.
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 What Determines Organizational Structure?

1. To what degree are tasks subdivided into

separate jobs?
2. On what basis will jobs be grouped together?
3. To whom do individuals and groups report?
4. How many individuals can a manager
efficiently and effectively direct?
5. Where does decision-making authority lie?
6. To what degree will there be rules and
regulations to direct employees and
managers?

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 Key Design Questions and Answers for Designing the
Proper Organization Structure

The Key Question The Answer Is Provided By

1. To what degree are tasks Work specialization
subdivided into separate jobs?
2. On what basis will jobs be grouped Departmentalization
together?
3. To whom do individuals and groups Chain of command
report?
4. How many individuals can a manager Span of control
efficiently and effectively direct?
5. Where does decision-making Centralization
authority lie? and decentralization
6. To what degree will there be rules Formalization
and regulations to direct employees
and managers?
E X H I B I T 15–1

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 What Is Organizational Structure? (cont’d)

Work Specialization
The degree to which tasks in the organization are
subdivided into separate jobs.

Division of labor:
• Makes efficient use of employee skills
• Increases employee skills through repetition
• Less between-job downtime increases productivity
• Specialized training is more efficient.
• Allows use of specialized equipment.

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 What Is Organizational Structure? (cont’d)

Departmentalization
The basis by which jobs are grouped together.

Grouping Activities By:

• Function
• Product
• Geography
• Process
• Customer

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 Functional Departmentalization

• Advantages
• Efficiencies from putting together similar specialties and people with
common skills, knowledge, and orientations
• Coordination within functional area
• In-depth specialization
• Disadvantages
• Poor communication across functional areas
•© Limited view of organizational goals
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(cont’d) Geographical Departmentalization

• Advantages
• More effective and efficient handling of specific
regional issues that arise
• Serve needs of unique geographic markets better
• Disadvantages
• Duplication of functions
• Can feel isolated from other organizational areas
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(cont’d) Product Departmentalization

+ Allows specialization in particular products and services

+ Managers can become experts in their industry
+ Closer to customers
– Duplication of functions
– Limited view of organizational goals
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(cont’d) Process Departmentalization

+ More efficient flow of work activities

– Can only be used with certain types of products

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(cont’d) Customer Departmentalization

+ Customers’ needs and problems can be met by

specialists
- Duplication of functions
- Limited view of organizational goals

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 What Is Organizational Structure? (cont’d)

Authority
The rights inherent in a managerial position to give
orders and to expect the orders to be obeyed.

Chain of Command
The unbroken line of authority that extends from the
top of the organization to the lowest level and
clarifies who reports to whom.

Unity of Command
A subordinate should have only one superior to
whom he or she is directly responsible.
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 What Is Organizational Structure? (cont’d)

Span of Control
The number of subordinates a manager can efficiently
and effectively direct. Trend in recent years has been
toward wider spans of control.
– Width of span is affected by:
• Skills and abilities of the manager
• Employee characteristics
• Characteristics of the work being done
• Similarity of tasks
• Complexity of tasks
• Physical proximity of subordinates
• Standardization of tasks
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 What Is Organizational Structure? (cont’d)
Centralization
The degree to which decision making is concentrated at a
single point in the organization. Highly centralized is when
top managers make all the decisions

Decentralization
The degree to which decision making is spread
throughout the organization. More decentralized is when
front line employees and managers make decisions

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 Factors that Influence the Amount of Centralization
• More Centralization
 Environment is stable.
 Lower-level managers are not as capable or experienced
at making decisions as upper-level managers.
 Lower-level managers do not want to have a say in
decisions.
 Organization is facing a crisis or the risk of company
failure.
 Effective implementation of company strategies depends
on managers retaining say over what happens.

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 (cont’d) Factors that Influence the Amount of Centralization

• More Decentralization
 Environment is complex, uncertain.
 Lower-level managers are capable and experienced at
making decisions.
 Lower-level managers want a voice in decisions.
 Corporate culture is open to allowing managers to have
a say in what happens.
 Company is geographically dispersed.
 Effective implementation of company strategies depends
on managers having involvement and flexibility to make
decisions.

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 What Is Organizational Structure? (cont’d)

Formalization
 The degree to which jobs within the
organization are standardized and the extent
to which employee behavior is guided by rules
and procedures.
 Highly formalized jobs offer little discretion
over what is to be done.
 Low formalization means fewer constraints on
how employees do their work.

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 Common Organization Designs
 A. Traditional organizational designs.
 Simple structure
 Functional Structure
 Divisional Structure

 B. Contemporary/New organizational designs.

 The Team Structure
 Matrix structure
 The Boundaryless Organization

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 Common Organizational Designs (cont’d)

 Traditional Designs
– Simple structure
• Low departmentalization, wide spans of control,
centralized authority, little formalization
– Functional structure
• Departmentalization by function
– Operations, finance, human resources, and
product research and development
– Divisional structure
• Composed of separate business units or
divisions with limited autonomy under the
coordination and control the parent corporation.
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Strengths and Weaknesses of Traditional
Organizational Designs

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 Common Organizational Designs (cont’d)

 Contemporary Organizational Designs

Team Structure
Organizational structure made up of work groups or teams
that performs the organization’s work. The use of teams
as the central device to coordinate work activities. The
entire organization is made up of work groups or self-
managed teams of empowered employees.
Characteristics:
• Breaks down departmental barriers.
• Decentralizes decision making to the team level.
• Requires employees to be generalists as well as
specialists.
• Creates a “flexible bureaucracy.”
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 Common Organization Designs (cont’d)
Matrix Structure
A structure that creates dual lines of authority and
combines functional and product departmentalization.
Specialists from different functional departments are
assigned to work on projects led by project managers.
Matrix and project participants have two managers.
Key Elements:
+ Gains the advantages of functional and product
departmentalization while avoiding their weaknesses.
+ Facilitates coordination of complex and
interdependent activities.
– Breaks down unity-of-command concept.
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 Matrix Structure (College of Business Administration)

(Director)

(Dean) Employee

E X H I B I T 15–6

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 Common Organization Designs (cont’d)
--Boundaryless Organization
 An flexible and unstructured organizational design
that is intended to break down external barriers
between the organization and its customers and
suppliers.
 Removes internal (horizontal) boundaries:
– Eliminates the chain of command
– Has limitless spans of control
– Uses empowered teams rather than departments
 Eliminates external boundaries:
– Uses virtual, network, and modular organizational
structures to get closer to stakeholders.
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 Contemporary Organizational Designs
Team Structure
• What it is: A structure in which the entire organization is made up of work
groups or teams.
• Advantages: Employees are more involved and empowered. Reduced barriers
among functional areas.
• Disadvantages: No clear chain of command. Pressure on teams to perform.

Matrix-Project Structure
What it is: A structure that assigns specialists from different functional areas
to work on projects but who return to their areas when the project
is completed. Project is a structure in which employees
continuously work on projects. As one project is completed,
employees move on to the next project.

• Advantages: Fluid and flexible design that can respond to environmental

changes. Faster decision making.
• Disadvantages: Complexity of assigning people to projects. Task and personality
conflicts.
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(cont’d) Contemporary Organizational Designs

Boundaryless Structure

What it is: A structure that is not defined by or limited to artificial

horizontal, vertical, or external boundaries; includes virtual
and network types of organizations.

• Advantages: Highly flexible and responsive. Draws on talent wherever it’s

found..

• Disadvantages: Lack of control. Communication difficulties..

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 ORGANIZATIONAL DESIGN DECISIONS
 Organizations aren’t structured the same way. Top
managers put a lot of thought into how best to design
the organization’s structure. That “best” design
depends on four contingency variables: the
organization’s strategy, size, technology, and degree
of environmental uncertainty.
 There are two generic models of organizational
design.
1. A mechanistic organization model
2. An organic organization model
 When is each design favored? It “depends” on
the contingency variables.

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 Organizational Design Decisions (cont’d)

Mechanistic Model
A rigid and tightly controlled structure

A mechanistic organization is an organizational

structure that is characterized by high
specialization, rigid departmentalization, narrow
spans of control, high formalization, a limited
information network, and little participation in
decision making by low-level employees.

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 Organizational Design Decisions (cont’d)

Organic Model
Highly flexible and adaptable structure

A structure that is flat, uses cross-

hierarchical and cross-functional teams, has
low formalization, possesses a comprehensive
information network, and relies on
participative decision making.

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Mechanistic Versus Organic Models

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 Contingency Factors
 Structural decisions are influenced by:
– Overall strategy of the organization
• Organizational structure follows strategy.
– Size of the organization
• Firms change from organic to mechanistic
organizations as they grow in size.
– Technology use by the organization
• Firms adapt their structure to the technology they
use.
– Degree of environmental uncertainty
• Dynamic environments require organic structures;
mechanistic structures need stable environments.
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Determinants of appropriate Organization Structure

Contingency factors—appropriate structure

depends on four contingency variables.
1.Strategy Dimensions:
 Innovation Strategy
 Cost-Minimization Strategy
 Imitation Strategy
2.Organization Size
3.Technology
4.Environmental Uncertainty
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 Strategy and structure (cont’d)

Innovation Strategy
A strategy that emphasizes the introduction of major new products and
services. —needs the flexibility and free flow of information of the organic
organization .

Cost-minimization Strategy
A strategy that emphasizes tight cost controls, avoidance of unnecessary
innovation or marketing expenses, and price cutting. —needs the
efficiency, stability, and tight controls of themechanistic organization

Imitation Strategy
A strategy that seeks to move into new products or new markets only
after their viability has already been proven. —which uses
characteristics of both mechanistic and organic.
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 The Strategy-Structure Relationship

Strategy Structural Option

Innovation Organic: A loose structure; low

specialization, low formalization,
decentralized

Cost minimization Mechanistic: Tight control; extensive

work specialization, high formalization,
high centralization

Imitation Mechanistic and organic: Mix of

loose with tight properties; tight
controls over current activities and
looser controls for new undertakings

E X H I B I T 15–9

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 Size and structure (cont’d)

Size
How the size of an organization affects its structure. As an
organization grows larger, it becomes more mechanistic. Larger
organizations tend to have more specialization,
departmentalization, centralization and formalization although
the size-structure relationship is not linear/line.

Characteristics of large organizations:

• More specialization
• More vertical levels
• More rules and regulations

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 Technology and structure (cont’d)

Technology
How an organization transfers its inputs into outputs.

Characteristics of routineness (standardized or

customized) in activities:
• Routine technologies are associated with tall,
departmentalized structures and formalization in
organizations.
• Routine technologies lead to centralization when
formalization is low.
• Nonroutine technologies are associated with delegated
decision authority.

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 Environment uncertainty and structure (cont’d)

Environment
Institutions or forces outside the organization that
potentially affect the organization’s performance. The more
uncertain the environment, the more flexible and responsive
the organization may need to be.

Key Dimensions-
• Capacity: the degree to which an environment can
support growth.
• Volatility: the degree of instability in the environment.
• Complexity: the degree of heterogeneity and
concentration among environmental elements.
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 The Three Dimensional Model of the
Environment

Volatility

Capacity

Complexity

E X H I B I T 15–10

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 Organization Structure: Its Determinants and
Outcomes

E X H I B I T 15–11

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 Organizational Designs and Employee
Behavior

Research Findings:
• Work specialization contributes to higher employee
productivity, but it reduces job satisfaction.
• The benefits of specialization have decreased rapidly as
employees seek more intrinsically/innately rewarding jobs.
• The effect of span of control on employee performance is
contingent upon individual differences and abilities, task
structures, and other organizational factors.
• Participative decision making in decentralized
organizations is positively related to job satisfaction.

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