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Study Note - 1

This Study Note includes

● Organisation and its Meaning

Organisation as a Process
Organisation as a Structure
Different Organisation Structure
Free Form Organisation
Conflict between Line and Staff
● Different bases of Organisation
Delegation of Authority
● Formal and Informal Organisations
Meaning of Formal Organisations
Nature of Formal Organisations
Steps in designing Formal Organisations
Determinants of Formal Organisations
Need and Significance of Formal Organisations
Principles of Formal Organisation
Meaning and Nature of Informal Organisation
Distinction between Formal and Informal Organisation
Needs and Significance of Informal Organisation
Dangers from Informal Organisation
How to Manage Informal Organisation
● Grouping of Activities - Departmentation
Meaning of Departmentation
Need and Importance of Departmentation
Bases or types of Departmentation
Choosing a basis for Departmentation
Question for Review and Discussion




Organisations normally mean entities (like hospitals, schools, churches, business units, charitable
institutions, etc.). As Amitai Etizioni contends “we are born in organisations, educated by
organisations, and most of us spend much of our lives working for organisations”. Most what
we eat, what we do, where we go,- our values, hopes, dreams etc. are basically part of
organisations that surround us and influence us. In fact, organisations invade us and shape our
destinies. One simple fact is that organisations are made of people, systems, procedures, and
The term ‘organisation’ is used in several ways.
(i) Organisation is considered as an activity in the sense it is one of the important
functions of management i.e. organising.
(ii) Organisation may refer to an ongoing business unit i.e. a unit, which is purposefully
created to attain some objectives with resources.
(iii) Organisation may be used in a static way representing a static structure of i,
responsibilities of authorities. !
(iv) Organisation may be used in a dynamic way referring to a process by which the ‘’
structure is created, maintained and used.
1.1.1. Definitions
Some of the very important definitions of organisation are captured hereunder :-
Joseph L. Massie : “Organisation is defined as the structure and process by which ; cooperative
group of human beings allocates its tasks among its members, identifies relationship and
integrates its activities toward common objectives”. ;
W. Richard Scott: “Organisations are defined as collectivities that have been established ; for
the pursuit of relatively specific objectives on a more or less continuous basis”.
Pfiffner ad Sherewood : “Organisation is the pattern of ways in which large number of . people,
too many to have intimate face-to-face contact with all others, and engaged in complexity of
tasks, relate themselves to each other in the conscious, systematic establishmeni and
accomplishment of mutually agreed purposes”.
Johnson, kast and Rsenzweig: “The organisation is an assemblage of people, materials machines
and other resources geared to task accomplishment through a series of interactio: and integrated
into a social system”;
Koontz and O’Donnel: “Organising involves the establishment of an intentional structure or
roles through determination and enumeration of the activities required to achieve the goals of
an enterprise and each part of it: the grouping of these activities, the assignment such groups of
activities to manager, the delegation of authority to carry them out, a provision for coordination
of authority and informational relationship horizontally a -vertically, in the organisation


An organisation always refers to people; it is developed for people. People interact with one
anotherin some way or other in organisations. These interactions are specified by some sort of
structure.These interactions are ordered to achieve some specific joint objectives.
1.1.2 Organisation as a Process
Organisation as a process means identifying and grouping the activities to be performed,
assigning duties or responsibilities and delegating authority. It involves establishing
relationships among the people for the purpose of enabling them to work most effectively in
achieving the objectives for which the organisation is set up. Thus, organisation as a process
refers to certain dynamic aspects like what tasks are to be performed, who is to do them, how
the tasks are to be grouped, who is to report tc whom and where the decisions have to be made,
etc. This process view includes both differentiation and integration of organisational activities.
As a process, the organisation function of management involves the following steps.
(i) Identifying the work : The first logical step in the organisation is to identify the work
that must be done to achieve the organisational objectives. Every organisation is
established to attain certain objectives. The objective of a business unit is to produce
and distribute goods and services and thereby earn maximum profits. A hospital is
established to provide medical care to the sick people. A cricket team is established to
play and win the matches. The work to achieve these objectives should be identified,
classified in a systematic way so th.-’t each person in the organisation gets a separate
and distinct task.
(ii) Division of work : After identifying the work to be performed, the next step is to
divide the work systematically so that it can be distributed among the personnel in
such a way that everyone gets his share of work. Division and distribution of work is
necessary because no one can handle the total work in an organisation single-handed.
The total work load of a distributive agency can be divided into purchase, storage,
display, advertising, sales, correspondence, accounting, etc.
(ii) Grouping the work : Division of work necessitates the groupihg of work or to
coordinate the divided work. That is to say, similar activities are grouped together
and departments are created. For example, all the activities concerned with the
purchases are kept under the head of purchasing department, all the activities
concerned with the finance and accounting are brought together under ‘Finance and
accounting’ department etc. In order to provide for smooth flow of work, it is absolutely
essential to group the similar activities under one umbrella. Further, responsible people
are asked to head the concerned department that is created in this process. For instance,
purchase department is headed by purchase manager; accounting department is
headed by the accountant; sales department is headed by. the marketing manager,
(iv) Assignment of duties : Not only that various departments are headed by competent
individuals, within each department duties are to be assigned to all the people. The
assignment of duties to each and every individual in the organisation should be
appropriate, taking into consideration the qualifications and experience, capacity of
the people to perform the given tasks, etc.



(v) Establishment of formal reporting relationships : Another important step in the

organising process is the establishment of formal reporting relationships. This would
help individuals to know what they should do, how they should do the work, to
whom the matters must be referred and how particular jobs are related to each other,
etc. Without establishing the formal reporting relationships, it becomes a hotchpotch
because no one knows who has to handle the work. Only by establishing the
relationship formally, people come to know who are their subordinates, who are their
superiors, who are their peers, etc. Similarly, each superior knows who are subordinates
to him, whom to delegate the authority, etc.
(vi) Delegation of authority : Authority is the right to act, to issue orders and extract
obedience from others. Every manager shall be given sufficient authority without
which he would not be able to perform the given tasks with confidence and show
results. Assignment of group activities to an individual should necessarily be followed
by delegation of authority to the person-in-charge or head of the department. Fof
instance, a finance manager shall be delegated authority to make payment to the dealer
from whom the goods are procured, to pay the salaries to the staff etc. Without
authority being delegated to him, the finance manager will not be in a position to
discharge his responsibility.

1.1.3. Organisation as a Structure

Organisation as a structure refers to the network of relationships among individuals and
positions in an organisation. According to William Newman “organisation structure describes
the organisation’s framework. Just as human beings have skeletons that define their parameters,
organisations have structures that define theirs. It is like the architectural plan of a building” .
Just as the architect takes into account various factors like cost, special features needed, etc.
while designing a good structure, the manager also considers various factors like benefits of
specialisation, communication problem in creating authority levels, etc., before designing
organisation structure.
According to classicists like Fayol, Weber and Taylor, structure is essential for achievement of
organisational goals. The concept of organisation as structure is also referred to as the static or
classical concept because it lays greater stress on the structure of relationships between the
positions on one hand and the jobs on the other.
Organisation, from the point of view of structure, implies the following things :- .
• Organisation is a purposive creation and the structure is a useful means of
convertingthe disorganised resources of men, machines, money, materials into
productive enterprise.
• Structure, in general, takes the shape of pyramid. Though in social organisations the
structural aspect cannot be conceptually visualised, in business organisations the
structural aspects can be inferred from the actual operations and behaviour of the
organisation itself.


• The structural relationships in an organisation can be shown through organisation
charts.These charts depict the intended relationships at a given point of time.
• There are two dimensions of structure viz. vertical and horizontal. The horizontal
aspects are concerned with the basic departmentation whereas the vertical aspects of
structure are related to the creation of vertical channels of communication, hierarchy
of superiors and subordinates.
As pointed out by W.G. Scott and T.R. Mitchell, ‘’organisation siructure is a method of reducing
the variability in behaviour of those who work for the organisation. It is a method of regulating
behaviour in order to achieve a common purpose in a coordinated manner”. Organisation
structure is a means to an end - a tool by which selected goals are attained effectively. .

1.1.4. Different Organisation Structures

Organisation structure is primarily concerned with the allocation of tasks and I delegation of
authority. There are several ways of division of work and distribution of authority. As a result
several types of organisation structure have been evolved. The six main types of organisation
siructure. are given below :
1. Line organisation.
2. Functional structure.
3. Line and staff organisation.
4. Project organisation.
5. Matrix organisation.
6. Committees.
Of these, line, functional line and staff, and committees, are traditional structures. Project and
matrix are modern structures. Line Organisation

Line organisation is the oldest type of organisation structure. It is also known as military or
‘scalar’ organisation because it originated in the army. In line organisation there is an unbroken
vertical line through which authority flows from the top to the bottom of organisation. Every
manager exercises direct authority over his subordinates who are in turn directly responsible
to their superior. There is thus a hierarchical arrangement of authority. There are no separate
supportive or service units for accounting, labour, etc. Every manager is required to incorporate
these activities in his department. For example, the manufacturing manager himself has to
arrange for the recruitment, selection and training of workers for the production department.
Each department is self-contained and works independently of other departments. All
departmental heads are supreme in their respective areas. Line organisation may be of two
types. In pure line organisation, all individuals at a given level perform the same type of work
and departments are created only to facilitate supervision and control. But in departmental line
organisation work performed in each department is of a different nature.









F ig . 1 .1 . P u re L in e O rg a n isa tio n .


S u p erin te n de n t S u p erin te n de n t S u p erin te n de n t

S p inn in g W ea v in g D y ein g

F o rem an F o rem an

W o rk ers W o rk ers

1.2. Departmental Line Organisation.


Line organisation has the following characteristics:
(i) Lines of authority are vertical flowing from top to the bottom,
(ii) The command is through a straight and unbroken line. Each subordinate receives
orders from one superior and is responsible to him alone.
(iii) All persons at the same level are independent of each other,
(iv) The authority and responsibility of each position is clearly specified.
(v) There are no staff specialists.
Line organisation has the following merits:
1. Simplicity. Line organisation is the most simple to establish and operate. Lines of author-
ity and responsibility are direct, simple and clear. Every individual understands to whom he is
responsible. The authority and responsibility of every position is clearly defined. There is no
confusion as to the role of an individual in the organisation. . .,,
2. Prompt decision. Every manager can take decisions independently witnout consulting
others. He has not to depend upon others for advice, assistance or service. Therefore, decision-
making process is easier and less time-consuming.
3. Effective discipline. Each position is under the direct control of its immediate superior
position. Therefore, it is easy to maintain discipline among the people in the organisation.
4. Orderly communication. Communication between superiors and subordinates flows in
a direct vertical line. Such communication is easy to maintain and it is orderly in nature. It
supports the authority of the superior.
5. Unified control. Unity of command results in close personal contacts between superiors
and subordinates. Direct and close contacts facilitate effective supervision and control.
6. Economical. Line organisation is quite economical because staff specialists are not re-
7. Fixed responsibility. Every manager can be held responsible for the results of his unit.
8. Executive development. As every manager has to perform a variety of functions, there is
an opportunity for the development of all-round executives.
9. Co-ordination. As all activities relating to one department are managed by one person,
co-ordination can be effective.
Line organisation suffers from the following drawbacks:
(i) Lack of specialisation. There is no scope for specialisation. A manager has to perform a
variety of functions which might not be interrelated. Every manager cannot be equally good in
all the functions and, therefore, the quality of management tends to be poor.
(ii) Overloading. As managers are overloaded with day-to-day work, they do not find time
for innovations and creativity and independent thinking.



(iii) Autocratic approach. The line of authority is direct and requires high level of obedience
on the part of subordinates. There is concentration of authority at the top and one-way com-
munication. Managers at the top may be devoid of the realities of the situation. As a result
decisions may be arbitrary. There is scope for favouritism.
(iv) Low morale. Subordinates are expected to carry out the decisions taken by superior.
There may be lack of initiative en the part of subordinates. Their opinions and grievances are
not properly communicated upward.
(v) Instability. The success and continuity of the organisation depend upon a few compe-
tent managers. Succession problem is acute and there may be lack of continuity when key
executives retire.
(vi) Rigidity. Discipline is emphasised so much that it may be difficult to change.
Line organisation is suitable in the following cases:
(i) Where the business is carried on a small scale and few subordinates are employed.
(ii) Where the work is largely of routine nature and the methods of operation are simple.
(iii) Where continuous processes are employed, e.g., sugar industry.
(iv) Where automatic machines are used so that there is less demand on the expertise of
(v) Where it is not difficult for a manager to handle labour problems. Functional Organisation Structure
As organisation grows in size, line organisation proves inadequate and it becomes necessary to
introduce specialisation. The functional organisation is based on the concept of ‘functional
foremanship’ suggested by F.W. Taylor.
Under functional organisation the organisation is divided into a number of functional areas.
Each function is managed by functional expert in that area. Every functional area serves all
other areas in the organisation. For example, the purchase department handles purchases for
all departments. The executive in charge of a particular function issues orders throughout the
organisation with respect to his function only. For example, the personnel manager will decide
the questions relating to salary, promotions, transfers, etc., for every employee in the organisation
whether he is in production, sales or any other department. Thus, an individual in the
organisation receives instructions from several functional heads. Every functional expert en-
joys functional authority over subordinates in other departments. Within a functional depart-
ment every operating executive receives orders from several functional specialists. For example,
each foreman in the factory receives orders from factory superintendent, chief engineer, chem-
ist, etc.
The main characteristics of functional organisation are as follows:
(i) The whole task of the enterprise is divided Into specialised functions. ;
(ii) Each function is performed by a specialist.


(iii) The specialist incharge of a functional department has the authority over all other
employees for his function.
(iv) Specialists operate with considerable independence.
Functional organisation contains the following benefits:
1. Specialisation. Functional organisation promotes logical division of work. Every func-
tional head is an expert in his area and all workers get the benefit of his expertise. The
importance of major functions is recognised.
2. Reduction of workload. Every functional head looks after one function only and, there-
fore, burden on top executives is reduced. Mental and manual functions are separated.
3. Better control. One man control is done away with and there is joint supervision of
work. As a result, functional control becomes more effective.
4. Easier staffing. Recruitment, selection and training of managers Is simplified because
each individual is required to have knowledge of one functional area only.






Fig. Functional Organisation.

5. Higher efficiency. Every individual in the organisation concentrates on one function
only and receives the expert guidance from specialists. Therefore, efficiency of opera-
tions is high. There is scope for functional improvements through application of expert
6. Scope for expansion. The success and growth of the organisation is not limited to the
capabilities of a few line managers. Standardisation and specialisation facilitate mass
production. A change can be introduced without disturbing the entire organisation.
There is flexibility.



Functional organisation suffers from the following weaknesses:
1. Double command. A person is accountable to several superiors. As a result, his respon-
sibility and loyalty get divided. In the absence of unity of command, responsibility for
results cannot easily be fixed. There Is erosion of the authority of line managers.
2. Complexity. There are many cross relationships which create confusion. A worker may
receive conflicting orders. He cannot easily understand his place in the organisation.
Discipline may be poor.
3. Delay in decision-making. A decision problem requires the involvement of several
specialists. Therefore, decision-making process In functional organisation is slow.
4. Problem of succession. Executives at lower level do not get opportunity of all-round
experience. This may create problem in succession to top executive positions.
5. Lack of co-ordination. A functional manager tends to have a limited perspective. He
thinks only in terms of his own department rather than of the whole enterprise. He may
be jealous of his prerogatives and fight to promote his own speciality. Inter-functional
conflicts may arise due to narrow specialisation.
6. Expensive. As a large number of specialists is required, functional organisation is ex-
Functional organisation is generally suitable for large and medium-sized concerns. But it should
be applied at higher levels because it does not work well at the lower levels. Line and Staff Organisation

Line and staff organisation is a combination of line and functional structures. Under it, line
authority flows in a vertical line in the same manner as in the line organisation. In addition,
staff specialists do not have power of command over subordinates in other departments. They
are purely of advisory nature. When the work of line executives increases, they need advice,
information and help of staff specialists. Therefore, staff positions are created to support the
line managers. Every staff specialist, however, has line authority over the subordinates in his
own department. For example, the chief accountant has command authority over accountants
and clerks in the accounts department. But he has only advisory relationship with other de-
partments like production, sales, etc.





Q u ality C o ntro l R ep airs an d

In sp ecto r M ain te n an ce O ffice r



Fig. Line and Staff Organisation.

Line and staff organisation offers the following advantages:
(1) Expert advice. Line managers receive specialised advice and assistance from staff
experts. They are enabled to discharge their responsibilities more efficiently.
(2) Relief to top executives. Staff experts carry out detailed investigation and supply
information to line executives. Therefore, the burden of line executives is reduced.
They get ample chance for creative thinking to generate new ideas.
(3) Quality decisions. Staff specialists provide adequate information and expert ad-
vice. As a result line executives can take better decisions.
(4) Training of personnel. As every executive concentrates in one field, he acquires
valuable experience. Young staff executives get opportunity of acquiring expertise
in their respective fields of activity. There are greater opportunities for advance-
(5) Flexibility. Line and staff organisation is comparatively more flexible. As the
organisation expands, staff can be added to help the line managers. There is more
opportunity for advancement because a greater variety of responsible jobs is avail-
able. Stability of the enterprise docs not depend on top executives alone.



Line and staff organisation suffers from the following drawbacks:
1. Line staff conflicts. The main problem of line and staff organisation is that conflicts
often arise between line managers and staff specialists.
2. Confusion. In actual practice, it is often very difficult to define clearly the authority
relationships between line and staff. Different managers may not be clear as to what
is the actual area of operations and what is expected of them. In the absence of clear
allocation of duties, co-ordination may be hampered.
3. Ineffective staff. Staff personnel are not accountable for the results. Therefore, they
may not take their tasks seriously. They may also be ineffective due to lack of com-
mand authority.
4. Expensive. Line and staff organisation is quite expensive for small firms because
several experts have to be employed.
Despite these limitations, line and staff organisation is very suitable for large organisations. It
provides ample scope for specialisation without violating the unity of command. Its success
depends upon the degree of harmony that is maintained among the line and staff. However, it
may not be useful for small organisations which cannot take full advantage of staff experts. Project Organisation
The traditional functional and line structures have been found inadequate in large multi-prod-
uct firms performing a variety of tasks. As organisations grow and diversify, managers work-
ing within such structures find it increasingly difficult to keep abreast of new developments as
well as to cope with routine matters or operations. New forms of organisation, e.g. matrix,
project, free form, task-force, etc. have been developed to meet the new needs of business—to
speed up decision-making and paper work. These new forms provide for a horizontal group-
ing of a number of functions which may otherwise be labelled as line or staff. Two such formats
are project organisation and matrix organisation.
The project structure consists of a number of horizontal organisational units to complete projects
of a long duration. Each project is vitally important to the organisation. Therefore, a team of
specialists from different areas is created for each project. The size of the project team varies
from one project to another. The activities of the project team are coordinated by the project
manager who has the authority to obtain advice and assistance of experts both inside and
outside the organisation.
The core of the concept of project organisation is to gather a team of specialists to work on and
complete a particular project. The project staff is separate from and independent of the func-
tional departments. Fig, 1.5 presents a simple project structure wherein project managers form
their own teams in addition to the normal functional departments.
Project organisation is employed in aero-space, aircraft manufacture, construction and profes-
sional areas like management consulting. In such organisations, projects are subject to high
standards of performance and there is a strong emphasis on horizontal relations among spe-
cialists. For example, Lockhead Corporation of U.S.A. makes extensive use of project structure
for its aircraft manufacturing programmes. In industrial concerns, project teams may be struc-


tured to facilitate the designing and development of new products. Project management {moul-
ding the Organisation around specific projects) has been developed to deal with situations
where production and marketing strategies do not fit into a purely functional organisation.
Generally, project organisation is appropriate when the enterprise is undertaking tasks that
have define goals, that are frequent and unfamiliar to the present structure, that are complex
due to interdependence of tasks and that are crucial to the success of the firm. According to
Terry “It is a preferred means whenever a well-defined project must be dealt with or the task is
bigger than anything the organisation is accustomed to.”
A project team is a temporary set-up. Once the project is complete, the team is disbanded and
the functioning specialists are assigned some other project.

Project organisation offers the following benefits:
(1) Project organisation provides concentrated attention that a complex project demands.
It permits the timely completion of a project without disturbing the normal routine
of rest of the organisation. It can be tailored to a particular mission or project to
consolidate diverse actions towards the completion of the project while retaining
the advantages of functional specialists. It allows maximum use of specialised knowl-
(2) Project organisation provides a logical approach to any challenge in the form of a
large project with definite beginning, end and clearly defined result. It cuts manager’s
job to a reasonable” level, spreads decision-making and facilitates communications
through lateral relationships.
(3) One reason for the success of project organisation is that the project often requires
highly talented professionals who find it difficult to work creatively in any struc-
tured set-up. The idea of being part of a team of skilled professionals . working on a
tangible project acts as a powerful motivator. Project organisation encourages ini-
tiative and creativity on the part of project staff by giving them a free hand to ac-
complish work.
(4) Project organisation has been found to fit a number of widely-varying situations,
from building contractors and advertising agencies to accounting and consulting
firms. The increasing complexity of projects that require the highly specialised ex-
perts and rapid changes from one project to another often demand the flexibility
provided by project structure. It accommodates the formal ideas of classical think-
ing together with the team and participative ideas of behavioural contributions. :
Thus, the project organisation provides flexibility, coordination of resources, fixation of re-
sponsibility and check over project work. However, the project structure suffers from the fol-
lowing drawbacks:
(i) There is organisational uncertainty because a project manager has to deal with profes-
sionals drawn from diverse fields. Often they differ in approach and interest. There is lack of



clearly defined responsibility, clear communication lines and measurement yardsticks. Lack of
prescribed organisational processes make the job of a project manager very frustrating. There
is danger of over-specialisation. In addition, lack of awareness of project problems and per-
sonal prejudices on the part of top people may jeopardise a project.
(ii) A project manager is responsible for project outcomes. But the ongoing conventional
organisation does not give him unlimited authority. Therefore, budgets, manpower and con-
trol are serious problems.
(iii) Organisational uncertainties may lead to interdepartmental conflicts. People have fear
of being forgotten at the time of promotion due to separation from the main structure. There
may be role conflicts, poor loyalty and underutilisation of resources. Excessive supervision
and multiple controls cause frustration. Decisions may be based on scanty data due to pres-
sures for completion of projects on time.
(iv) There is considerable fear among personnel that the completion of a project may result
in loss of job. The feeling of insecurity and varying status creates considerable worry about
career progress.
Project organisation can be effectively applied under the following situations:
(a) The project offers a unique or unfamiliar challenge.
(b) The project has definite goals and well-defined specifications.
(c) Successful completion of the project is crucial to the organisation.
(d) The project is complex with interdependent tasks. :
(e) The assignment is to be completed within the given time limit.

Project Vs. Product Structures

Point of Difference Project Organisation Product Organisation

1. Basis Every project organised as a separate Every product line organized as a
unit. separate division;
2. Differentiation Various functional experts form the Every product division has its
project team. production and marketing
3. Responsibility for results Lies with the project manager. Lies with the product manager
4. Operational autonomy Very high High
5. Coordination Very simple Simple
6. Economy Economical Expensive
7. Flexibility More flexible Less flexible
8. Job security Low High
9. Time limits Specific starting and completion dates No specific time limits
for each project
10. When useful Firms engaged in Project work. Multiproduct diversified firms.



S ales Finance Production E ngineering

P roject Manager 1 Project M anager 2

Design Test M anufacturing D esign Test Manufacturing

Quality Control Personnel Quality Control Personnel

Fig. 1.5 Project O rganisation


Research and
M anufacturing Engineering Developm ent Accounting


Manager M anufacturing Engineering R esearch and A ccounting
Project A Group A Group A Development A Group A

Manager M anufacturing Engineering R esearch and A ccounting

Project B Group B Group B Development B Group B

Manager M anufacturing Engineering R esearch and A ccounting

Project C Group C Group C Developm ent C Group C

Fig. 1.6 M atrix Organisation


ORGANISATION Matrix Organisation

Matrix organisation or grid organisation is a hybrid structure combining two complementary
structures—functional departmention with pure project structure. Functional structure is a
permanent feature of the matrix organisation and retains authority for the overall operation of
the functional units. Product departments or project teams are created whenever specific projects
require a high degree of technical skill and other resources for a temporary period. Functional
departments create a vertical chain of command while the project teams form the horizontal
chain. The functional or vertical lines of authority intersect product or horizontal lines, thereby
focming a matrix or grid. Thus, a matrix organisation is a two dimensional structure, a combi-
nation of pure project structure and the traditional functional departments.
Members of a particular project team are drawn from the functional departments and are
placed under the direction of a project manager. A project manager has overall responsibility
for the success of the particular project. He has authority over the members of the project team.
In Fig. 1.6, this temporary authority is shown by dotted lines. On the completion of a project,
the project team is dissolved and its members including the project manager revert or return
back to their respective departments for reassignment to new projects. They may again be
assigned to another project. Each project has a definite time duration.
The matrix organisation originated in the defence and aero-space industries in the USA. It
differs sharply from the typical one boss command structure based on the principle of unity of
command. Matrix organisation has been defined as “any organisation that employs a multiple
command system that includes not only the multiple command structure but also related mecha-
nisms and an associated organisational structure and behaviour pattern”.
Sometimes, matrix and project organisations are considered as one and the same. However,
there is a distinction between the two. In the project organisation, separate identifiable units
are created for executing large projects. Every project manager has complete responsibility for
the project and complete authority for the use of resources required for its accomplishment.
Such organisational units or projects are like semi-autonomous divisions. On the other hand,
in matrix organisation, the project manager shares resources with the functional managers. He
does not have complete authority for use of resources. Pure project organisation is suitable for
organisations dealing with a small number of long-term, manufacturing projects of short dura-
tion which are undertaken through temporary project teams.
Matrix organisation has been developed to meet the needs of large and complex organisations
which require a structure more flexible and technically oriented rather than the functional
structure. Temporary project teams are tailored to the successful completion of particular
projects. For instance, chemical, mechanical, industrial and electronic engineers may work to-
gether with physicists, accountants and other professionals to develop a new product. Project
managers’ authority flows horizontally while functional managers’ authority flows vertically.

Matrix organisation is used in industries with highly complex product systems, e.g.. aero-
space industry where project teams are created for specific space or weapon systems.


Matrix organisation provides the following benefits:
(1) It helps to focus attention, talent and resources on a single project which facilitates better
planning and control. Specialists from several functional departments provide a pool of exper-
tise, particularly technical skill. The project manager can keep a track on the progress of work
to ensure the completion of project in time. Specialised knowledge is available to all projects on
an equal basis.
(2) It is more flexible than the traditional functional structure. It can better respond to the
inevitable changes in market conditions, technology, etc. that occur as work progresses on a
project. Effective information system enables the organisation to respond quickly to project
needs and customer desires.
(3) It provides an environment in which professionals can test their competence and make
maximum contributions. More emphasis is placed on the authority of knowledge than the
rank of an individual in the organisational hierarchy. Matrix organisation pushes decision-
making down the chain of command.
(4) It provides motivation to the project staff as they can focus directly on the completion of
a particular project. It also improves communication by encouraging direct contact and reduc-
ing the inhibitions arising from formal rank. The problem of coordination is reduced in so far
as the project manager acts as the integrator of personnel from diverse disciplines. Responsibil-
ity for a particular project is clearly defined. Lines of communication are short and well-estab-
(5) Each project is assigned the physical resources and personnel it requires. Thus, unneces-
sary duplication is avoided. Functional departments provide support to projects. Project people
revert back to their functional departments when the project is completed. There is no sense of
job insecurity. A better balance between time, cost and performance is obtained. Interactions
between specialists encourage creativity and broadening of vision.
Matrix organisation suffers from the following limitations:
(1) It violates the principle of unity of command. Each employee has two bosses—the func-
tional boss and the project manager. During his assignment to a project, he works under the
command of the project manager. In addition, he receives orders from his permanent supervi-
sor. This creates role conflict or confusion and may create jurisdictional conflicts in the
organisation. Multiple flows of authority may create problems of vertical coordination.
(2) The scalar principle is also violated as there is no determinate hierarchy. Project manag-
ers and functional managers are distinct but do not stand in a scalar relationship. Working
relationships are not very clear. Balance of power between functional managers and project
managers is not clear.
(3) Conflicts may arise due to the heterogeneity of team members. People are drawn tempo-
rarily from different departments. Project manager does not have line authority over his het-
erogeneous group of personnel. This results into problems of coordination.
(4) In matrix organisation, organisational relationships become very complex. Apart from
the formal relationships, informal ones also arise creating problems of coordination.



(5) The success or failure of the functional group depends upon its performance in the project.
This may lead the group to emphasise its own function even at the cost of the overall project.
As a result conflicts arise between the functional groups. Personnel often lack commitment to
project goals and their morale tends to be low.
(6) The secondment of specialists from functional departments to a number of projects makes
it difficult for the functional heads to appraise employee performance. It is quite likely that job
requirements in projects may be different from the original job in functional departments. In
the absence of proper adjustment of compensation to take account of such differences, discon-
tent may arise.
(7) Matrix organisation is not a homogeneous and compact group. The multiplicity of verti-
cal and horizontal relationships may impair organisational efficiency. Deputationists may try
to emphasise their own specialisations at the cost of the overall project. There is lack of jurisdic-
tional clarity.
(8) Switching over to a matrix organisation is a time-consuming process. It requires major
organisational changes which may give rise to numerous problems. The reorganisation may be
resisted by individuals in so far as it alters the existing system in terms of status and security.
New reporting and accounting systems also need to be developed so that individuals in au-
thority are supplied with timely and accurate data on which they can base their decisions.
Despite these drawbacks, the matrix organisation is breaking down barriers to action that
have been built into traditional hierarchies. If role prescriptions are clearly defined and the
decision-making authority of the project manager is differentiated from that of the functional
manager so that each individual knows who will decide regarding specific matters, matrix
structure can be effective. Prof. John F. Mee of Indiana University, U.S.A., a major architect of
the matrix system suggests that it will be a dominant form of organisation as we get more
complex products and more sophisticated managers.
The matrix form of organisation can be used in public institutions too. For instance, in a
college, faculty members may be assigned to their specialised departments such as finance and
accounts, marketing, personnel and industrial relations, economics, etc. Then there are
programme managers for the executive development programme, post-graduate programme,
research programme, consultancy, etc. Each faculty member may work for several programme
managers for varying periods of time. In general, matrix ftrganisation is useful wherever a new
task is to be done, when specialists from different areas must be grouped together, when there
is a compact project, e.g., construction of a building, making a. missile, etc. and when a time
deadline must be met within certain cost limits. “ Committees and Their Role
A committee is a group of persons appointed or elected to meet on an organised basis for the
consideration of matters brought before it. It is formally assigned some task or problem for
taking or recommending decisions on it. According to Hicks, “a committee is a group of people
who meet to plan, to discuss or make a decision for a particular subject”.
This definition reveals the following features of a committee:
(i) A committee consists of two or more persons. There is no maximum limit on the mem-
bers of a committee. However, a very big committee, e.g., more than ten members becomes
unwieldy as members cannot effectively communicate with one another.


(ii) A committee has a precise jurisdiction. It is required to deal with specific problems or
A Comparative Study of Organisation Formats
Form of Organisation Advantages Disadvantages
Line Organisation 1. Simple and easy for both workers 1. No specialisation,
and managers to understand.
2. Clear delegation of authority and 2. Overburdening of top executives with
responsibility for each area. administrative details.
3. Quick decisions
4. Direct communications.
Functional Organisation 1. T he benefits of specialisation. 1. W orkers having more than one boss.
2. Expert advice available for each 2. Discipline breaking down unless
worker. authority is clearly defined.
3. Reduced managerial workload. 3. Possible conflict due to overlapping of
Line and Staff 1. Specialists to advise line m anagers. 1. Conflict between line and staff unless
Organisation relationships are clear.
2. Employees reporting to one 2. Staff managers making only
supervisor. recommendations to the line managers.
Committee O rganisation 1. Combined judgement of several 1. Committees slow in making decisions.
executives in diverse areas.
2. Improved morale through participation 2. Decisions that are the result of
in decision-making. compromises rather than a choice of the
best alternative.
Matrix Organisation 1. The benefits of specialisation and 1. Lack of unity of command.
2. Can be used in all types of 2. Chances of conflicts and frictions.
Project Organisation 1. Individual attention on every project. 1. Feeling of insecurity among project
2. T eam work and participation. 2. Conflicts between project and functional

(iii) A committee may merely deliberate on a problem and make recommendations. Alter-
natively, it may be given the authority to take a final decision in the matter.
(iv) A committee acts as a collective group by holding meetings. Individual members do
not have the final authority. Each member can exercise one vote on a resolution.
(v) A committee may be constituted at any level of organisation. Moreover, its members
may be drawn from several levels of authority.
Committees have become an important instrument of management in modern
organisations. They may be used for the following objectives:
(i) to secure viewpoints and consultation of various persons in the organisation;
(ii) to give participation and representation to different groups of interests;
(iii) to co-ordinate the activities of different departments;
(iv) to review the performance of certain units; (u) to facilitate communication and co-
operation among diverse groups.



Types of Committees
Committees can be classified on several bases, e.g., authority, functions, tenure, etc. Some of
the popular kinds of committees are given below:
1. Advisory or Executive Committees. An advisory committee is vested with staff author-
ity. It can deliberate upon problems and make recommendations but cannot enforce them. For
example, a works committee makes suggestions relating to problems on the shop floor. On the
other hand, an executive committee not only takes decisions but also enforces them. It is a
plural executive vested with line authority. The board of directors is an executive committee.
2. Line or Staff Committees. A committee may be line or staff depending upon the function
assigned to it. If its authority involves decision-making affecting subordinates responsible to
it, it is a line committee. If its authority relationship to a superior is advisory, then it is a staff
3. Standing or Ad Hoc Committee. A standing or permanent committee is constituted for
an indefinite period. It exists continuously for an indefinite time. On the other hand, an ad hoc
committee is appointed for a specific purpose or a specific time period. When the purpose is
served or the time period is over, the committee is dissolved.
Advantages (Reasons for Use of Committees)
Now-a-days committees are widely used in all areas of administration and management on
account of the following reasons:
1. Pooling of knowledge and experience. The personal skills and experience of several
persons are pooled together. Group deliberations and combined judgement of all the members
can be brought to bear on important problems. There can be a more realistic and objective
appraisal of the problem from all angles. This helps to improve the quality of decisions. Busi-
ness problems are multifaceted and require breadth of vision. Subjective and unbalanced deci-
sions can be minimised, “When several people study and deliberate on each critical problem,
there is more assurance that every fact will be thoroughly explored and weighed in terms of
the interests of the company as a whole”. A group of people can bring to bear a wide range of
experience and a more thorough probing of facts than a single person.
2. Improved communication. Committees serve as important means of communication be-
tween the members of an Organisation. Information and ideas can be easily transmitted both
upward and downward. Unwritten policies and objectives can be explained effectively through
deliberations of a committee. Creative ideas emerge from interactions among the members.
Doubts and ambiguity can be removed on the spot.
3. Facility of coordination. Participation in committee meetings promotes mutual under-
standing, team-work and cooperation among employees. Committees serve as an important
technique of coordination by bringing together managers from different departments. Mem-
bers of a committee come to appreciate each others’ point of view and they can pursue a com-
mon course of action. A committee is a useful means of integrating and unifying various points
of view.
4. Better motivation. Committees help to improve the motivation and morale of employees
by providing them an opportunity to express themselves. Participation in the decision-making


process not only improves quality of decisions, it creates a sense of belonging. Employees are
keen on the execution of decisions in the making of which they have taken an active part.
5. Executive development. A committee is an useful device for educating and training sub-
ordinate managers. Participation in committee meetings provides opportunity for learning
through experience. A manager learns to take an integrative view of organisational problems
by serving on various committees. Executive development ensures continuity of management
in the organisation.
6. Democratic management. As a plural executive, a committee helps to avoid the risk of
concentration of too much authority in the Individual and the danger of abuse of power. There
Is no fear of delegating too much authority to one individual. The tyranny of a powerful head
can be reduced. Group authority makes for diffusion of power and democratic leadership.
7. Representation of interests. Various interest groups can be given representation on a
committee. Such representation may be necessary to secure the commitment and cooperation
of people. Members can be enlightened on policy matters and ideas beyond the capacity of one
individual can be generated.
8. Consolidation of authority. The manager of every department or section may have a
portion of the total authority required to take a decision. Such authority is known as splintered
authority. In such a case, a committee of different managers may be constituted to consolidate
the authority. In this way the decision can be taken without reference to the higher level. How-
ever, frequent need for consolidation of splintered authority is the sign of a poor organisation
9. Avoidance of action. Sometimes, committees are constituted to postpone or avoid action.
In order to cool agitation and temper on the part of employees, the matter may be referred to a
committee. Delaying of action through a committee is a strategy for overcoming resistance,
pressure or opposition from affected people.
The committee form of organisation suffers from the following weaknesses:
1. Indecisiveness. In general, it takes longer to get decision or action from a committee than
from an individual. Members of a committee tend to indulge in lengthy discussions. Every
member has the right to speak and be heard. Matters are unnecessarily dragged. Opinion is
divided and decisions get delayed. Group decision processes are not appropriate where prompt
action is required. Due to conflicting view-points, a committee fails to reach a decision in time.
2. High costs. A lot of expenditure and time is incurred in convening meetings and giving
travelling or other allowance to members. Therefore, committees are an expensive form
of’administration. As such a committee should be appointed only when the gains of committee
work justify the costs. Committee work is very time-consuming.
3. Compromised decisions. Committee decisions are often mediocre compromises between
conflicting viewpoints. The ultimate decisions may reflect the opinion of none so that there is
little eYithusiasm for them. Individual thinking is expected to conform to the average or group
thinking. Such levelling effect or long-rolling reduces the quality of decisions. The compromise
is often arrived at the least common denominator. Therefore, committee decisions are not nec-
essarily the best decisions but merely acceptable ones.



4. Diffused responsibility. No member can be individually held responsible for a wrong

decision taken by a committee. As no one feels accountable for results, members shirk their
responsibilities. The committee becomes an organised means of passing the buck. According
to Urwick committees do not necessarily increase the democratic process in administration.
5. Domination by few. A few aggressive or vocal members often dominate committee’s
deliberations. A minority group exercises an unwarranted tyranny ignoring the interest of
other members. Members frequently seek to protect their narrow sectional interests. There is a
tendency to cloud the real issues and bring in extraneous matters for discussion. Often a com-
mittee becomes a battle-ground for warring camps to settle personal scores.
6. Perpetuation. Committees have a tendency to perpetuate themselves even after the pur-
pose is served. There exist too many committees even for routine problems. Sometimes com-
mittees are appointed to just void actions. Such committees serve no useful purpose and the
aggrieved people remain aggrieved. It is often difficult to dissolve a committee even when it
has outlived its utility.
7. Lack of secrecy. It is difficult to maintain secrecy regarding the decisions and actions
taken by a committee. A large number of persons participate in committee meetings.
Due to its weaknesses and misuse, a committee has been described as “a group of unfits
engaged by the unwilling to do the unnecessary”. Some people remark that a committee is a
group of people who individually can do nothing but who can meet together and decide that
nothing can be done. Such remarks reflect wide-spread frustration and disillusionment with
Suggestions for Making Committees Effective
Some of the drawbacks are inherent to committees while others arise due to misuse of commit-
tees. The following measures can be taken to improve the effectiveness of committees:
1. Appropriate size. The number of members should not be very large. Too many members
make the committee unwieldy and ineffective. At the same time a committee should be large
enough to provide breadth of expertise and to promote deliberations. The exact size of a com-
mittee will depend upon the nature and type of the problem.
2. Selection of members. The members of a committee should be selected carefully keeping
in view the tasks involved. They should possess necessary knowledge and experience. They
should be capable of participating in discussions and deliberations. Yesmen or showpiece mem-
bers should not be selected. The composition of the committee should be such that every mem-
ber is able to contribute to the committee working. Members of a committee should possess
homogeneity of outlook but heterogeneity of background.
3. Effective chairperson. The chairman of the committee should be competent enough to
plan and conduct the meetings in a fair and effective manner. He should understand and carry
out his role properly. The actions and behaviour of the chairman have significant bearing on
the success of a committee.
4. Well-defined authority. The objective, functions, scope and authority of a committee
should be defined in clear and precise terms. The jurisdiction and terms of reference must be
spelled out carefully. The subject matter should be appropriate. Committees are not an appro-
priate form of organisation for exercising managerial functions.


5. Proper planning. Thorough preparations should be made for committee meetings. Agenda
should be prepared and circulated among members in advance so that the members can be
ready for discussion. Logical procedure must be followed in conducting the meetings. There
should be a time schedule for deliberations and proper minutes should be recorded.
6. Group behaviour. The members should behave like a team in a responsible manner.
There should be free and frank discussions without ill-will or bickerings.
7. Follow-up action. There must be a periodic review of the functioning of a committee.
Recommendations of the committee should be duly considered. The group should be informed
about the action taken on the recommendations. It is also necessary to judge the validity of the
committee from time to time.
Despite their limitations, committees are widely used in management. Committees cannot
be a substitute for executive Judgement. But they are useful in:
(a) investigation and collection of facts;
(b) pooling of ideas and judgement;
(c) coordinating of departmental activities;
(d) representation of various interests;
(e) examination and evaluation of proposals ;
(f) gaining acceptance of ideas;
(g) taking decisions beyond the authority of individual managers;
(h) communication of ideas and information, etc.
1.1.5. Free From Organisation
A free form organisation is a rapidly changing, adaptive, temporary system organised around
problems to be solved by groups of relative strangers with diverse professional skills. It evolved
out of the task forces developed during Second World War to perform specific missions. It is
also known as an organic or ad hoc organisation. Free form organisation is in many ways
similar to the project and matrix organisations.
Main Features
Some of the important characteristics of free form organisation are as follows:
(i) Objectives. A free form organisation is created generally to accomplish long range and
development oriented goals. But tasks, roles and relationships are not well defined.
(ii) Environment. A free form organisation is a highly flexible and dynamic structure that
is constituted in response to a volatile and unstable external environment. Every enterprise
adopts its own organisational design to meet effectively the demands of the fast changing
(iii) Time span. There is no rigid time span. The structure may last a week, a month or a
year depending on changes in the environment.
(iv) Structure. A free form organisation reduces the emphasis on positions, departments
and other formal units and on the organisational hierarchy. This is because problems differ



from one situation to another. The structure is related to individual expertise in resolution of
the problems at hand. There is, however, a mechanism to avoid any chaos or confusion that
may result from lack of a formal structure. Focus is on interpersonal and group cooperation
and coordination.
(v) Authority, Specific tasks are assigned keeping in view individual expertise and compe-
tence. There are no definite levels with which authority could be associated for ever. Rather
authority is located wherever there is required competence and skills to accomplish the given
(vi) Roles. Job tasks in a free form organisation cannot be defined with certainty. Roles
performed are interchangeable depending on the nature and complexity of the mission. There
is no specific chain of command.
(vii) Profit centres. Profit centres rather than functional departments are used. Profit cen-
tres place all contributions to an integrated single unit with unified goals so that all gain or lose
by the results. Major functions are treated as profit centres.
(viii) Flexibility. The free form organisation is highly fluid and dynamic. It is so consti-
tuted that its constituent units are operated quite flexibly. A small central group at the top is
relatively stable. It consists mainly of planners and those who evaluate and control. Operating
divisions are highly flexible and changing.
(ix) Communication. There are no fixed channels of communication. Focus is on team ap-
proach and not on organisation charts or chain of command.
Communication is in the form of advice and information rather than orders and instructions.
(x) Control. Criteria used for evaluating performance is both objective and subjective but
the focus is always on activities and results.
Free form organisation is suitable for industries which operate in a highly dynamic environ-
ment. Such an environment requires fast information procuring, quick decisions and highly
flexible units. Free form organisation is also useful in a democratic society. Democratic values
put greater emphasis on equality rather than subordinate relationships.
1.1.6. Conflict Between Line and Staff
There is frequent conflict and friction between the line executives and staff personnel. The
causes of such conflict may be divided into three categories:
1. Line managers make the following complaints against staff personnel:
(a) Staff oversteps its authority. Staff officers encroach upon line authority. They inter-
fere in the work of line managers and attempt to tell them how to do their work.
They do not confine themselves to their advisory role.
(b) Staff does not give sound advice. Staff personnel fail to give fully considered, well-
balanced and sound advice. They are academicians and give new ideas that have
little practical application. They are not well-acquainted with the real problems of
the enterprise. They often push untried and untested ideas.
(c) Staff steals credit. Staff personnel are not directly accountable for results and are
generally overjealous. They tend to assume credit for success but lay the blame for
failure on line managers.


(d) Staff experts fail to see the whole picture objectively. They tend to emphasise their speci-
ality rather than the interest of the total organisation.
(e) Staff has a complex. Staff officers tend to impose their superiority on line managers.
Staff personnel are generally more educated and specialists in their areas. There-
fore, they consider themselves superior to line executives.
2. Staff personnel usually make the following complaints against line managers:
(a) Line managers often resist new ideas and are not prepared to listen to the arguments of
staff experts.
(b) Line executive do not provide sufficient authority. Staff specialists lack authority to get their
useful ideas implemented. As a result they get frustrated.
(c) Line managers do not make a proper use of their service of staff specialists. Line managers
consult them only as a last resort. They consider that asking for advice is admitting
defeat. Therefore, staff cannot anticipate problems and recommend precautionary mea-
3. The following weaknesses in the organisation structure also lead to line-stiff conflict:
(a) Lack of well-defined authority. Very often authority relationships between line and staff
are not clearly defined. This -results in overlapping and gaps in authority leading to
(b) Temperamental differences. There are fundamental differences in the orientation, view-
points and perceptions of line and staff. Generally, staff people are relatively young,
better educated and more sophisticated in their outlook. On the other hand, line per-
sonnel tend to be old, less educated and more conservative. Staff feel their advice will
produce miracles while line feels it impracticable. Staff seeks change and experimenta-
tion whereas line often desire status quo and caution.
A certain amount of conflict might be inevitable and even desirable. But extreme and pro-
longed line-staff conflict can be very dangerous to the organisation. Therefore, it is necessary
that line and staff work together as a team for the smooth working of the enterprise. The fol-
lowing steps may be taken to improve line-staff relationships:
(1) Clarify relationships. The limits of line authority and staff authority should be defined
clearly and precisely. It should be made clear to all that line has the ultimate responsibility for
results while staff is responsible for providing sound advice and service to the line executives.
(2) Educate line. Line should give due consideration to the staff advice and should follow
the recommendations if they are in the best interests of the organisation. They should give
reasons for not accepting the staff advice. Line executives should be educated and encouraged
to make proper use of staff.
(3) compulsory staff advice. Line executives should consult and seek staff advice as a mat-
ter of habit. They may be forced to consult staff on regular basis. This will enable line to make
maximum use of staff.
(4) Inform staff. Line managers should not take action directly affecting staff without in-
forming the staff. They should keep the staff fully informed of their problems and require-



(5) Sell advice. Staff specialists should appreciate and understand the problems of line.
They should not make it a prestige issue when their advice is not followed. Rather they should
sell their ideas to line executives.
(6) Encourage line. Staff should encourage and educate line managers by letting them know
what they can do for line.
(7) Overcome resistance. Staff should try to recognise and overcome resistance to change
on the part of line. They should be convinced and consulted before introducing change and
results of change should be made known to them.
(8) Completed staff work. Staff experts should fully consider their suggestions before put-
ting them before line executives. They should be a problem-solver not a problem-creator. They
should make complete recommendation so that line can respond in terms of yes or no. This is
called completed staff work.
(9) Orientation. Line and staff should understand the orientations of each other. Line should
recognise the importance of staff and should consider staff as a helper. Similarly, staff should
not encroach upon line authority but persuade line to use their advice. In this way line and
staff can become an organisational way of life.
(10) Constitute committees. Committees of line and staff executives should be constituted.
Such committees should meet periodically to discuss all outstanding differences among line
and staff. Such differences should be amicably resolved by unanimous decisions. If differences
still persist an appeal to the common superior may be made.
(11) Position rotation. Wherever possible staff specialists should be placed in the position
of line managers. Such position rotation will improve understanding and initial co-operation
among line and staff.
(12) Linking pin concept developed by RensisLikert may be used. Under this concept,
overlapping groups are formed with some individuals, being members of two or more sepa-
rate groups who serve as linking pins between line and staff.


As business activities are performed by a large number of persons, it is essential that business
activities should be organised in such a manner that business functions are performed with
maximum efficiency and at minimum cost. In order to organise the business activities, the
following steps should be taken :-
(A) Departmentation.
(B) Selection of suitable persons, allocation of duties and delegation of authority and responsibility.
(C) Providing necessary working conditions.

1.2.1. Departmentation
In modern times, multifarious activities of diversified nature are performed by business
corporation. It is difficult to function for a business enterprise unless its activities are divided
into a group of functions. These classified functions are performed by specialised employees
seated at a centre known as department. In order to achieve the organisational objectives and


to have efficient administration at all levels, it is desirable to have departmentation.
Departmentation is the process of grouping activities into units for purposes of administration.
The administrative units so created may be designated as divisions, units, branches, departments
or by some other names.

Objectives of Departmentation.
The objectives of departmentation are as under :—
1. To have necessary degree of specialisation of executive activities for efficient ‘
2. To provide a basis on which top management can coordinate and control the activities
of the different departments or sections in the organisation.
3. To fix responsibility for defaults and correct the mistakes, if any.
The main aim of departmentation is to secure maximum efficiency in work at minimum cost.
Departmentation leads to greater efficiency and reduction in the cost of management. This also
helps the management to do its job most effectively. It also generates healthy competition among
different departments and welcome initiative and personal judgement on the part of the

Basis of Departmentation
The following are main bases or methods of departmentation which are adopted by the different
organisations according to their needs:
1. Functions. When the activities of the concern are divided according to broad functions
of the organisation, it is called functional departmentation. For example, there may
be production department, sales department, finance department, accounting
department etc. This is the most popular basis of departmentation.
2. Geographical areas or territory. Where the units of an organisation are geographically
dispersed, an organisation may have separate departments on the basis of areas or
territory served by it. An’ organisation may create different departments for different
regions. For example, M/s Usha Sales Private Ltd. has divided its sales organisation
in North, East, West and South Zones and then into different districts. It takes
advantage of the intimate knowledge of local conditions possessed by executives.
3. Product or services. Department may be set up for each product manufactured or
services supplied. For example, a concern may have textile division, chemicals division,
plastic division, fertilizer division etc. This makes it possible for the management to
take advantage of specialised product knowledge and place responsibility for results
4. Process. Where different processes are carried out in order to convert raw material
into finished products in a manufacturing organisation, this method of classification
is adopted. For example, a machine shop may establish process department for lathe
work, milling, shaping, drilling, grinding etc.



5. Time. Activities may be divisionalised on the basis of time e.g. day shift, evening
shift, night shift.
6. Customers. Departments may be created on the basis of customers served. A restaurant
may have different rooms for rich customers and a common cafeteria for less well-to-
do customers.
The business house may select any one or more of the above basis of departmentation of their
activities. The number of departments may depend upon the size and number of functions
performed by the purpose. Functional method is generally followed by most of the organisation.
For a large enterprise with a distribution network all over the country, the scheme of
departmentalisation should have a combination of territorial method and product method.
The said enterprise may classify its sales activities into four zones, Viz. North, South, East and
West. The zones may be further classified into districts and districts into villages and towns. If
the enterprise deals in one or two products, the said scheme of departmentalisation is enough.
In case enterprise deals in many products, the zones may have departments on the basis of
Factors in Departmentation.
For sound departmentation, the following factors should be taken into account :—
1. Specialisation. Departmentation should be such as to yield the advantages of
specialisation. For example, production department specialises in production problems,
sales department specialises in sales and so on.
2. Control. This is an important factor to be considered. While creating departments
they should be so formed as to make easy the work of a manager. He should effectively
control the affairs of a business.
3. Coordination. Different departments set up should be made to work to achieve the
common objective of the business. Certain service departments like filing, purchasing
etc. may be attached to a department to which they have to serve.
4. Economical. The cost of operating a large number of departments should be given its
due weight. The number departments should be such as is inexpensive and economical
for the business concerned.
5. Attention. Attention should be given to those activities of the business which are
more important and need greater importance. Separate departments should be created
for such activities. For example, if an organisation wants to give special importance to
research, it can create a “research cell”.
6. Adaptability to local conditions. Sometime local conditions play an important role
in the functioning of different departments located at different places. In such
circumstances, departmentation should facilitate adaptability to local conditions.


1.2.2. Delegation of Authority
Delegation of authority is an important part of the organising process. Delegation of authority
simply refers to the act of entrusting the subordinates with same powers that are of the superior
authority. This is granting of authority by superior to subordinate. By means of delegation of
authority a superior spreads his area of managerial influence and make an organisation structure
more meaningful and executive more effective. As Alien puts it, “Once man’s job grows beyond
his personal capacity, his success lies in his ability to multiply himself through other people
(i.e. delegate his work to others)” . The superior divides the work among his subordinates on
the expectation that his subordinate would do the work in the same manner as he himself
would have done. This process of allocating the work among subordinates is called delegation
of authority.
Let us see some definitions of delegation of authority :-
According to Alien, “Delegation is the process, a manager follows in dividing the work
assigned to him so that he performs that part which only he, because of his unique
organisational placement, can perform effectively, and so that he can get others to help him
with what remains”.
According to Haimann, “Delegation of authority merely means the granting of authority to
subordinates to operate in their prescribed limits”.
According to Koontz and O’Donnel, “Authority is delegated when organisation power is
vested in a subordinate by a superior”.
In short, delegation of authority means assigning work to others and give them authority to do.
Elements of Delegation of authority. Basically delegation of authority involves three elements:
1. Assignment of duties. Since one executive cannot perform all the tasks, he is desired to
allocate a part of his tasks to his subordinates. The sharing of duties between a manager
and his subordinates can only be possible when the work is divisible into parts. The
Manager has to decide which part he has to retain with himself and which parts he will
like to transfer to his subordinates.
2. Grant of authority. Besides the power to command or to give orders, authority means
the right to permission to act for the company, to use company’s powers or to do other
like things. The subordinates when granted duty to be discharged are also granted
requisite authority to perform such duties. The top executive confers the necessary
right and powers to these subordinates. One thing to be noted here is, that the top
executive does not delegate total duty. He retain some reserved duty and authority for
his own performance, otherwise he will not be able to function as chief executive and
lose his importance.
3. Creation of obligation. The delegation of duty and allocation of powers to the
subordinates to perform their duties creates an obligation on the part of the subordinates
to render an account of their performances to the person delegating the authority. The
chief executive is himself accountable to the Board of Management whether he delegates
the authority or not. When he delegates his authority, he has to exercise control over



the performance of his subordinates. This control is exercised by him through demanding
accountability from the subordinates. Duty and authority flow from the top to the
subordinates, while accountability flows from subordinates to the chief. Thus duty and
authority flow in the downward direction while accountability flows in an upward
Basic Principles of Delegation.
The following well-recognised principles govern delegation of authority :—
1. Authority should be commensurate with responsibility. Principle of parity of authority
and responsibility. There should be an equality between authority and responsibility.
The subordinate cannot be held responsible for which he had no authority. If a
subordinate accepts responsibility without authority, he will not be able to perform the
work for lack of power of authority. On the other hand, if a subordinate has only
authority and no responsibility or authority of a person is more than his responsibility,
he may misuse it. Thus, as far as possible authority should be coextensive with
2. Principle of unity of command. A person cannot serve two masters well. A subordinate
should receive orders from one superior and a person should not have more than one
boss. This will ensure clear understanding and effective operation of authority and
3. Principle of delegation by results expected. Authority should be delegated to such an
extent and in such a manner as may be considered necessary for the accomplishment of
the results expected. It should be delegated in accordance with the responsibility that
he expects from the subordinates.
4. Principle of absoluteness of authority. The superior cannot escape the responsibility
for the activities entrusted to him merely by delegating authority to his subordinate.
He cannot pass on his responsibility to account for to his superior or to the subordinate.
It is rightly said that accountability cannot be delegated; it always moves upward.
5. Principle of Motivation. Delegation must motivate the subordinate. They must
understand the advantages, they are likely to get by performing the jobs delegated to
them. Performance of work will improve if work and reward can directly be linked up.
Similarly, subordinates should be encouraged to accept responsibility and take initiative.
Delegation significantly depends on the value that an organisation puts on it as a managerial
function and the availability of subordinates with requisite abilities, knowledge and motivation,
and commitment to goals. It also depends on the unique leadership style of the delegator.
External and internal environment of an organisation also influence the extent to which authority
can be delegated to managers at lower levels.
Factors determining the delegation of authority. The delegation of authority depends upon
the following factors: ..
1. Managers’ willingness and desire to delegate authority.
2. Subordinate’s willingness to accept responsibility, coextensive with authority.


3. Amount of work to be done by delegating the authority.
4. Confidence of the manager in the subordinates.
5. Atmosphere of personal and group cooperation and trust.
6. Subordinate’s capacity and capability to accept the responsibility.
7. Sufficient incentives for the subordinates for additional work delegated to them.

Importance or benefits of delegation.

Stressing upon the importance of delegation Koontz and Donnell opined, “Just as the authority
is the key to the Manager’s job, delegation of authority is key to organisation”. Newmann,
Summer and Warren expressed “The cement that holds a formal organisation together is made
up of delegation and resulting relationship between the organisation’s members”. Organisation
and Management Fundamentals The following are the main points of importance of delegation
of authority.
1. Vehicle for Coordination. Delegation acts as a vehicle for coordination. By establishing
structural relationships though out the organisation, delegation results in securing
coordination and company unity.
2. Reduction of manager’s burden. Delegation reduces the burden of executives by
relieving them of the botheration of taking routine decisions which others can take
efficiently. This will help them in concentrating on vital aspect of management.
3. Expansion of Business. Delegation facilitates the expansion of business through
extending and multiplying the limited personal capacity of the superiors.
4. Motivation. Delegation improves the morale of subordinates by way of raising their
status and importance in the organisation. Subordinates are encouraged to take more
initiative and turn out better work. Delegation of authority is a type of motivation.
5. Development of Subordinates. Delegation permits the subordinates to enlarge their
jobs, to develop their capacity and to broaden their understanding. Delegation helps
in imparting automatic managerial training and development.
6. Specialisation. Delegation helps the organisation in getting the benefits of specialised
services of its personnel.

Difficulties or Weakness of Delegation.

Though delegation appears to be a simple process, many difficulties come in the way of effective
delegation. These difficulties may be grouped into three categories which are discussed below
(A) On the part of the Superior: Managerial failure in delegation arises because of the following:
1. There is a superiority complex among the supervisors (superiors). They feel that they
can do the job in a better way.
2. Superiors sometimes do not have faith in the subordinate. Lack of confidence in the
capacity, ability and dependability of the subordinate obstructs the superiors to delegate
authority. Due to this superiors are unwilling to delegate their authority.



3. Sometimes, the superiors do not have enough ability of directing the subordinates.
They fail to guide the subordinates and this poses problems before the process of
delegation of authority.
4. The desire of dominance over the work of subordinate at each step hampers the
delegation. Hence, superiors would like to do everything by themselves. They will not
like their subordinates to enjoy any power.
5. If a superior is not competent, the procedures and methods designed by him are likely
to be faulty. For fear of exposure, he keeps all the authority to himself.
6. While delegating authority, the superior must find means of assuring himself that the
authority is being used to accomplish the given assignments. Where the manager does
not set up adequate controls or has no of knowing the use of authority, he may hesitate
to delegate the authority.
7. If the superior is conservative in attitude and is not willing to take any risk, he will
never think of delegating power of authority.
(B) On the part of the subordinate. Sometimes, the subordinates may pose problems in the
process of delegation, because of the following reasons:
1. Subordinates are often unwilling to accept or utilise delegated authority because they
lack self-confidence in their abilities.
2. Some superiors are in the habit of criticising actions taken by a subordinate. This
discourages initiative. They want to play safe by depending on the boss for all decisions.
3. Some subordinates have low need for autonomy and feel comfortable in the relationship
of dependence with their superiors. They feel confused and a sense of loss of direction
if they are entrusted with authority to make decisions.
4. Subordinates may hesitate accept the delegated assignment, if they believe that they
lack necessary information and other infra-structure to perform it.
5. Subordinates may be shy of taking a delegated authority.
6. Some subordinates feel lack of motivation to take responsibility and accept authority.
This happens particularly when reward like recognition, pay increases, promotion etc.
are not linked with performance.
(C) On the part of the Organisation. The fault contributing to the weakness of delegation
may also lie with the organisation. They may include the following:
(i) Defective organisation structure and non-clarity of authority,
(ii) Inadequate planning.
(iii) Non-implementation of the principle of unity of command,
(iv) (iv) Lack of effective control mechanism.
Guidelines for Securing Better Delegation
1. Authority should be commensurate with responsibility.
2. Interference should be minimum.


3. Mistakes should be tolerated.
4. Adequate controls should be established.
5. Goals should be predetermined and clearly defined.
6. Policies, rules and procedures should be established to guide decisions.
7. Upward delegation should not be allowed.
8. Delegation should be rewarded.
(D) Immediate decision in case of emergency. Centralisation of decision-making is essential
when the business conditions are uncertain and there are chances that emergency conditions
may develop to endanger the very existence of the1 organisation. Centralisation will help in
taking rational decisions from both short as well as long term perspectives to meet such
(E) Secrecy. It is easy to maintain secrecy about decisions taken by a few top level executive. In
a decentralised set up decisions are taken at lower levels and become known to so many people
that it becomes difficult to maintain secrecy about them.
(F) Specialisation. Centralisation is suitable for the development of specialised services, e.g.
maintenance of accounts, recruitment and training of staff. It may promote utilisation of
efficiency and efforts and reduce the cost. For example, the services of a research scientist or a
financial adviser can be best utilised when there is centralisation.

Disadvantages of Centralisation
Centralisation of authority has following disadvantages.
1. Costly. Under centralisation, most of the decisions are taken not at a point where work
is being done but at a point higher in the organisation. It involves considerable cost and
delay in taking the decisions.
2. Burden of top management. Centralisation of authority increases the burden on the top
management, because all the decisions are taken by the top executives. Top executives
cannot give much attention to more urgent and important work.
3. Red-tapism. A centralised set up breeds red-tapism which results not only delay in the
work but also helps in the raising eyebrows because bureaucracy always leads to
discrimination. Thus, there is lack of cordial atmosphere and team spirit.
4. Distinctive to Subordinates. Subordinates in a centralised set up is required to implement
whatever they are asked to carry out. This hampers the growth and development of
low level managers. There is no sehse of participation and initiative on the part of
1.2.3. Decentralisation
Decentralisation means distribution of authority from the superior to all the people right down
to the lowest unit through out the organisation i.e., wide delegation. Decentralisation is nothing
but an advanced form of delegation of authority. It is the end result of delegation at various
levels. According to Alien. “Decentralisation is the systematic and consistent delegation of



authority to the levels where the work is performed. According to Dalton, “Decentralisation is
a situation in which ultimate authority to command and ultimate responsibility for results is
localised as far down in the organisation as efficient management of the organisation permits”.
Decentralisation, thus, refers to:
(a) departmentalisation of activities or (b) decentralisation of authority for decision-making or
(c) dispersal of location of activities.
Decentralisation of authority should not be confused with geographical decentralisation or
dispersal of location of activities.
Circumstances that make decentralisation possible or desirable. The following circumstances
generally bring about decentralisation:
i) Physical separation of manufacturing units or facilities.
ii) More growth and increase in the size of the undertaking.
iii) Diversification in the products or process.
iv) Technological developments.

Advantages of Decentralisation.
The following advantages are offered by decentralisation:
1. Reduction of burden on top management. Decentralisation reduces burden on top
executives. By decentralisation. Top management can pass some of its managerial
functions to the subordinates. Thus, top executives can devote their valuable time on
more important matters of organisation, like planning, coordination and control.
2. Development of management and personnel. Decentralisation helps to develop prospective
managers. Under decentralisation, the junior executives and in-charge of various units
get training in decision-making which makes them capable of handling higher
responsibilities later.
3. Motivation. The subordinate, who is asked to shoulder the responsibility with sufficient
authority, feels enthusiastic and works with extra Zealand energy. A sense of being a
part of the organisation and a sense of accomplishment gives the subordinate vigour
and vision. Thus, subordinates feel highly motivated and this helps the organisation
in achieving the target satisfactorily.
4. Diversification of activities. Decentralisation facilitates the growth and diversification
of product lines or activities. If more people are involved in decision-making, they
can think of new lines and products. Where the product lines consist of a variety of
products, decentralisation brings excellent result in its wake.
5. Quick decisions and prompt actions. Decentralisation avoids red-tapism in making
decisions as it places responsibility on decision-making as near as possible to the place
where action takes place. The subordinate executives can make timely decisions
without asking for the approval or direction of superiors. This increases flexibility
and permits prompt action.


6. Effective control and supervision. Decentralisation helps in placing the authority and
responsibility as near as possible to the place where the action takes place. The greater
the degree of decentralisation, the more effective becomes the span of control. It leads
to effective supervision as the managers at lower levels have authority to make changes
in work assignment, to change production schedules, to recommend promotions and
to take disciplinary actions.
7. Economies. Decentralisation brings about internal and external economies. Internal
economies include speedier communication, better utilisation of lower level and middle
level executives, greater incentive to work and greater opportunities for training. It
results reduction in the cost of production.
Disadvantages or Limitations of Decentralisation. Decentralisation has following limitations:
1. Difficulty in coordination. Decentralisation may create problems of coordination in
various departments of divisions. Decentralisation may hamper adoption of uniform
2. Delayed decisions. When quick decisions are to be taken, decentralisation becomes
handicap to the organisation.
3. Costly. Decentralisation requires experts and specialist staff to manage different
divisions or sections of the concern with the result that it becomes a costly affair for
the concern. As the operating costs is quite high, small enterprises may not afford to
bear decentralised organisation.
4. Shortage of competent managers. Decentralisation requires a large number of trained
and competent managers. In practice, it is difficult to find competent managers who
can be entrusted with power of decision-making in every unit.
5. Not suitable in small organisation. Decentralisation implies creation of divisions and
departments. This is possible only where an enterprise is large. Thus small
organisation do not have much scope for decentralisation.
From the above description, it may be concluded that neither absolute centralisation nor absolute
decentralisation is a feasible preposition for effective organisation structure. Both these have to
be used in different degrees. Both the concepts are based on the proportion between reservation
of authority by the top management and delegation of authority to the lower levels. A mixture
of the two is generally used. However, decentralisation is preferred to centralisation.

How to make decentralisation more effective.

Following steps would make decentralisation more effective.
1. Having the faith in the ability of the subordinates and tolerance for human mistakes.
2. Establishment of clear and definite goals so that the subordinate knows why his work
is necessary and important. The step is the key to successful delegation.
3. Determining what to delegate. This will involve appraisal of capacities of the people
and needs of the job. Authority and responsibility should be clearly defined.



4. Motivating subordinates to carry out the delegated tasks.

5. Delegating a complete job so that the subordinate completes the job and reports back to
the superior about the completion of that task.
6. Developing subordinates through planned experience and training to accept delegation.
7. Setting up adequate controls which will act as selective check points where measure
will be made to see if any corrective action is required.
Decentralisation is not the same thing as delegation. Delegation involves passing over authority
by the superior to his immediate subordinate. The manager delegating his authority is
responsible for good or bad of his subordinate to his superior. Decentralisation implies dispersal
of authority within the entire enterprise. According to Alien, “Delegation refers primarily to
the entrustment of responsibility and authority from one individual to another. Decentralisation
applies to the systematic delegation of authority in an organisation-wide context.
Decentralisation is completed only when the fullest possible delegation is made to all or most
of the people who are delegated a specific kind of responsibility.” Thus decentralisation is
much more than delegation. In fact, decentralisation is an extension of delegation.
1. Delegation is a process of devolution of authority while decentralisation is the end-
result of delegation of authority at various levels.
2. Delegation of authority is a complete process between a superior and subordinate. It
may consist of specific tasks alone. But decentralisation involves spreading out the total
decision-making power.
3. Decentralisation of authority may create problems in coordination among the various
units. But delegation does not create such problems.


1.3.1 Meaning of Formal Organisation
Formal organisation refers to the organisation structure deliberately created by management
for achieving the objectives of the enterprise. It is a pattern of activities, processes, human
relationships and roles planned and structured in order to accomplish organisational goals. It
is a network of official authority responsibility relationships and communication flows. It is an
official and rational structure. According to Chester Barnard, “Formal organisation is a system
of consciously co-ordinated activities of two or more persons towards a common objective. The
essence of formal organisation is conscious common purpose and formal organisation comes
into existence when persons (a) are able to communicate with each other, (b) are willing to act,
and (c) share a purpose.” In the words of Alien, “the formal organisation is a system of well-
defined jobs, each bearing a definite measure of authority, responsibility and accountability.”
It consists of those relationships that are relatively stable and change only slowly.
Formal organisation is also known as ‘Organisation Structure’. Organisation structure is the
network of vertical and horizontal authority relationships among various positions and
individuals. The horizontal dimension represents the differentiation of jobs into departments.
The vertical dimension reflects the chain of authority from top to bottom. It is the skeleton


framework designed to achieve some common objectives. The lines of authority which hold
this framework together are at the same time, communication channels through which messages
are transmitted between the members of the organization.

1.3.2. Nature of Formal Organisation

The main characteristics of formal organisation are as follows:
1. Common purpose. Every organisation exists to accomplish some common goals. The
structure must reflect these objectives as enterprise activities are derived from them. It is bound
by common purpose.
2. Division of labour. The total work of an organisation is divided into functions and sub-
functions. This is necessary to avoid the waste of time, energy and resources which arises
when people have to constantly change from one work to another. It also provides benefits of
3. Authority structure. There is an arrangement of positions into a graded series. The authority
of every position is defined. It is subordinate to the position above it and superior to the one
below it. This chain of superior-subordinate relationships is known as chain of command. *
4. People. An organisation is basically a group of persons. Therefore, activity groupings
and authority provisions must take into account the limitations and customs of people. People
constitute the dynamic human element of an organisation.
5. Communication. Every Organisation has its own channels of communication. Such
channels are necessary for mutual understanding and cooperation among the members of an
6. Coordination. There is a mechanism for coordinating different activities and parts of an
organisation so that it functions as an integrated whole. Cooperative effort is a basic feature of
7. Environment. An organisation functions in an environment comprising economic, social,
political and legal factors. Therefore, the structure must be designed to work efficiently in a
changing environment. It cannot be static or mechanistic.
8. Rules and regulations. Every organisation has some rules and regulations for orderly
functioning of people. These rules and regulations may be in writing or implied from customary

1.3.3. Steps in Designing Formal Organisation

The process of designing formal organisation involves the following steps:
1. Identification of activities. Formal organisation is developed to achieve objectives.
Therefore, first of all. the activities necessary for the accomplishment of objectives are
determined. The total work is classified or divided systematically because no one handle the
total work alone. Identification and classification of work enables managers to concentrate
attention on important activities, to avoid duplication of work and to avoid overlapping or
wastage of effort. While identifying and classifying activities, management must ensure that



(a) all the necessary activities are performed, (b) there is no unnecessary duplication in
performing activities, and (c) the different activities are performed in a coordinated manner.
2. Grouping of activities. Closely related and similar activities are grouped together to form
departments, divisions or sections. Grouping may be done on several bases depending on the
requirements of the situation. Such grouping of activities is called departmentation.
3. Assignment of duties. Each group of related activities is assigned a position most suited
for it. Every position is occupied by an individual. While assigning duties, the requirements of
the job and the competence of the individual should be properly matched together. The process
of assigning duties goes on till the last level of the organisation. It creates responsibility and
ensures certainty of work performance.
4. Delegation of authority. Appropriate amount of authority is delegated to people to enable
them to perform the assigned duties with confidence. Authority and responsibility are properly
balanced. Delegation of authority creates superior-subordinate relationships between various
positions in the organisation. Such relationships and channels of communication should be
clearly defined. Each and every individual should know clearly from whom he is to take orders
and to whom he is accountable for his performance.
Peter Drucker has suggested three specific ways to find out what kind of structure is needed
to attain the objectives of an enterprise. While designing the structure of an organisation, the
activities to be performed, the decisions to be made and the relations to be established must be
analysed keeping in view the objectives of the organisation.
(i) Activities analysis. The first stage in designing a formal organisation is to identify and
analyse the activities needed to achieve the objectives of the organisation. Activities provide
the building blocks of organisation design. Once the activities have been identified and listed
in order of their importance, the next step is to divide and sub-divide them into smaller
homogeneous and manageable units so that they can be assigned to different individuals. For
example, the chief executive may divide the total work into departments and may delegate
authority to departmental managers. Each departmental manager may sub-divide his work
into sections and appoint a manager in charge of each section.
(ii) Decision analysis. The next stage in developing an organisation is to identify the decisions
needed to achieve the objectives and to classify these decisions according to their kind and
character. Drucker has suggested four criteria to determine the nature of decisions:
(a) Degree of futurity. A decision which commits the organisation for a long period in future
(e.g., a decision to set up a new factory) is a major decision and should be taken by top
(b) Impact. If the decision affects several functions (e.g., a decision to change the product
design), it is of high order and should be taken at a higher level of authority. If the
decision affects only one function, it may be taken at a lower level.
(c) Qualitative factors. A major decision involves several qualitative or intangible factors,
e.g., basic principles of conduct, ethical values, social and political beliefs, etc. Such an
important decision should be taken at high level.


(d) Periodicity. Major decisions are unique and are taken infrequently. On the other hand,
minor decisions are repetitive and are taken frequently.
In short, it is necessary to analyse all the decisions and to establish their relative importance
so as to determine the levels at which different decisions should be taken.
(iii) Relations analysis. Activities and decisions create an interlocking system of relations
both vertically and horizontally. Analysis of relations involves study of what contributions a
manager has to make and what contributions he will require from other managers. Traditionally,
a manager’s job is defined only in terms of the activity he is heading, i.e., in relation with lower
level managers. This alone is not sufficient and it is also necessary to analyse the upward
relationship. It means defining a manager’s job in terms of the contribution it has to make to
the larger unit of which it is a part. It is also necessary to analyse sideways relations, Le., analysis
of the contribution a manager has to make to other managers of the organisation.

1.3.4. Determinants of Formal Organisation

Formal organisation is not a static frame. It undergoes change with changes in the external
environment and internal conditions. While designing the formal organisation, management
should consider the following factors:
1. Goals. An organisation is a goal-oriented system. Therefore, its goals play a decisive role
in designing its structure. An organisation structure should be designed in such a way that it
facilitates the achievement of organisational goals in the most efficient and economical manner.
The goals of an organisation determine its tasks and activities. The nature and extent of sub-
division of tasks and their grouping depend on what organisation seeks to achieve.
2. Strategy. Strategy is a contingent plan designed to achieve the objectives. It involves
decisions as to what industry the organisation will enter, how will it compete and where. Top
managers generally formulate strategy after careful analysis of opportunities in the environment
and the strengths and weaknesses in the organisation. Strategy determines the organisational
tasks and the choice of technology. It also determines the specific environment within which
the organisation will operate.
Alfred Chandler has clearly established the relationship between the strategy a business
adopts and the structure of its organisation. Chandler “carried out intensive case studies of
four of the largest American companies (Sears Roebuck, General Motors, Du Pont and Standard
Oil). These studies revealed that the companies shifted their organisational design from a simple
centralised pattern to a more elaborate divisionalised pattern following changes in population,
technological innovations, expanding product lines, increase in national income, etc. Thus,
changes in corporate strategy lead to changes in formal organisation.






Fig. 1.3.1. Factors in Organisation Design.

3. Size. Size of the organisation is another factor affecting organisational design. As an
organisation grows in size, there is a tendency to greater specialisation. The number of sub-
units increases and more levels are created in the hierarchy. Impersonal rules and procedures
increase formalisation and the organisation becomes more and more structured. Several studies
by Ernest Dale, John Child, D.S. Pugh, Peter Blau and others reveal that larger organisations
tend to be more specialised, more formalised, more decentralised and more documented.
Certain other studies by Rihard Hall, J.H. Jackson and C.P. Morgan, however, suggest that
size has no significant affect on organisation structure. These studies reveal that size has impact
on very few organisational variables like vertical differentiation. All aspects of structure cannot
be predicted from size.
4. People. Very often, it is taken for granted that people—managers and workers—are to fit
into the structure. But human organisation cannot afford to have machine like designs for long.
The organisation structure is a major source of satisfaction for the employees. Therefore, the
organisation design should reflect the thinking and way of working of the employees. The
philosophy, value system and attitudes of management are important forces affecting
organisation structure. For example, Negendhi and Estafen found that two textile mills in India
having different philosophy, one seeking long-term profit and the other seeking quick profit,
had different delegation of authority, span of control and communication pattern.
Similarly, a management believing in Theory X will tend to have a mechanical structure
with close control. On the other hand, if management has a feeling that its people fall in Theory
Y assumptions, it will adopt a more decentralised structure with a larger measure of autonomy
at every level.
Formal organisation makes contributions to employees’ motivation and performance.
Therefore, tasks, roles and the network of relationships should be designed around people.
5. Technology. Technology is an important variable in the design of organisation structure.
It refers to the way in which work is done, Le., equipment and technical skills used and the type
of work flow in the transformation process. In general, if the technology is routine and simple
a less complex structural design is needed. The technology restricts the amount of discretion
which can be given to subordinates, hence influencing organisation structure. Several studies
by Joan Woodward, Edward Harvey, William Zwerman, Peter Blau, Charles Perrow and J.D


Thompson have revealed that length of the chain of command, span of management, ratio of
managers to non-managers, etc.; are correlated with the type of technology employed. After a
study of 100 manufacturing firms in Great Britain Woodward found that firms using mass
production and assembly line were characterised by mechanistic structures with large span of
control. On the other hand, firms employing unit and process technologies adopted organic
structures with small span of control.
6. Environment. An organisation is an open system which continuously interacts with its
external environment in which it functions. Therefore, forces in the external environment must
be carefully analysed while designing formal organisation. Firms operating in simple and stable
environment tend to have simple and organic structures wherein job roles and relationships
are not rigidly defined. On the other hand, firms operating in complex (diversity) and dynamic
environment are forced to adopt more differentiation and integration in their structures. For
example. Burns and Stalker concluded, after a study of 20 Industrial firms in the United Kingdom,
that successful firms in stable environment were mechanistic in structure while successful firms
in dynamic environment had more organic or flexible structures. Similarly, Lawrence and Lorsch
found that organisational units operating In stable environment were more highly structured
than those operating in dynamic environment.
Thus, formal organisation is the result of several operating forces inside and outside the
enterprise. These forces are interrelated and interdependent. They suggest that what might be
a suitable structure for one organisation may not be suitable for another organisation. There is
no one ideal structure suitable for all organisations.
1.3.5. Need and significance of formal organisation
Organisation is the foundation upon which the whole structure of management is built. It is
the backbone of management. Sound organisation can contribute greatly to the continuity and
success of an enterprise in the following ways:
1. Facilitates administration. A properly designed organisation facilitates both management
and operation of the enterprise. It provides proper division of labour, consistent delegation of
authority and clear authority relationships. Organisation is the mechanism through which
managers direct, coordinate and control the business. If the organisation is ill-designed or it is
a make-shift arrangement, the management is rendered difficult and ineffective. If, on the other
hand, it is logical and clear-cut, then the first requisite of sound management has been achieved.
2. Facilitates growth and diversification. The formal organisation is the framework within
which an enterprise grows. Management can anticipate the need for change to facilitate growth
and may suitably adjust the formal organisation when the size of business increases.
3. Permits optimum use of technological improvements. Sound formal organisation
provides for optimum use of technical and human resources. The high cost of installation,
operation and maintenance of expensive equipment calls for proper organisation. Similarly
sound formal organisation helps in optimum use of human efforts through specialisation.
4. Encourages use of human beings. Proper organisation provides psychological satisfaction
to employees. An individual contributes his best when he gets satisfaction from his job, his



working environment and his relationships. In this way formal organisation facilitates intensive
use of human capital. It also creates training and promotional avenues for people.
5. Stimulates creativity. Sound organisation stimulates creative thinking and initiative by
providing well-defined areas of work with provision for development of new and improved
ways of doing things. It enables managers to turn over routine and repetitive jobs to supporting
positions. A good organisation enhances capacity of individuals and enables them to take
advantage of the accumulated knowledge and experience of preceding generations.
Stating the importance of organisation, the distinguished industrialist of the U.S.A., Andrew
Carnegie observed: “Take away our factories, take away our trade, our avenues of transportation,
our money. Leave us nothing but our organisation, and in four years we shall have re-established
1.3.6. Principles of Formal Organisation
The basic principles of organisation are as follows:
1. Unity of objective. An organisation structure is sound when it facilitates the
accomplishment of objectives. Therefore, the organisation as a whole and every part of it must
be geared to the basic objectives of the enterprise.
2. Specialisation or division of work. The activities of every member of the organisation
should be confined, as far as possible, to the performance of a single function.
3. Span of control. Every manager should have a limited number of subordinates reporting
to him directly. Generally, the span should be narrow for complex work and wide for simple
and routine work. Span should be neither too wide nor too narrow.
4. Scalar principle. There should be a clear chain of command extending from top to the
bottom of the organisation. Every subordinate should know who his superior is and who his
subordinates are.
5. Functional definition. The duties (functions), authority and responsibility of every position
should be clearly defined so as to avoid duplication of work and overlapping of functions.
6. Exception principle. Only exceptional matters which are beyond the authority of lower
level persons should be referred to higher levels. Routine matters should be dealt with by
executives at lower levels. This is also known as authority level principle.
7. Unity of command. Each subordinate should have only one superior whose command he
has to obey. This is necessary to ensure discipline and to fix responsibility for results.
8. Balance. A proper balance between centralisation and decentralisation should be kept.
Each function in the organisation should be developed to the point at which the value received
is at least equal to costs.
9. Efficiency. The organisation structure should facilitate the achievements of objectives at
minimum possible cost. It should permit the optimum use of resources.
10. Flexibility. The organisation structure should be adaptable enough to accommodate
technical and other changes in the environment. Therefore, complicated procedures, red tape


and complexity of control should be avoided. At the same time, the organisation structure
should be reasonably stable so as to withstand changes.
11. Continuity. Proper arrangements should be made for the training and development of
12. Facilitation of leadership. Organisation structure should be so devised that there is
enough opportunity for the management to give effective leadership to the enterprise.
13. Parity of authority and responsibility. In every position, the authority and responsibility
should correspond. Adequate authority should be delegated to all levels and wherever authority
is delegated the person should be held responsible.
14. Coordination. The organisation structure should facilitate unity of effort and co-ordination
among different individuals and groups. Channels of communication should be open and clear.
1.3.7. Meaning and Nature of Informal Organisation
Informal organisation refers to the pattern of activities, interactions and human relationships
which emerge spontaneously due to social and psychological forces operating at the work
place. It arises naturally on the basis of friendship or some common interest which may or may
not be related with work. It Is an unintended and non-planned network of unofficial and social
patterns of human relationships. Informal organisation represents the pattern of interpersonal
and intergroup relations that develop within the formal organisation, e.g., friendship groups
and cliques. For example, the typists working in different departments may form an informal
group due to similarity of work. Common language, common habits, common hobby may also
lead to informal groups. It is an unofficial and social pattern of human interactions. According
to Chester Barnard, “Informal organisation is joint personal activity without conscious common
purpose though contributing to joint results.”

1.3.8. Distinction Between Formal and Informal Organisations

On the basis of above description formal and informal organisations may be distinguished in
the following ways:
(i) Origin. Formal organisation is created deliberately and consciously by management. On
the other hand, informal organisation emerges spontaneously on account of socio-psychological
forces operating at the workplace. People working together develop certain liking and disliking
for each other.
(ii) Purpose. Formal organisation is created for achieving the legitimate objectives of the
organisation. On the contrary, informal organisation is created by the members of the
organisation for their social and psychological satisfaction.
(iii) Size. Formal groups may be quite large in size particularly when these groups are
constituted to give representation to various interest groups. But informal groups tend to be
small In size so as to maintain group cohesiveness.
(iv) Nature of groups. Formal groups are stable and may continue for a very long period of
time. On the other hand, informal groups are quite unstable in nature. They tend to disappear
or cease to be attractive for members when changes take place in personal liking and disliking.
Members may form alternative groups.



(v) Number of groups. Generally, the number of informal groups is larger than the number
of formal groups. Moreover, these may be overlapping because an individual may become
members of several informal groups.
(vi) Authority. Formal organisation is bound together by a hierarchical structure in which
authority flows from higher to lower levels. Members of a formal group derive their authority
from the process of delegation. In informal organisation all members are equal, though some
may command more authority by virtue of their personal qualities.
(vii) Behaviour of members. The behaviour of the members in the formal organisation is
governed by formal rules and regulations. The rules are normally directed towards efficiency
and rationality. In the informal organisation the behaviour of the members is governed by
norms, belief and values of the group,
(viii) Communication. In formal organisation, communication normally flows through the
prescribed chain of command. In informal organisation, on the other hand, communications
pass through the informal channels which do not have one single form.
(ix) Abolition. Management can abolish the formal groups at any time. But management
has no control over informal groups which are the creation of natural desire of human beings
to interact.
(x) Leadership. In formal organisation, leadership is vested in managers. But in informal
organisation, leadership is not associated with managership.
(xi) Status. There are sharp status differentials among the members of formal organisation.
Such differentials inhibit free interaction and socialisation. In informal organisation there may
be social rankings among people but these do not prevent free interaction among people.
Comparison between Formal and Informal Organisations
P o in t o f C o m p a riso n F o rm a l O rg a n isa tio n In fo rm al O rg a n isa tio n
1 . O rig in C re a te d d e lib e ra te ly A rise s sp o n tan e o u sly
2 . N a tu re P lan n e d a n d o fficial U n p la n n e d an d u n o fficial
3 . S iz e L a rg e S m a ll
4 . C o n tin u ity S ta b le In sta b le an d d y n a m ic
5. Focus B u ilt a ro u n d jo b s B u ilt a ro u n d p e o p le an d th e ir
ro le s
6 . S tru c tu re D e fin ite stru c tu re m e ch an ic al S tru c tu re le ss im p e rso n al a n d
a n d ra tio n a l e m o tio n al
7 . G o a ls P ro fits a n d se rv ic e to so cie ty S a tisfac tio n o f m e m b e rs
8 . In flu e n c e p ro c e sse s L e g itim a te a u th o rity Pow er
9 . C o n tro l p ro c e ss R ig id ru le s a n d re g u la tio n s G ro u p n o rm s a n d v alu e s
1 0 . C o m m u n ic a tio n O fficia l a n d w e ll-d efin e d U n sp ec ifie d ch an n e ls. T w o -
p a th s. O n e w a y a n d slo w flo w w a y an d fa st flo w o f
o f in fo rm a tio n in fo rm atio n -g ra p e v in e
1 1 . A u th o rity P o sitio n al-flo w s to p d o w n P e rso n al-flo w s b o tto m u p
1 2 . C h a rtin g S h o w n o n o rg an isa tio n a l c h a rt N o t sh o w n o n o rg a n isa tio n a l
c h a rt


George Homans has suggested a model for a comparative study of formal and informal
organisations. The model is based on three concepts—activities, interactions and sentiments.
Activities are concerned with what a person actually does. Interactions are the interpersonal
contacts and relationships between individuals. Sentiments are the emotional reactions oi
individuals LO various organisational issues.
In the formal organisation, the management establishes the activities and interactions. The
participants are expected to possess certain sentiments about work, the organisation and the
manager. But the informal relationships develop spontaneously, supplementing or modifying
the formal relationships. Fig. 3.2 shows that formal organisation is built around authority,
responsibility and accountability while informal organisation is based on status, power and

Fo rm al O rganisatio n Info rm al O rganisation

U nit R ole P rim ary

Job G roup


it y


a tu

lit i

b il

i ty

R espo nsibility P ow er

A ---A ctivities I---Interactions S ---S en tim en ts

Fig. 1.3.2. Formal and Informal Organisations.



1.3.9. Need and Significance of Informal Organisation

The basic reason for the emergence of informal groups is that the formal organisation does not
satisfy all the needs of employees. In particular, informal groups emerge due to the following
1. Desire to socialise with others. The need for relationship with others is a basic human
need. Man is a social being and he wants to associate with others. He does not like to work
isolated, loneliness. This quest for social satisfaction prompts people to form informal groups.
Informal groups provide social satisfaction and a sense of belonging to the members. It pro-
vides an opportunity for people to behave in a natural and uninhibited manner free from rigid-
ity and oppressiveness. It provides them a sense of identity and self-respect and helps in solv-
ing their personal problems and difficulties. According to Chester Barnard, “Informal groups
are important means of maintaining the personality of the individual against certain effects of
formal organisation which tend to disintegrate personality.”
2. Job satisfaction. Due to specialisation, tasks have become routine and repetitive. Every
employee concentrates on a single or a few simple tasks. Such division of work leads to psycho-
logical fatigue and boredom. Employees get little sense of accomplishment, autonomy or iden-
tification with work. They are unable to relate their jobs to final output. They feel powerless
and jobs appear meaningless to them. Formal organisation requires conformity.
Literal obedience to formal policies, rules and procedures affects the motivation and morale
of employees. Informal organisation adds a human touch to the cold and inhuman qualities of
the formal structure. It provides a means for developing friendships and fellow feeling. Infor-
mal organisation fills the psychological vacuum or void created by dull, boring and monoto-
nous jobs. It allows people to satisfy their psychological needs. It creates a pleasant and satisfy-
ing work environment. People resort to informal interactions to release their tension and frus-
tration. Informal relationships provide them a sympathetic ear to their problems and provide
an outlet to ventilate their grievances. In this way, informal organisation serves as a safety
valve to release daily tensions and frustrations. Thus, informal organisation exercises signifi-
cant influence on job satisfaction and productivity.
3. Source of protection. Hierarchical organisation structure involves rigid control over the
behaviour of employees. Informal organisation offers a powerful protection against such threat-
ening and oppressive forces. It provides a sense of security by protecting the individual against
arbitrary treatment by management. It provides stability to work groups and psychological
support to the members. Informal groups also protect their members from outside pressure
and work pressure.
4. Support to formal structure. Informal organisation provides support to the formal struc-
ture. It blends with the formal organisation to make a workable system for getting the work
done. Formal structure tends to be inflexible and cannot meet every problem in a dynamic
environment. Informal organisation lends flexibility and dynamism to the formal structure. It
also brings cohesiveness to a formal organisation. Informal organisation can overcome the
deficiency in the formal structure through suitable innovations.
5. Communication device. Formal organisation lays down the lines of communication which
tend to be slow. Informal organisation provides the management with an additional channel of
communication in the form of grapevine. Management can use this channel to transmit useful


information quickly. Grapevine supplements official communication. It provides valuable feed-
back to managers on their style of functioning. For example, proposals for important
organisational changes may first be conveyed informally to the ‘opinion leaders’ in the infor-
mal organisation to get their reactions.
6. Overcomes managerial limitations. Authority may not always be effective and manag-
ers may have to relay on voluntary compliance of people out of sheer goodwill and respect. In
the day-to-day working of the organisation, several ticklish situations arise for which the pre-
scribed procedures provide no guidance. In such situations, informal organisation has its own
ways of coping with problems. Informal organisation can fill in the managerial gaps by educat-
ing people how to really perform the task.
7. Training and development. Informal organisation is a forum for socialisation of new
employees and for helping them to learn the work practices and rules. Moreover, informal
organisation provides a training ground for the development of informal leaders.
8. Coordination and control. Informal organisation helps to develop team spirit and group
pride. As a result need for close supervision is reduced. Members of cohesive groups feel less
nervous and express less anxiety. Groups develop performance standards and group cohesive-
ness reduces turnover and absenteeism. Informal groups facilitate research and innovation.
Informal leaders can help managers in solving problems like absenteeism, late coming, etc. A
properly motivated informal group can achieve much better results than a formal group. Ac-
cording to Chester Barnard, “Informal organisation brings cohesiveness to a formal organisation,
a feeling of belonging, of status, of self-respect and of gregareous satisfaction.”
1.3.10. Dangers from informal organisation
Informal organisation may create difficulties in the smooth management of an enterprise in the
following ways:
(i) Conflicting norms. Informal groups often evolve their own norms, standards of perfor-
mance which are below the physical capabilities of their members. These groups exercise social
pressures against members who produce above the unofficial standards.
Informal organisation upholds the individual and social goals of its members which often
run counter to the goals and values of the formal organisation. As a result the efficiency of
operations is reduced and talents of employees are suppressed.
(ii) Resistance to change. Informal groups tend to perpetuate the status quo. An informal
group is bound by convention and custom. In order to maintain equilibrium it resists innova-
tion and change in work methods. Conformity may make group members reluctant to act inde-
pendently and creatively.
(iii) Undermine discipline. Informal groups oppose management policies, rules and proce-
dures which are meant to structure and discipline work behaviour and performance of em-
ployees. As a result managers are forced to become lenient in enforcing rules and regulations
in tolerating deviations from required behaviour. The character and competence of manage-
ment tend to suffer. Informal organisation may ridicule and even sabotage the process, prac-
tices and culture of the formal organisation.



(iv) Rumour. The grapevine often carries rumours or false information which is detrimental
to smooth functioning of organisation. It destroys confidentiality of the enterprise.
(v) Power politics. Informal organisation is often riddled with functionalism and power
politics. Members divert their energy and time from jobs to indulge in faction fighting and
petty politics. The informal leader may manipulate the group towards selfish or undesirable
ends. Jurisdictional disputes among groups create problems for management.
(vi) Role conflict. Since informal groups try to meet the social needs of their members, there
is a natural tendency to produce role conflict. An individual faces role conflict when he has to
meet the conflicting requirements of work group and informal group.

1.3.11. How to manage informal organisation?

Informal organisation is natural and management cannot destroy it. A manager must recognise
that informal groups are a fact of life and cannot be done awayT with. A manager can modify
behaviour of informal groups to make it more useful to the organisation. A manager should
adopt a flexible and accommodating approach towards informal organisation rather than a
repressive approach. Repressive attitude of a manager hardens the attitudes of informal group
members leading to destructive conflicts. Therefore, the best approach is to recognise the exist-
ence of informal organisation and to integrate it with the formal organisation. A manager should
accept and learn to live with informal groups. Management should understand the goals, struc-
ture, processes and norms of informal organisation. A manager should not view the informa-
tion organisation as necessarily hostile to the formal organisation. He should find ways and
means of taking advantage of the informal processes and behaviour on the one hand, and to
neutralise their adverse effects on the other.
A manager should take the following measures to handle informal groups successfully:
(i) Let employees know that management accepts and understands informal

(ii) Consider possible influence upon informal groups when taking any decision or

(iii) Integrate interests or goals of informal groups with those of the formal organisation.

(iv) Involve groups in decision-making process,

(v) Make use of group method of supervision.

(vi) Resolve inter-group conflicts by locating a common enemy, bringing sub-groups

into interaction with each other and locating a super -ordinate goal,

(vii) Keep formal activities from unnecessarily threatening informal organisation in gen-

(viii) Maintain an objective atmosphere where correct information is easily available.


1.4.1. Meaning of departmentation
Grouping of activities is an essential step in designing an organisation structure. Grouping of
activities into departments, divisions or other homogeneous units is known as departmentation
or departmentalisation. Departmentation or departmentalisation is the process of grouping
tasks into jobs, the combining of jobs into effective work groups and the combining of groups
into identifiable segments or departments. It involves horizontal differentiation of activities in
an enterprise. A department is a division, branch, regiment or some other organisational unit
over which a manager has authority for performance of task. Thus, departmentation is the
process of dividing the work of organisation into departments or other manageable units.

1.4.2. Need and importance of departmentation

The basic purpose of departmentation is to make the size of each departmental unit manage-
able and to secure advantages of specialisation. Departmentation is necessary on account of
the following reasons:
1. Specialisation. Departmentation enables an organisation to avail of the benefits of
specialisation. When every department looks after one major function, expertise is developed
and efficiency of operations increases.
2. Expansion. One manager can supervise and direct only a few subordinates. Grouping of
activities and personnel into departments makes it possible for the enterprise to expand and
grow. If there is no departmentation, the size of the organisation will be restricted to a manager’s
span of control.
3. Autonomy. Departmentation results in the division of the enterprise into semi-autono-
mous units. In these units, every manager is given adequate freedom. The feeling of autonomy
provides job satisfaction and motivation which in turn lead to higher efficiency of operations.
4. Fixation of responsibility. Departmentation enables each person to know the specific
part he is to play in the total organisation. It provides a basis for building up loyalty and com-
mitment. The responsibility for results can be defined more precisely and an individual can be
held accountable for performance.
5. Appraisal. Appraisal of managerial performance becomes easier when specific tasks are
assigned to departmental personnel. The sources of information, the skills and competence
required for total managerial decisions can be located.
6. Management development. Departmentation facilitates communication, coordination
and control. It simplifies the training and development of executives by providing them op-
portunity to take independent decisions and to exercise initiative.
7. Administrative control. Departmentation is a means of dividing the large and complex
organisation into small and flexible administrative units. Grouping of activities and personnel
into manageable units facilitates administrative control. Standards of performance for each
and every department can be precisely determined. Excessive departmentation may result in
several organisational problems such as erosion of the line of command, multiple accountabil-
ity, dysfunctional conflicts and difficulty of co-ordination and control.



1.4.3. Bases or types of departmentation

(Patterns of Grouping Activities)
The following patterns may be used for grouping activities into departments:
1. Departmentation by Functions
2. Departmentation by Products
3. Departmentation by Territory
4. Departmentation by Customer
5. Departmentation by Process or Equipment
6. Departmentation by Time and Numbers
7. Composite departmentation. Functional Departmentation
Under functional departmentation each major or basic function is organised as a separate de-
partment. Basic or organic functions are the functions the performance of which is vital and
essential to the survival of the organisation. For example, production, sales, financing and
personnel are basic functions in a manufacturing enterprise. On the other hand, in a retail store
buying, selling and finance are the major functions. If necessary, a major function may be di-
vided into minor or sub-functions. For instance, activities in the production department may
be classified into quality control, processing of materials and repairs and maintenance. Thus,
the process of functional differentiation may take place through successive levels in the hierar-
chy. The process can continue as long as there exists a sound basis for further differentiation.
Functional departmentation is the most widely used basis for grouping activities. It exists al-
most in every organisation at some level.
The main advantages of functional departmentation are as follows:

B o a rd o f D ire cto r s

M a n a g in g D ire c to r

M a rk e tin g P ro d u c tio n F in an ce

Q u a lity C o n tro l P ro ce s sin g R e p a irs a n d

M a te ria ls M a in te n a n c e

Fig. Departmentation by Functions.


1. It is the most logical, time proven and natural form of departmentation.
2. It provides occupational specialisation which makes optimum utilisation of manpower.
3. It ensures the performance of all activities necessary for achieving organisational ob-
jectives. It gives status to major functions.
4. It facilitates delegation of authority.
5. It enables top management to exercise effective control over a limited number of
6. It eliminates costly duplication of effort.
7. It simplifies training because managers have to be experts only in a narrow range of
1. There is too much emphasis on specialisation. When each employee specialises only in
a small part of the job, he cannot develop a balanced attitude towards the job as a
2. There may be conflicts between departments as the responsibilities are interdependent
and cannot always be clearly delineated.
3. Functional departments may grow in size to justify their costs. Managers may try to
build their functional empires.
4. The scope for management development is limited. Functional managers do not get
training and experience for top management positions. Responsibility for results can-
not be fixed on any one functional head.
Functional Departmentation
A dvantages D isadvantages
1. Logical reflection of functions. 1. O ver-specialised and narrow outlook of
departm ental heads.
2. O ccupational specialisation. 2. Lim its developm ent of general
m anagers.
3. Pow er and prestige of m ajor functions 3. Reduces coordination betw een
m aintained. functions.
4. Facilitates tight control at the top. 4. Responsibility for profits at the top only.
5. Sim plifies training. 5. M akes econom ic grow th of the com pany
5. There may be difficulties in co-ordinating the activities of different departments. For
example, the sales department may fail to honour delivery schedule due to problems in
the production department. There may be inflexibility and complexity of operations.

Committees may be constituted to ensure effective co-ordination between functional

departments. The functional basis is more useful to large organisations. Very often the functional
basis is used at the top level and some other basis is applied at lower levels.


ORGANISATION Product Departmentation

In product or service departmentation, every major product is organised as a separate
department. Each department looks after the production, sales and finance of one product.
Product departmentation is useful when product expansion and diversification, manufacturing
and marketing characteristics of the product are of primary significance. It is generally employed
when the product line is relatively complex and diverse requiring specialised knowledge and
a great deal of capital is required for plant -and equipment such as in automobile and electronic
industries. For instance, a big company with a diversified product line may have three product
divisions, one each for plastics, chemicals and metals. Each division may be sub-divided into
production, sales, finance and personnel activities.

B o a rd o f D irec to rs

M a n a gin g D ire c to r

P la stic D iv isio n C he m ica l D iv is io n M e ta ls D iv isio n

F in an ce P ro d u ctio n S ale s P erso n n e l

Fig. Departmentation by Product.

1. Product departmentation can reduce the problem of co-ordination between production
and sales activities. All activities concerning a particular product line are integrated

2. It focuses individual attention on each product line which facilitates product expansion
and diversification.

3. It permits full use of specialised production facilities. Personnel skills and specialised
knowledge of product managers can be fully utilised.

4. The performance of each product division and its contribution to overall results can be
easily evaluated.

5. Product managers can be held accountable for the profitability of each product.

6. As each product division is semi-autonomous and contains different functions, product

departmentation provides an excellent training ground for top management positions.

7. It is more flexible and adaptable to change.


Product Departmentation

A d v a n ta g e s D is a d v a n ta g e s
1 . P la c e s re s p o n s ib ility fo r p ro fits a t th e 1 . R e q u ire s m o re p e rs o n s w ith g e n e ra l
d iv is io n a l le v e l. m a n a g e m e n t s k ills .
2 . F o c u s e s a tte n tio n a n d e ffo rt o n p ro - 2 . C re a te s p ro b le m o f to p m a n a g e m e n t
d u c t lin e . c o n tro l.
3 . Im p ro v e s c o o rd in a tio n b e tw e e n 3 . M a k e s e c o n o m ic a l c e n tra l s e rv ic e s
fu n c tio n al a c tiv itie s . d iffic u lt,
4 . P ro v id e s tra in in g g ro u n d fo r g e n e ra l 4 . L e a d s to d u p lic a tio n o f p h y sic a l
m a n a g e rs. fa c ilitie s .
5 . P e rm its g ro w th a n d d iv e rs ific a tio n o f
th e c o m p a n y .

1. There is duplication of physical facilities and functions. Each product division main-
tains its own specialised facilities and personnel due to which operating costs may be
2. Advantages of centralisation of certain activities like financing, accounting, industrial
relations, etc., are not available.
3. There may be underutilisation of plant capacity when the demand for a particular prod-
uct is not adequate.
4. It creates the problem of effective control over product divisions by the top manage-
5. More persons with general management ability are required.
6. Each product manager asserts his autonomy disregarding the interests of the
On the whole, product departmentation is suitable for those big enterprises which supply a
wide variety of products with different manufacturing technologies and marketing methods. Territorial Departmentation
Territorial departmentation is very useful to a large-scale enterprise whose activities are geo-
graphically spread over a wide area. Banks, insurance companies, transport companies, distri-
bution agencies are examples of such enterprises. Under territorial or geographical
departmentation, activities are divided into zones, divisions and branches. It is obviously not
possible for one functional manager to manage efficiently such widely separated activities.
This makes it necessary to appoint regional managers for different regions.

1. It helps in achieving the benefits of local operations. The local managers are more con-
versant with local customs, preferences, fashions, styles, etc. They can adapt and re-
spond to the local demand situation with speed and accuracy. The enterprise can gain
intimate knowledge of conditions in the local markets.



2. It results in savings in freight, rents and labour costs. There are savings in time and
money. Therefore, economies of localised operations are available.

B o a rd o f D ire c to rs

M anaging D irector

N o rth e rn W e ste rn C en tra l E a ste rn S o u th e rn

R e g io n R e g io n R e g io n R e g io n R e g io n

B ra n ch I B ra n ch II B ra n ch III

Fig. Departmentation by Territory.

3. Every regional manager can specialise in the peculiar problems of his region.

4. There is better co-ordination of activities in a locality through the setting up of regional

divisions. It provides for effective span of control.

5. It facilitates the expansion of business to various regions.

6. It provides opportunity to train managers as they look after the complete operations of
a unit. Each regional manager can be given adequate autonomy.

1. Due to geographical distance there is problem of communication.

2. Geographical departmentation requires more managers with general managerial abili-

ties who may not always be available.

3. There may be friction between regional managers.

4. All activities of a firm may not be amenable to territorial specialisation.

5. Coordination and control of different branches from the head office become less effec-

6. There is duplication of physical facilities due to which costs of operations may be high.
There is multiplication of personnel, accounting and other services at the regional level.


Territorial Departmentation
A d v a n tag e s D is a d v a n ta g e s
1 . F o c u s e s o n lo c a l m a r k e ts a n d p r o b le m s . 1 . R e q u ir e s m o r e p e r s o n s w it h g e n e r a l'
m a n a g e m e n t a b ilit ie s .
2 . I m p r o v e s c o -o r d in a t io n in a r e g io n . 2. M ak es e c o n o m ic a l ce n tra l s e r v ic e s
d iffi c u lt .
3 . P la c e s r e s p o n s ib ilit y a t lo w e r le v e ls . 3 . I n c r e a s e s p r o b le m o f t o p m a n a g e m e n t
c o n t r o l.
4 . T a k e s a d v a n t a g e o f e c o n o m ie s o f lo c a l 4 . L e a d s t o d u p lic a tio n o f fa c ilitie s
o p e r a t io n s
5 . B e tt e r fa c e -t o -fa c e c o m m u n ic a tio n w it h
lo c a l p e o p le .
6 . P r o v id e s t r a in in g g r o u n d fo r g e n e r a l
m a n ag ers Customer Departmentation

Under this basis of departmentation, activities are grouped according to the type of customers.
For instance, a large cloth store may be divided into wholesale, retail and export divisions. This
type of departmentation is useful for banks, departmental stores, etc., which sell a product or
service to a number of distinct and clearly defined customer groups. Each department specialises
in serving a particular class of customers. For example, a large readymade garment store may
have a separate department each for women, children and men. A bank may have separate
loan departments for large-scale and small-scale businessmen.

B o a rd o f D ire c to rs

M a n a g in g D ire c to r

F in an c e M a rk e tin g P ro d u ctio n P e rso n n el

W h o le sa le E x p o rts R e tail

Fig. Departmentation by Customers.

1. Special attention can be given to the particular tastes and preferences of each class of
customers. Customers’ satisfaction enhances the goodwill and sales of the enterprise
and loyalty of customers.

2. The benefits of specialisation can be derived.

3. The enterprise gains intimate knowledge of the needs of each category of customers.



1. As such departmentation is applied only to sales function, there may be difficulties in
co-ordinating the activities of different functions. There is constant pressure from cus-
tomer departments for special treatment.
2. There may be under-utilisation of facilities and manpower, particularly during periods
of low demand.
3. Managers of customer departments may put pressures for special facilities and ben-
4. It may lead to duplication of activities and heavy overheads. Process or Equipment Departmentation

Under this basis, activities are grouped on the basis of production processes or equipment
involved. This is generally used in a manufacturing enterprise and at lower levels of organisation.
For example, a textile mill may be organised into ginning, spinning, weaving and dyeing de-
partments. Similarly, a printing press may consist of composing, proofreading, printing and
binding departments. Such departmentation may also be used in engineering and oil indus-
tries. The main object is to achieve efficiency and economy of operations.

B o a rd o f D ire cto r s

M a n a g in g D ire c to r

G in n in g S p in n in g W e a v in g D y e in g

Fig. Departmentatlon by Process.

1. There is clear-cut technical division of work.

2. This ensures specialisation and facilitates training of junior executives.

3. It is possible to appoint persons with special education and experience for each process.

4. Location of similar type of machines in one place results in economies in costs of re-
pairs and maintenance.”

There may be difficulty in co-ordinating different process departments. Conflicts among man-
agers of different processes may arise. It cannot be used where manufacturing activity does not
involve distinct processes. It is suitable only for special and composite type of plants.

Under this basis activities are grouped on the basis of the time of their performance. For ex-
ample, a factory operating twenty-four hours may have three departments, one each for morn-
ing, day and night shifts. The idea is to obtain the advantages of people specialised to work in
a particular shift.
In case of departmentation by simple numbers, activities are grouped on the basis of their
performance by a certain number of persons. For example, in the army soldiers are grouped
into squads, battalions, companies, brigades and regiments on the basis of the number pre-
scribed for each unit. This basis of departmentation is used at the lower levels of hierarchy.
Departmentation by numbers is useful when the work is repetitive and unskilled, where
manpower is the most important, where group efforts are more important than individual
efforts and where the group performance can be measured. It is useful only at the lowest level. Composite or Combined Departmentation
Departmentation is not an end in itself but a means for achieving organisational objectives.
Each basis of departmentation has its own merits and demerits. Therefore, the relative advan-
tages and limitations of various types of departmentation should be analysed in the light of the
needs and circumstances of the particular enterprise. That basis of departmentation is the best
which facilitates the achievement of organisational objectives most economically and efficiently.
In practice, no single pattern is ideal to suit all situations. Therefore, no single basis is followed
for grouping activities. Rather, most of the big enterprises follow a composite or combination
of several bases. Generally, functional departmentation is used at the top level. Activities of
the sales department may be grouped on product or territorial basis which may further be sub-
divided on customer basis. Similarly, activities in the production department may be grouped
on the basis of process or equipment employed.

M an a gin g D irec to r

W p r k s M a n ag er M ark etin g M an a ge r F in an c e M a n a ger F u n ctio n a l

C o n su m er P ro d u cts In d u stria l Su p p lies

P ro d u ct
D iv is io n D iv is io n

D o m estic Sa les M a n ag er E x p o rt S a les M a n a ger T errito ria l

P riv a te B u y ers G o v t. A g en cies C u s to m er

Fig. Combined Departmentation.



1.4.4. Choosing a basis for departmentation

Every basis of departmentation has its own advantages and disadvantages. No single basis is
the ideal for all organisations.
Management must be very careful in choosing the basis of departmentation because once a
pattern is chosen it is very difficult and costly to switch over to another pattern. The following
factors should be kept in view while selecting a suitable basis of departmentation.
1. Specialisation. The activities of an organisation should be grouped in such a way that
it leads to the specialisation of work. Specialisation helps to improve efficiency and
economy of operations. It enables people to become experts. However, over-
specialisation should be avoided because it results into loss of motivation among the
2. Coordination. All activities are designed to achieve the organisational objectives. Co-
ordination in the performance of different activities is necessary so that they contrib-
ute maximum towards the organisational goals. Sometimes dissimilar activities may
have to be put together in one department because close co-ordination between them
is necessary.
3. Control. The departmentation should be such that it facilitates measurement of perfor-
mance and timely corrective action. It should enable the management to hold people
accountable for results. Effective control helps to achieve organisational goals efficiently
and economically.
4. Cost. Creation of a new department involves extra cost of additional space, equipment
and personnel. Therefore, the pattern and number of departments should be so de-
cided that maximum possible economy is achieved in the utilisation of physical facili-
ties and personnel.
5. Special attention. The various activities should be given adequate attention so that
each necessary activity is performed and there is no unnecessary duplication of activi-
ties. Proper weightage should be given to different functions depending upon their
significance and the organisational needs. The future importance of an activity should
also be considered. Key areas should be given special attention.
6. Local conditions. Local factors should be adequately considered in a scheme of
decentralisation. Departmentation should be adjusted according to available resources.
Full utilisation of resources should be the aim.
7. Human considerations. Departmentation should not follow only technical aspects
but human aspects of the organisation too. The existence of informal groups, cultural
patterns, value system, attitudes of personnel, etc., should be given due consider-
ation. Attention to the human factor will make departmentation more efficient and
more effective.


Exercise - 1


1. Define the term “organisation’. Explain organisation as a process.
2. Explain elaborately various principles of sound organisation.
3. Differentiate between formal and informal organisation.
4. What do you mean by the term ‘departmentation1 ?
5. Elaborately explain various bases of departmentation.
6. What principles should be followed to make departmentation effective ?
7. Do you agree with the following statements ? Write Yes/No with support

answers not exceeding fifty words.

(a) A formal organisation is created automatically

(b) Organisations are purposeless entities.
(c) An informal organisation is a part of formal organisation.
(d) Existence of informal groups is inevitable in any organisation.
(e) Various bases of departmentation are just useless in day-to-day
(f) An organisation is designed to balance the authority responsibility
8. What do you mean by the term ‘delegation of authority’ ? What are the steps in
9. Distinguish between Centralisation and decentralisations of authority,

10. Do you agree with the following statement? Also give a fifty words answer in sup
port of your answer.
(a) Responsibility cannot be delegated.
(b) Authority and responsibility are one and the same thing.
(c) A good manager is one who centralised all the decisions in the organisation.
(d) Decentralisation means concentration of decision-making power at the top
(e) Delegation of authority increases the work load of top management.