FACULTY OF SCIENCE AND TECHNOLOGY

SEMESTER 1162

BBPP1103

PRINCIPLES OF MANAGEMENT

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LEARNING CENTRE : KEDAH LEARNING CENTRE, ALOR SETAR

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Organizational structure is one of the key components that should not be overlooked in order to
build a successful and stable organization. It is usually described as a system that is used to
establish a hierarchy for a particular organization. This system helps to identify the role of each
job, facilitate the communication between different individuals or groups inside the organization
and cause the workflow to be smoother by providing the right channels. The bigger an
organization is, the more important it is to build a good organizational structure to ensure that
each communications is happening effectively. Having a good organizational structure allows an
organization to operate collectively as a whole and facilitate in achieving the goals that have
been set. The structure is usually illustrated using an organizational chart; where individuals with
important role and greater responsibilities can be found at the upper part of the chart while those
with lesser responsibilities are located on the lower part.

Departmentalization is another keyword which cannot be left out while discussing about
organizational structure. Departmentalization refers to the division of work and employees to
different work groups that are responsible for performing the tasks that have been assigned. Each
individual which was assigned in specific work groups will fulfill the tasks that have been given.
Then this collective work output from all individuals and units will be used by the organization
to achieve all their objectives that have been set earlier. There are five types of
departmentalization that will be discussed which includes functional, product, customer, matrix
and geographic departmentalization.

Firstly, functional departmentalization works by coordinating the employees to different units

and each unit has their own area of expertise or specific function. Let’s use a hospital as an
example to make it clearer. A hospital usually operates by having different departments for
example surgery unit, psychiatry unit and nursing unit. Then the employees will be assigned to
this different unit based on their expertise and qualification; surgeons will be placed under
surgery unit, psychiatrists under psychiatric unit and nurses under the nursing unit. This type of
departmentalization allows each employee to work efficiently because they are grouped together
with those of the same expertise. The communications within the same unit would not be an

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issue because each employee has roughly the same level of qualification and they can work
together in a coordinated fashion. Financially, the cost to operate can be reduced by avoiding
work duplication and reducing the waste of resources. However, there are several disadvantages
related to functional departmentalization and one of them is the communication between
different units or departments. Each unit has their own leader and any disagreement between
them would cause delay in decision making of an organization.

Secondly, product departmentalization assigns the employees to different units and each unit is
assigned to produce specific products or providing service. Let’s take an automobile
manufacturing company as an example. Here, they might separate their departments by different
automobile products like two wheeler (motorcycles), four wheeler (jeeps) and heavy motors
(trucks) department. This allows those individuals involved with the products to increase their
expertise and knowledge regarding the specific product which could lead to further product
developments. Furthermore, it is also easier for the management to monitor and evaluate the
performance of each department. One of the disadvantages related to product
departmentalization is the increased in administrative cost as each units has their own experts
regarding the products.

The third type of departmentalization is based on customer. Customer departmentalization

assigned employee to units that each responsible to different type of customers. The best
example for this type of departmentalization is banking enterprise with different departments like
corporate banking, agricultural banking and real estate loans. Corporate banking deals with
customers with corporate background; agricultural banking deals with farmers while real estate
loans deals with customers that plan to buy properties. The advantages of this type of
departmentalization include encouraging the focus into customer needs and satisfaction and
allow the employees to develop expertise in customer service. Meanwhile, one of its
disadvantages is difficulty in coordinating works which might cause work duplication, waste of
resources and increased operation cost.

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The fourth departmentalization is based on geographic aspect, where employees are assigned to
specific geographic location. For example, a small company might divide its department based
on region like the north, east, west and south zone. For bigger company that operates globally,
they might use different departments based on country or region like the South East Asia, West
Europe and North America. This type of departmentalization allows reduction of cost by
positioning the organization resources near to the target consumer. On other hand, problems like
work duplication and communication problems might arise because each departments are
situated far from each other.

The last type of departmentalization to be discussed is matrix departmentalization which is more

complex compared to the previous one. This structure combines two or more type of
departmentalization simultaneously. It enables cross interactive functions between different
departments effectively which in turn allow the organization to work on a larger scale and more
complex projects. An example of this type of departmentalization is shown in Figure 1.1 below.

Figure 1.1

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Example in figure 1.1 shows a matrix organization in an engineering company, where there are
overlaps between functional managers in charge of different engineering functions (mechanical,
electrical etc.) with project managers (project A, B, C etc.) that are responsible for the outcome
or products of each separate project. While this type of departmentalization allows a company to
work on project with high complexity, it also has its own disadvantages. Conflict between
managers might occurs as they compete for the same limited resources, confusion and
miscommunication arising as employee needs to report to more than one manager and meetings
involving all departments is highly time consuming.

Now that we have already discussed about organizational structure and departmentalization, let’s
go further into the new emerging organizational design and their importance. The four new
organizational designs that will be discussed are team structure, modular organization, virtual
organization and borderless organization.

Firstly, team structure involves grouping individuals into different teams where each team might
work separately but still be working towards the same objectives of an organization. Ideally,
each team has members that complement each others in term of skill and knowledge so that the
team has a wide coverage of expertise. It is interesting to note that the individuals within the
team can be changed depending on the team requirements and there is no clear hierarchy among
the team members. The way this type of organization works is as follows; one team is assigned
with a specific task while another team works on another task. When both teams have
accomplished their own tasks, the combination of work outputs from both teams is utilized by
the organization to achieve their overall objective. Team structure allows an organization to be
more flexible. They can use the teams to work separately on different projects or require the
teams to be more interactive with each other towards a more complex project. The end result
would be increased productivity and efficiency in the organization.

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The second one is modular organization, where an organization focuses on developing modules
or units that can be separated and recombined depending on situation to perform more efficiently.
This allows the organization to determine which modules or department works effectively or not.
The organization then can decide whether to remove the ineffective modules or using the method
of outsourcing from another organization. For this type of organization to be effective, each
modules need to be strong enough on its own and not dependent on other modules. An advantage
from this type of structure is high flexibility and restructuring within the organization can be
managed more easily. For example, a company can switch between different providers so they
can respond more quickly to different market needs. However, it is harder to manage a modular
organization especially the one that involves outsourcing as the organization do not have control
over their partners’ way of doing business. An organization might also lose their competitive
advantages through the exchange of technology between the outsourced partners.

Thirdly, virtual organization refers to a network between different organizations that join
together to produce a service or product. The partnership between the organizations could be
permanent but it is usually temporary for most of times. Partners in virtual organization share the
same risks, costs and rewards in producing a certain products. An example of how a virtual
organization operates is as follow:

1) A textbook is published by company A

2) Putting the textbook and supplemental material together is done by a virtual team

 The authors live in New York, London and Cairo

 The editors work in India
 The text compositors are based in Vietnam
 Deadlines are coordinated by company A editors located in Singapore

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Based on the example given above, it is clear that virtual organization allows the project to be
completed even if the members do not live close to each other. This saves time, travel expenses
and the overall production costs. However, there are also disadvantage to this structure which is
difficulty in controlling the quality of work by the partners and to make sure that the projects can
be completed before the deadline.

The last one is borderless organization where an organization is not limited by vertical,
horizontal or external boundaries. This allows more flexibility to the organization as there are
fewer boundaries to deal with such as chain of command and departmentalization. Borderless
organization allows the free flow of ideas, information and resources within its own or between
other organizations which allow the organization to develop at a faster pace. Productivity of the
organization might increase as they are more effective communication between the employees
and external environments. However, problems might arise as the transition of an organization
from a traditional structure towards borderless structure might cause job insecurities among the
employees especially the managers. It is also harder to maintain an ideal workplace within the
organization compared to traditional structure due to communication problems that might arise.

Finally, we will discuss about how organizational design may increased competitiveness. One of
the ways which organizational design may provide an organization with competitive advantage is
through providing clarity. A well-design organizational structure provides clarity about the
hierarchy system and chain of command, decision-making process, the flows of information and
work processes. This allow the employees to be very clear about their own role and
responsibility, know who they should report to and aware of their co-workers role. With every
details being clear to the employees, they can perform at their highest level which will result in
increased productivity to the company. Furthermore, a good organizational design will provide a
good way of communication between employees and their supervisors. This will allow the
organization to react quickly if there is problem arising from their projects thus reducing the risk
of failure. A good communications also allow the information to be passed more easily and
enable technology and knowledge to be shared effectively within an organization. This is

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beneficial to the organization on a long term as it allows the employees to have career
development in their field of expertise.

Organizational design also helps to create competitive advantages by increasing the adaptability
of a particular organization. Most industries are very dynamic and the demand for products and
services are always constantly changing. Therefore, an organization needs to have a good
organizational structure in order to be flexible and able to keep up with the current market. This
could be achieved through the new emerging organizational structures like modular and virtual
departmentalization which allow the organization to be more flexible and can respond to the
changes in their business. For example, with modular departmentalization an organization are
able to restructure easily in respond to the changes in market trend. When there is low demand
on a particular service or product, an organization that is using modular departmentalization
could quickly respond by removing the affected modules in order to reduce operational cost. The
same situation could be said if there is new market opportunity available where the company are
able to respond quickly either by creating a new module themselves or using the method of
outsourcing.

Another way organizational design creates competitive advantages is through maximizing the
employees’ potential and the resource. A good organizational design allows the company to
utilize their employees in a beneficial way. This could be done in various ways including
grouping the employees based on their work of expertise. By doing so, the workflow will
become smoother as the employees relatively have the same knowledge on the field they are
working on and communication regarding specialized topics could be done in a more effective
manner. Organizational design also helps the organization to manage their resource properly. A
proper coordination from the managers can potentially avoid work duplication and thus
preventing the waste of resource. It also allows the output from a single to project to be shared
between different departments which will not only cut the operation cost but also save the time
of employees as they do not need to repeat the work twice.

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Last but not least, organizational design creates competitive advantages by preparing the
organization towards the latest technology and knowledge. Every organization needs to equip
themselves with the latest technology in the related field if they wish to stay relevant in the
industries. This is where a well-design organizational design comes into play. Organizational
structure such as virtual and borderless departmentalization promotes the sharing of technology
and knowledge between their partner organizations. Furthermore, as these different organizations
are working together towards producing a product or service, they could further collaborate and
develop the existing technology into greater heights. By doing so, an organization will always be
ahead compared to their competitors as long as they continually sharing and developing the
technology with their partners.

In conclusion, we could see how the traditional organizational structures like functional, product,
customer, matrix and geographic departmentalization affect the way an organization is being
managed. It is clear to us how these different structures could transform an organization to be
more productive and efficient. We can also compare the traditional organizational structures with
the new emerging organizational structures that include team structure, modular organization,
virtual organization and borderless organization. All this different structures have their own
advantages and disadvantages so it is important to evaluate them before an organization tries to
adapt a particular structure. It is also important to note that well-designed organizational
structures could bring enormous competitive advantages towards an organization compared to
the competitors. We should be aware that organizational designs is dynamic and is always
developing according to trend and market demand. Lastly, adapting a good organizational
structure would not only benefit the organization by maximizing profits and minimizing losses
but also improving the quality of life for the employees by providing a better working
environment and opportunity for career development.

(2502 words)

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References

Bateman, T. S., & Snell, S. A. (2008). Management: Building competitive advantage (8th ed.).
Boston: Irwin-McGraw Hill.

Davidow, W.H., and M.S. Malone. (1992) The Virtual Corporation: Structuring and Revitalizing
the Corporation for the 21st Century. New York, NY: Harper Collins Publishers.

Organizational Structure (accessed on 20th of July 2016). Retrieved from:

http://www.referenceforbusiness.com/management/Ob-Or/Organizational-Structure.html

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