CHAPTER NINE

ORGANIZATIONAL STRUCTURE AND DESIGN

Overview
There is revolution occurring in how organizations are structured. Organizational structure has
significance of ensuring the management of the organization to facilitate administration, encourage
growth, use of technology, optimize utilization of human resources, and stimulate creativity. The
knowledge about the subject of organizational structure provides the tool to engage in organizational
design. Organizational design is the process of creating and modifying organizational structure.

Organizational structure
Organizational structure refers to the division of labor as well as the pattern of coordination,
communication, workflow, and formal power that direct organizational activities. Or it can be simply
defined as how tasks are formally divided, grouped, and coordinated. It also reflects organizational
culture and power relationships.
Organization structures are frequently used as tools for change. They Support or inhibit
communication and relationships across the organization.
Division of labor and Coordination
All organizational structure has two fundamental requirements or processes: division of labor into
distinct tasks and coordination of that labor so that employees are able to accomplish common goals.
Division of labor refers to the subdivision of work into separate jobs assigned to different people.
Subdivided work leads to job specialization. Work divided into specialized jobs potentially increases
work efficiency.
Coordination of work activities, as soon as people divide work among themselves, coordinating
mechanisms are needed to ensure that everyone works in concrete. Every organization, large or small,
uses one or more of the following coordinating mechanisms.
 Coordination trough informal communication
 Coordination trough formal hierarchy, and
 Coordination trough standardization
Organization structure is abstract but we can see it in action through the behavior of the organization
and its operations.
Needs to design organization structure
There are many needs to management to design a good organization structure. Some of them are to:
 Facilitate Management: A well designed organization structure will help in both managerial as well
as operational activities of an organization. The proper grouping and arrangement of activities will
lead to coordination and smooth running of the organization, thereby its objectives.
 Encourage growth: A good organization structure encourages efficiency and creates a situation that
will be quite constructive for growth. Growth can be witnessed when the scale of the operations of
the organization increases and when the organization diversifies.
 Use of technology: A good organization structure can absorb the fast changing technology and
utilize it for the increasing efficiency of the organization.
 Optimum utilization of Human resources: An efficient organization structure will lead to
satisfaction of employees and contributes to the optimum utilization of the human resources of the
organization.
 Stimulates creativity: Specialization is another benefit of a good organization structure. This
specialization stimulates creative thinking and provides a lot of initiative to employees to
contribute to the achievement of the objectives of the organization.

Features of a good organization structure

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Even though managers expect their organization structures to benefit them in different ways there are
certain common features of a good organization structure. They are;
 Simplicity: An organization structure should not confuse people, even a layman should be able to
easily understand and interpret the information provided by the structure.
 Flexibility: The external environment and the internal environment of the organization are always
dynamic hence an organization structure should be flexible so as to absorb these changes and
continue to grow.
 Clear line of authority: Top bottom and horizontal lines of authority should be clearly mentioned to
avoid confusion, friction and wastages.
 Delegation of authority and fixation of responsibility: Proper delegation of authority and fixation of
ultimate responsibility is also another important feature of a good organization structure.
 Minimum Managerial level: Organizational structure has to be flat rather than tall. This ensures
decentralization and more delegation of authority and responsibility, and it is essential for an
organization to function effectively.
 Unity of command and direction: Unity of command is receiving orders from one boss and unity of
direction is one plan one man. A good organization structure should possess these principles.
 Focus on staff: An organization structure which is designed by separating the line and staff
functions. Line activity serves the organization directly and staff activity contributes in making the
organization more efficient by helping the people involved in line activity indirectly.

Characteristics of new organizational forms

The new organizational forms are characterized by seven main features. They are:
 Flat: through the removal of many of the middle tiers of managers and subordinates.
 Flexible: by virtue of the opening up of narrow, specialized roles.
 Customer-responsive: through the empowerment of front-line employees.
 Decentralized: through the passing down of responsibility and autonomy from the center.
 Cross-boundary: through increasing permeability of internal and external boundaries.
 Self-organizing: through empowerment and the emphasis on learning.
 Lateral communication: through a reduced emphasis on hierarchy.

Elements of Organizational Structure

Organizational structure establishes a pattern of relationships among different components or parts of
the organization. The division of labor and the coordination of work represent the fundamental
requirements of organizations. These requirements relate to the following elements of organizational
structure. Basically, there are six key elements that managers need to address when they design their
organization's structure. These are
o work specialization,
o departmentalization,
o chain of command,
o span of control,
o centralization and decentralization, and
o formalization
Organization Chart is diagrams of the organizational structure, showing the functions, departments, or
positions of the organization and how they are related. It is a graphic representation of formal authority
and division of labor relationships. - i.e. it is boxes-and-lines illustration showing chain of formal
authority and division of labor.
 Work specialization
We use the term work specialization or division of labor to describe the degree to which tasks in the
organization are subdivided into separate jobs.
Job specialization is the result of division of labor in which each job now includes a narrow subset of
the tasks required to complete the product or service.

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In organizations, some tasks require highly developed skills; others can be performed by the untrained.
Work specialization increases efficiency and productivity by encouraging the creation of special
inventions & machinery, b/se employee skills at performing a task successfully increase through
repetition.
In such cases, productivity could be increased by enlarging, rather than narrowing, the scope of job
activities, and also by giving employees a variety of activities to do, allowing them to do a whole &
complete job, and by putting employees into teams with interchangeable skills, they often achieved
significantly higher output with increased employee satisfaction.
 Delegation, Decentralization, and authority relationships
 Delegation
In one-person operation, all decisions and works are vested in a single individual. As the organization
grows, he/ she must empower others to perform activities and make decisions; hence the manager
must delegate authority in order for the organization to achieve its objectives.
Delegation of authority or the power to act is inherent in the organizing process. Failure to delegate can
create many problems such as: over-worked managers, lack of times to handle important matters,
mistakes, and other forms of inefficiency can result when work is not delegated skillfully.
In general, the more authority delegated to lower-level employees, the more decentralized the
organization is said to be. Conversely, the more authority retained by higher-level managers, the more
centralized the organization is said to be.
Advantages of Delegation
 Delegation is essential to obtain prompt action
 Delegation enables managers to perform higher level work
 Delegation can be a training experience for supportive staff
 Delegation can result in better decisions
 Delegation can improve morale
Disadvantages of Delegation
Despite its advantages, delegation has two potential limitations.
 Control at the top may be more difficult.
 A manager may over time lose touch with what is really happening in the organization.
Factors determining the delegation of authority
Common factors determining the delegation of authority are:
 Importance of the decision
 Size of the organization
 Management style & philosophy
 Availability of capable Managers
Decentralization is possible only if persons are available who are sufficiently trained and experienced
to accept and implement authority.
 Centralization & Decentralization
In some organizations, top managers make all the decisions, lower-level managers merely carry out top
management's directives. At the other extreme, there are organizations in which decision-making is
pushed down to those managers who are closest to the action.
Centralization refers to the degree to which decision making is concentrated at a single point in the
organization. The concept includes only formal authority that is the rights inherent in one's position.
Typically it is said if top management makes the organization's key decisions with little or no input
from lower-level personnel, then the organization is centralized.
Decentralization is dispersing decision authority and power throughout the organization. The more
that lower-level personnel provide input or are actually given the discretion to make decisions, the
more decentralized the organization is.
An organization characterized by centralization is an inherently different structural design from one
that is decentralized. In a decentralized organization
 action can be taken more quickly to solve problems,
 more people provide input into decisions, and
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 employees are less likely to feel alienated from those who make the decisions that affect their work
lives.
 Authority relationships
In the process of organizing, the emphasis is mainly on positional authority that is the authority
derived out of a position in an organization. Hence authority is defined as the legitimate power to give
orders and gets these orders obeyed.
Features of Authority
 Authority is legitimized by organizational rules, regulations, procedures, practices, etc.
 Authority gives the right to decision making. Only a person with authority has the ability and the
right to make a decision which must be implemented by his subordinates.
 Authority is exercised to influence the behavior of subordinates so as to achieve the goals of the
organization.
 Authority is given to a position, not to an individual in an organization; hence the way it is used may
differ from person to person.
Line, staff, and functional authority
An enterprise to function effectively, it is essential that authority relationships be clearly defined and
understood by all members of the organization. Confusion regarding such relationships often leads to
interdepartmental friction & poor coordination of the organization's activities.
Line & staff authorities
Managers in an organization have to deal with people in two types of jobs (positions): line positions
and staff positions. Line managers are involved in carrying out the primary activities of the
organization. They are the organizational commanders, the people who make decisions that relate to
the organization’s goals.
Staffs managers on the other hand serve as advisers & are auxiliary to the organization in terms of
helping to achieve its goals. They counsel, advise, guide & serve line managers. Some common staff
activities are public relations, research, personnel & legal services. All staff positions are advisory. Staff
people may make recommendations but line managers retain formal authority & decide what to do
with a staff person's advice. In general, it is common to refer to staff managers as "advisers" and line
managers as "doers"
Now we have understood the difference between line & staff positions, we can examine the authority
relationships between them more closely.

The three distinct types of authorities evident in business organizations are line, staff, & functional.
Line authority
Line authority enables a manager to tell subordinates what to do. Both line and staff managers have
line authority over their subordinates. In general, line authority is represented by the chain of
command, which links superiors and subordinates from top to bottom in an organization or extends all
the way to the lowest level in the organizational structure.
Staff authority
As we have already pointed out, people in staff positions assist and advice line managers. They relieve
some of the line managers' burdens by giving them the information they need to make
recommendations, they have staff authority. e.g. the legal officer exercises staff authority by advising
the company president. Likewise the personnel officer may advise and assist other managers on
personnel matters
Functional authority
Functional authority is exercised over people or activities in other departments usually limited in scope
and duration. It is exercised one level below the person who has it.
 Span of Control
Span of control refers to the number of people directly reporting to a given manager or to the next level
in the organizational hierarchy. It is the number of subordinates that a single manager can directly,
immediately and effectively supervises.

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The division of labor limits the span of control. Span of control can range from narrow to wide. The
narrower the span of control, the closer the supervision and the higher the administrative cost as a
result of a higher manager-to-worker ratio.
Structures can be tall or flat. A tall structure has many hierarchical levels, each with relatively narrow
span of control, whereas a flat structure has few levels, each with a wide span of control.
Upper- echelon managers usually have fewer immediate subordinates than middle managers do.
Likewise, middle managers typically have narrower spans of control than supervisors (lower level
managers) do.
The variations at different organizational levels result from the complexity and /or diversity of jobs,
the need for personal interaction, leadership philosophies, and a host of other variables.
Narrow spans of control permit a manager to have greater interaction with each subordinate, i.e. to
exercise close supervision. But they also result in "taller" organizational structures and communication
barriers since information must be transmitted through more people (levels). Conversely, wide spans of
control necessitate general supervision and result in "flat" organizational structures.
 Chain of command
The chain of command is line of authority that extends from the top of the organization to the lowest
echelon (denoted by an unbroken line) & clarifies who reports to whom.
It answers questions for employees such as "To whom do I go if I have a problem?" and "To whom am I
responsible"
 Formalization
Formalization refers to the degree to which jobs within the organization are standardized. It is the
degree to which organizations standardize behavior through rules, procedures, formal training, and
related mechanisms. In other words it represents the establishment of standardizations as a
coordinating mechanism. E.g. McDonald’s look and test the same everywhere in the world.
Standardization is creating routine patterns of behavior or outputs. Organizations standardize work
activities through job description and procedures.
If a job is highly formalized, then the job incumbent has a minimum amount of discretion over what is
to be done; when to be done; or how he/ she should do it. Employees can be expected always to handle
the same input in exactly the same way, resulting in a consistent and uniform output.
In organizations in which there is high formalization, there are explicit job descriptions, lots of
organizational rules, & clearly defined procedures covering work processes.
When formalization is low, job behaviors are relatively non-programmed and employees have a great
deal of freedom to exercise discretion in their work.
The greater the standardization, the less input the employee has into how his or her work is to be done.
Standardization not only eliminates the possibility of employees engaging in alternative behaviors, but
it even removes the need for employees to consider alternatives. The degree of formalization can very
widely between organizations and within organizations.
 Departmentalization
Just as the parts of machine must fit together properly to function the machine, the human components
of an organization must mesh with the enterprise to attain its intended results. The structure of an
organization is an important determinant of the organization's success in achieving objectives.
The goal of departmentalization is to perform the work of an enterprise in the most efficient manner to
obtain the best possible use of human, material and financial resources.
What is departmentalization?
Departmentalization is an important part of organizing. Departmentalization is arrangement of the
work of an enterprise into manageable parts. It specifies how the employees and their activities are
grouped together.
Departmentalization is a fundamental strategy for coordination organizational activities because it
influences organizational behavior in the following ways. Departmentalization;
 establishes a system of common supervision between positions and units within the
organization. i.e. it establishes interdependence between employees and subunits; formal
work teams, and typically determines which position and unit must share resources.

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  usually creates common measures of performance.
 encourages coordination through informal communication between people and subunits.
Departmentalization involves three steps.
Step 1: Reasonably similar tasks are grouped together.
Step 2: Authority to perform these activities is assigned to a department head, and
Step 3: the department head accepts responsibility for achieving organizational goals and is
held accountable to a superior for performance.
Major bases for departmentalization
There are almost as many organizational charts as there are as there are businesses. There are five
primary bases for departmentalization: Function, territory or geographic area, customer, product and
matrix.
Departmentalization by function
It is the process of grouping an organization's activities into logical units on the basis of the essential
functions (contents) that must be performed to attain the organization's goals.
All organizations, profit-seeking or non-profit seeking, large or small, perform three key functions:
production, marketing and finance.
Production function: Producing something, regardless of the product's form or name, is the central
purpose of organizations. For example, for Air lines "operation", for hospitals “Patient care", for
insurance company, “underwriting".
Marketing function: All organizations try with varying degrees of sophistication, to market the product
they create.
Finance function: The finance function is essential. All organizations require money to produce and
market the utility they offer.
Advantages
An important advantage of functional structure (departmentalization) is that
 It fosters professional identity and clarifies career paths.
 It permits greater specialization so that the organization has expertise in each area.
 Direct supervision is easier ,
 It creates common pools talent that typically serve every one in the organization.
o i.e. cerates economy of scale that would not exist
Disadvantages
Functional departmentalization’s also have limitations. Because
 Promote differentiation among functions b/se people are grouped together according to
common interests and back grounds.
 have higher dysfunctional conflict and poorer coordination with other work units.
 emphasize subunit goals over superordinate organizational goals, i.e. employees give less
priority to the organizational goal than to the specific departmental goals.
 Failure to develop a broader understanding of the business, i.e. less transfer of people from one
function to the next function.
Departmentalization by Geographic areas
Whenever a company establishes operations in different regions of the country or in different countries,
departmentalization on the basis of geography may be beneficial.
Geographic departmentalization often referred to as area or territorial departmentalization. It groups
business activities on the basis of geographic region or territory, enabling a firm to adapt to local
customers more quickly.
Departmentalization by geographic area encourages decentralized decision making and also
encourages the employment, retention and promotion of people who are familiar with the traditional
values of a particular area.
The decision to set up departments on the basis of geography is based totally on economic
considerations (e.g. transportation costs).
Departmentalization by product

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A firm's activities also can be grouped around its products called product departmentalization. This
arrangement is commonly used by manufacturers who produce and sell a number of product lines
(whole range of products, group of related products) made up several different items.
Customer departmentalization
Companies that must provide special services to different groups set up departments by types of
customers, using customer departmentalization. For example, a manufacturer may have both an
industrial products division for its industrial customers and a consumer products division for other
customers.
Normally, setting up departments by customers is not a primary form of departmentalization. It is used
instead within some other framework.
1. Types of organization structures
Structures can be further characterized as one of three types:
 simple structure,
 mechanistic Vs organic structure and
 Matrix structure.
Simple structure
Most companies begin with a simple structure. They employ only few people and typically offer only
one distinct product or service. Employees are grouped into broadly defined roles because there are
insufficient economies of scale to assign them to specialized roles.
Simple structures are flexible but very difficult to operate under complex conditions. This type of
functional structure describes relatively small & young organizations that primarily use mutual
dependence & direct supervision as coordinating mechanisms. E.g. a men's clothing store, a family
restaurant & a small consulting firm probably have this structure.
In the simple structure, the top management has significant control. Thus, managers frequently
organize their firms along these lines. As the organization grows or becomes increasingly larger, the
simple structure will frequently departmentalize further by function; it develops additional products or
services; and the organization will develop a more complex structural form that relies on other means
of coordination.
Mechanistic Structures:
Mechanistic structures typically have extensive centralization of decision making accompanied by a
unitary chain of command. They rely on extensive horizontal and vertical division of labor to
encourage specialization of activities throughout the organization.
Mechanistic structures rely on coordination by standardization of work processes and direct
supervision
Mechanistic structures can be advantageous in relatively predictable situations, but limit the discretion
of most workers in the organization to make and implement decisions. They tend to slow decision
making and impedes effective communication, and typically have a low capacity for processing
information.
Organic Structures
The organic structure deemphasizes job descriptions and specializations and encourages individuals
throughout the organization to assume responsibility for making important organizational decisions. It
is characterized by decentralization of decision-making.
Organic structure is one with low formalization, highly decentralized decision-making authority, and
coordination mainly through informal communication among team members. It relies on mutual
adjustment and standardization of outputs; gives individuals great discretion in how they attain
organizational goals; has a high capacity for information processing. Thus, organic structures offer a
much greater ability to respond to unexpected changes
Organic structure typically relies on a unitary chain of command, but may occasionally shift to multiple
lines of authority. Horizontal and vertical differentiations tend to be less extensive, while personal and
spatial differentiation may be greater.
Matrix structure

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Matrix structure is a type of departmentalization that combines or overlays two structures, i.e. a
divisionalized structure (typically a project team) with a functional structure. It combines two
structures to leverage the benefits of both types of structures.
Matrix structure is a sense in a combination and interaction of project and functional structures and is
generally suggested to overcome some of the problems associated with project and functional
structures individually.
The most common form of matrix structure occurs in project-based organizations. The employees are
assigned to a cross-functional project team, yet also belong to a permanent functional unit in which
they return when the project is completed.
The project managers are generally responsible for overall direction and integration of activities &
resources related to the project; accomplishing work on schedule & within the prescribed budget;
integrating the efforts of all functional managers towards the accomplishment of the project and
directing & evaluating project activity.
The functional managers are concerned with the operational aspects of the project, and responsible for
providing technical guidance for the project; providing functional staff, which is highly skilled and
specialized, and Completing the project within prescribed technical specification.
Avantages
Matrix structures
 optimize the use of resources and expertise,
o making them ideal for project-based organizations with fluctuating workloads.
 if properly managed, they improve communication efficiency, project flexibility, and innovation
compared to purely functional designs.
 focus on technical specialists and on the goals of serving clients and creating marketable
products. Yet by maintaining a link to their functional unity, employees are able to interact and
coordinate with others in their technical specialty.
Disadvantages
In spite of its advantages, matrix structures
 require more coordination than functional or pure divisional structures.
 The existence of two bosses can also dilute accountability.
 also tend to generate or increase conflict, organizational polities and stress.
Other types of structures
There are also other types of structures. They are
 Hybrid structure
 Team-based (lateral) structure and
 Network structure
2. Organizational design parameters/ contingencies
Organizational theorists and practitioners are interested not only in the elements of organizational
structure but also in the contingencies (parameters) that determine or influence the optimal design.
The four contingencies of organizational design are organizational size, technology, external
environment, and organizational strategy. The best organizational structure depends on these four
parameters.
Organizational Size
Larger organizations have considerably different structures than smaller organizations. As the number
of employees increases, job specialization increases due to a greater division of labor.
Larger firms/ organizations also have more elaborate coordinating mechanisms to manage the greater
division of labor. They are more likely to use standardization of work processes and outputs to
coordinate work activities. These coordinating mechanisms create an administrative hierarchy and
greater formalization. Informal communication has traditionally decreased as a coordinating
mechanism as organizations get larger. It also tend to be more decentralized, i.e. decision making
authority is pushed down to lower levels where incumbents are able to cope with the narrower range
of issues under their control.
Technology
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Based on the open systems model, we know that an organization's structure needs to be aligned with
its dominant technology.
Two important technological contingencies that influence the best type of organizations structure are
the variety and analyzability of work activities.
Variety refers to the number of exceptions to standard procedure that can occur in the team or work
unit. And Analyzability refers to the extent that the transformation of input resources to outputs can be
reduced to a series of standardized steps.
Some jobs are routine, meaning that employees perform the same tasks all of the time and rely on set
rules (standard operating procedures) when exceptions do occur. Almost everything is predictable.
When employees perform tasks with high variety and low analyzability, they apply their skills to
unique situations with little opportunity for repetition. Research project teams operate under these
conditions. These situations call for an organic structure.
High- variety and high-analyzability tasks have mainly exceptions to routines, but these exceptions can
usually be resolved through standard procedures. Maintenance groups and engineering design teams
experience these conditions. Work units that fall into this category should use an organic structure, but
it is possible to have some what greater formalization and centralization due to the analyzability of
problems.
External Environment
The best structure for an organization depends on its external environment. The external environment
includes anything outside the organization including most stakeholders, clients, suppliers,
government, and resources.
Four relatively distinct characteristics of external environments that influence the type of
organizational structure best suited to a particular situation are dynamism, complexity, diversity, and
hostility.
Dynamic versus stable environments
Dynamic environments have a high rate of change, leading to novel situations and a lack of identifiable
patterns. Organic structures are better suited to this type of environment so that the organization can
adapt more quickly to changes.
Stable environments are characterized by regular cycles of activity and steady changes in supply and
demand for inputs and outputs. Events are more predictable, enabling the firm to apply rules and
procedures. Thus, more mechanistic structures tend to work best under these conditions.
Complex versus simple environments
Complex environments have many elements where as simple environments have few things to
monitor. For instance, a multinational corporation (i.e. operating many different countries) has a
complex environment because it has many stakeholders.
Decentralized structure seems to be better suited to complex environments because these subunits are
close to their local environment and are able to make more informed choices.
Diverse versus integrated environments
Organizations located in diverse environments have a greater variety of products, clients, and regions.
In contrast, an integrated environment has only one client, product and geographic area.
The more diversified the environment the more the firm needs to use a divisionalized form aligned
with that diversity. For example, if the firm sells a single product around the world, a geographic
divisionalized form would align best with the firm's geographic diversity.
Hostile versus munificent environments
Firms located in a hostile environment face resource scarcity and more competition in the market place.
Hostile environments are typically dynamic ones because they reduce the predictability of access to
resources and demand for outputs. Organic structures tend to be best in hostile environments.
When the environment is extremely hostile - such as a severe shortage of supplies or lower market
share, organizations tend to temporarily centralize so that decisions can be made more quickly and
executives feel more comfortable of controlling the situation. Centralization, ironically, may result in
lower quality decisions during organizational crises, because top management has less information,
particularly when the environment is complex.
Organizational strategy
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Sizes, technology, and environment influence the optimal organizational structure. These contingencies
don not necessarily determine structure.
Increasing evidences show that corporate leaders formulate and implement strategies that shape both
the characteristics of these contingencies as well as the organization's resulting structure.
Organizational strategy refers to the way the organization positions itself in its setting in relation to its
stakeholders, given the organization's resources, capabilities, and mission.
Strategic choice refers to the idea that an organization interacts with its environment instead of being
totally determined by it. In other words, organizational leaders take steps to define and manipulate
their environments, rather than let the organization's fate be entirely determined by external influences.
The notion of strategic choice can be traced back to the work of Alfred Chandler in the early 1960s.
Chandler's proposal was that “structure follows strategy.”
He observed that organizational structures follow the growth strategy developed by the organization's
decision makers; also noted that organizational structures change only after decision makers decide to
do so. This recognizes that the link between structure and the contingency factors described earlier is
mediated by organizational strategy.

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