Unit II

What is organizational structure?

An organizational structure defines how activities such as task allocation, coordination and supervision are directed towards the

achievement of organizational aims. It can also be considered as the viewing glass or perspective through which individuals see their

organization and its environment. Organizations are a variant of clustered entities. Organizational structure is a system used to define

a hierarchy within an organization. It identifies each job, its function and where it reports to within the organization. This structure is

developed to establish how an organization operates and assists an organization in obtaining its goals to allow for future growth.

A structure depends on the organization's objectives and strategy. In a centralized structure, the top layer of management has most

of the decision making power and has tight control over departments and divisions. In a decentralized structure, the decision making

power is distributed and the departments and divisions may have different degrees of independence. A company such as Proctor &

Gamble that sells multiple products may organize their structure so that groups are divided according to each product and depending

on geographical area as well.

Importance of Organization Structure

Decision Making

Organizational structure is particularly important for decision making. Most companies either have a tall or flat organizational
structure. Small companies usually use a flat organizational structure. For example, a manager can report directly to the president
instead of a director, and her assistants are only two levels below the president. Flat structures enable small companies to make
quicker decisions, as they are often growing rapidly with new products and need this flexibility. Small companies should not even
worry about organizational structure, unless they have at least 15 employees. The reason is that employees in extremely small
organizations have numerous responsibilities, some of which can include multiple functions. For example, a product manager also
might be responsible for marketing research and advertising.

Large organizations often have many tiers or echelons of management. As a smaller organization grows, it can decide to add more
management levels. Roles become more defined. Therefore, it is important to know which people oversee certain functions.

Better Communication

The importance of organizational structure is particularly crucial for communication. Organizational structure enables the
distribution of authority. When a person starts a job, he knows from day one to which he will report. Most companies funnel their
communication through department leaders. For example, marketing employees will discuss various issues with their director. The
director, in turn, will discuss these issues with the vice president or upper management.

Evaluating Employee Performance

Organizational structure is important for evaluating employee performance. The linear structure of functional and product
organizational structures allow supervisors to better evaluate the work of their subordinates. Supervisors can evaluate the skills
employees demonstrate, how they get along with other workers, and the timeliness in which they complete their work.
Consequently, supervisors can more readily complete semiannual or annual performance appraisals, which are usually mandatory in
most companies.

Achieving Goals

Organizational structure is particularly important in achieving goals and results. Organizational structure allows for the chain of
command. Department leaders are in charge of delegating tasks and projects to subordinates so the department can meet project
deadlines. In essence, organizational structure fosters teamwork, where everyone in the department works toward a common goal.

Prevention/Solution

Organizational structure enables companies to better manage change in the marketplace, including consumer needs, government
regulation and new technology. Department heads and managers can meet, outline various problem areas, and come up with a
solution as a group. Change can be expected in any industry. Company leaders always should strive to find the best organizational
structure to meet those changes.

Smooth flow of Information

The flow of information is essential to an organization’s success. The organization structure should be designed to ensure that
individuals and departments that need to coordinate their efforts have lines of communication that are built into the structure. The
financial planning and analysis department might report to the Chief Financial Officer and the Senior Vice President of Marketing,
because both of these members of the top management team depend on information and reports provided by financial planning.

Reporting Relationships

Reporting relationships must be clear so all members of the organization understand what their responsibilities are and know to
whom they are accountable. These clear relationships make it easier for managers to supervise those in lower organization levels.
Each employee benefits by knowing whom they can turn to for direction or help. In addition, managers are aware of who is outside
the scope of their authority, so they do not overstep their bounds and interfere with another manager’s responsibilities.

Growth and Expansion

Companies that grow rapidly are those that make the best use of their resources, including management talent. A sound
organization structure ensures that the company has the right people in the right positions. The structure may suggest weak spots
or deficiencies in the company’s current management team. As the company grows, the organization structure must evolve with it.
Many times more layers of management are created, when one department head has too many individuals reporting to him at one
time to give each employee the attention and direction needed for the employee to succeed.

Task Completion
A well-designed organization structure facilitates the completion of projects. Project managers can better identify the human
resources available to them if the scope of each department’s responsibility -- and each team member’s capabilities--are clear. A
project to develop a new product would require market research. The project manager needs to know who in the organization can
provide this research, and whose permission must be obtained for the research to be done.

Fits Company’s Needs

Companies in different industries require different mixes of talent and a relatively greater emphasis on certain management
functions. A software company often has a large development staff. Structuring the reporting relationships within the development
team so creativity and productivity are maximized, and deadlines are met, is vital to that type of company’s success. Companies
often have to go through a reorganization phase in which individual positions or even whole departments are repositioned on the
organization chart in an effort to better utilize the company’s human resources and make the operation run more smoothly.
Design and Structure
 Forms of Organizations/Approaches to Organizational Structure

Product Organisation structured

Activities are on the basis of individual products, product line, and service and are grouped into departments in product
organisation structure. All important functions like marketing, production, finance and human resources are contained within each
department.

Advantages

● The product based organisation is more appropriate than functional form of organisation for the firms producing multiple
products.
● Co ordination among functions area likes design, producing, marketing is effective as all functions are performed in each
department.
● Since, each department is independent; most of the decisions can be made at departmental level without involving the top
management
● Responsibility and accountability for the market share, sales, profit/loss are clearly fixed. Thus either credit for the success or
blame for the failure of products can be clearly attributes to particular departments.

Disadvantages

● One of the major disadvantages is that there are duplications of equipments and personnel’s among each department.
● Procurement of special staff for each department is costly affair
 ● Some decision such as pay, promotion, quality, design and pricing may be inconsistent between department resulting
conflicts within the departments

Geographical Organisation structured

The activities or functions are grouped into departments based on the activities performed in the geographical areas/region. Each
geographical unit includes all the functions required to produce and market the products and services in a particular area.

Multinational organizations, enterprises operating in diverse geographical markets serving an expansive geographical area are
organized based on the geographical structured. This structured is also used by chain stores like KFC, MCD or a multinational like Citi
Bank, HSBC

Advantages

● Allows tailoring of strategy to needs of each geographical markets.

● Takes advantage of economies of local operations
● Products and services are better designed to the climate needs of specific geographical.
● A geographical structured allows a firm to respond to the technical needs of different international are.
● Producing and distributing products un different national or global locations may give the organisation an opportunity to
better serve the consumers needs of various nations.
● This organisation structured enables a company to adapt to varying legal systems.
● It also allows firms to delegate accountability and responsibility to different region according to their performance.

Disadvantages
 ● Poses a problem of how much geographical uniformity headquarters should impose versus how much geographical
diversity should be allowed
● Greater difficulty in maintaining consistent company image/reputation from area when managers exercise much strategic
freedom
● Adds other layers of management to run the geographic units
● Can result in duplication of staff services at headquarter and regional levels, creating a relative cost disadvantage
● Result in inconsistent decisions from one region to another region.
● Result in duplication of equipment and personnel
●

Decentralized Business Unit Structure

In a diversified firm, the basic organizational building blocks are its business units, each business is operated as a stand along profits
centre.

Strategic Business Units

A single chief executive cannot control a number of decentralized units of a broadly diversified company. The business
can be effectively controlled, if the related business are grouped into strategic units and the efficient and senior
executive is delegated with the authority and responsibility for its management. The senior executive will in turn report
the matter to chief executive.
 Advantages

● Reduction of the corporate headquarters’ span of control. The chief executive at the corporate headquarters’ has to
control the general manager or group manager of each strategic unit
● This structure permits better coordination between the general divisions with similar mission, products, markets and
technologies
● It allows strategic management to be done at the most relevant level within the total enterprise
● It helps to allocate corporate resources to areas with greatest growth opportunities.
● Business units are organized based on the strategically relevant method
● Makes the task of strategic review by top executives more objectives and more effectives

Disadvantages

● The first disadvantages are that corporate headquarters becomes more distant from the division.
● Conflicts between or among the strategic units managers for greater share of corporate resources can become
dysfunctional.
● Corporate portfolio analysis become a complete one in structure
● Increase layer of management

Functional Organization Structure

A functional organization structure is a hierarchical type of organization structure wherein people are grouped as per their area of
specialization. These people are supervised by a functional manager who has expertise in the same field, which helps him to
effectively utilize the skills of employees, which ultimately helps him in achieving the organization’s business objectives.

In this kind of organization structure, people are classified according to the function they perform in the organization. The
organization chart for a functional organization structure shows you the president, vice president, finance department, sales
department, customer service department, administration department, etc.

Each department will have its own department head, and he will be responsible for the performance of his section. This helps the
organization control the quality and uniformity of performance. The functional organization structure is suitable for an organization
which has ongoing operations and produces some standard products or goods, such as manufacturing and production industries.

The functional organization structure helps organizations run their business and earn profit. This type of structure suits
organizations intended to produce some product or service on a continuous basis. Here, employees feel secure, perform well and
tend to be highly skilled. The project manager doesn’t have any role in functional organization, and even if he exists, his role will
very limited and he will be known as either the expediter or coordinator.
Advantages of the Functional Organization Structure
● Employees are grouped as per their knowledge and skills, which helps achieve the highest degree of performance.
● Employees are very skilled and efficient because they are experienced in the same work and hence they perform very
well.
● Their role and responsibility is fixed, which facilitates easy accountability for the work.
● The hierarchy is very clear, and employees don’t have to report to multiple bosses. Each employee reports to his
functional manager, which reduces the communication channels.
● There is no duplication of work because each department and each employee has a fixed job responsibility.
● Employees have a clear career growth path.
● Within the department, cooperation and communication is excellent.

Disadvantages of the Functional Organization Structure

● Employees may feel bored due to the monotonous, repeated type of work and may become lazy.
● If the performance appraisal system is not managed properly, conflicts may arise. For example, an employee may feel
demoralized when a lower performing employee is promoted.
● The cost of high skilled employee is higher.
● The departments have a self-centered mentality. The functional manager pays more attention to only his department;
he usually doesn’t care about other departments.
● Communication is not good among the departments, which causes poor inter-department coordination. This
decreases flexibility and innovation. Moreover, there is a lack of teamwork among different departments.
● Employees may have little concerns and knowledge about anything happening outside their department. This causes
obstacles in communication and cooperation.
● When the organization becomes larger, functional areas can become difficult to manage due to their size. Each
department will start behaving like a small company with its own facilities, culture and management style.
 Matrix Organizational Structure

The matrix structure groups employees by both function and product. This structure can combine the best of both separate
structures. A matrix organization frequently uses teams of employees to accomplish work, in order to take advantage of the
strengths, as well as make up for the weaknesses, of functional and decentralized forms. An example would be a company that
produces two products, "product a" and "product b". Using the matrix structure, this company would organize functions within the
company as follows: "product a" sales department, "product a" customer service department, "product a" accounting, "product b"
sales department, "product b" customer service department, "product b" accounting department. Matrix structure is amongst the
purest of organizational structures, a simple lattice emulating order and regularity demonstrated in nature.

Matrix structure is only one of the three major structures. The other two are Functional and Project structure. Matrix management
is more dynamic than functional management in that it is a combination of all the other structures and allows team members to
share information more readily across task boundaries. It also allows for specialization that can increase depth of knowledge in a
specific sector or segment.

Advantages

However the matrix structure also has significant advantages that make it valuable for companies to use. The matrix structure
improves upon the “silo” critique of functional management in that it diminishes the vertical structure of functional and creates a
more horizontal structure which allows the spread of information across task boundaries to happen much quicker. Moreover matrix
structure allows for specialization that can increase depth of knowledge & allows individuals to be chosen according to project
needs. This correlation between individuals and project needs is what produces the concept of maximizing strengths and minimizing
weaknesses.
Disadvantages

Disadvantages are an increase in the complexity of the chain of command. This occurs because of the differentiation between
functional managers and project managers, which can be confusing for employees to understand who is next in the chain of
command. An additional disadvantage of the matrix structure is higher manager to worker ratio that results in conflicting loyalties
of employees.