Part III: Management

Organizational Structure 8

Introduction to Business 3e
Jeff Madura
Copyright © 2004 South-Western. All rights reserved.
 Learning Goals
• Explain how an organizational structure
may be used by a firm to achieve its
strategic plan
• Identify methods that can be used to
departmentalize tasks

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 Organizational Structure

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 Example of an Organization Chart

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.1 8–4

 Structure and the Strategic Plan
• Organizational structure identifies
responsibilities for each job position and
the relationships among those positions.
– Organization chart
A diagram that shows the interaction
among employee responsibilities.
– Chain of command
 Job positions to which each type of
employee must report; indicates who is
responsible for various activities.

Copyright © 2004 South-Western. All rights reserved. 8–5

 Chain of Command
• President (and/or) CEO
– Has ultimate responsibility for firm’s success.
– Attempts to coordinate all divisions and
provide direction for the firm’s business.
• Vice-Presidents
– Normally oversee specific divisions or broad
functions and report to the president.
– Chain of command ensures that managers
make decisions to maximize the firm’s value,
rather than serve their own interests.
Copyright © 2004 South-Western. All rights reserved. 8–6
 Board of Directors
• A set of executives responsible for
monitoring the activities of the firm’s
president and other high-level managers
– Directors are selected by share-holders to
serve as representatives for the
shareholders.

Copyright © 2004 South-Western. All rights reserved. 8–7

 Small Business Survey
Who Are Board Members of Small Firms?

Copyright © 2004 South-Western. All rights reserved. 8–8

 Board of Directors (cont’d)
• Inside board members are also managers
of the firm.
• Outside board members are not
managers of the firm.
– Firms may partially compensate directors
with awards of stock to help motivate
directors to serve the interests of the firm’s
shareholders.

Copyright © 2004 South-Western. All rights reserved. 8–9

 Board of Directors (cont’d)
• Boards usually focus on major issues and
not day-to-day activities of the firm
– Approves key business proposals, such as
mergers and acquisitions.
– Can initiate changes in a firm, such as
replacing the CEO or restructuring the firm’s
businesses.
– Conflicts of interest can prevent board
members from making decisions that are in
the best interest of shareholders.
Copyright © 2004 South-Western. All rights reserved. 8–10
 Other Elements of Structure
• Internal auditor
– Responsible for ensuring that all
departments follow the firm’s
guidelines and procedures.

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 Other Elements of Structure
• Span of control
– The number of employees managed by each
manager.
– Narrow spans of control have fewer
employees reporting to each manager than
do wide spans of control.
• Organizational height
– Tall organizations have many layers.
– Short (or flat) organizations have few layers.

Copyright © 2004 South-Western. All rights reserved. 8–12

 Distinguishing
between a Narrow
and Wide Span of
Control

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.3 8–13

 Other Elements of Structure
• Centralization
– Most authority is held by high-level
managers.
– Middle and supervisory managers are not
allowed to make many decisions.
• Decentralization
– Authority is spread among several divisions
or managers.
– Autonomous divisions can make their own
decisions and act independently.
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 Decentralization
• Advantages • Disadvantages
– Reduces operating – May force some managers
expenses by eliminating to make major decisions
unnecessary positions even though they lack
– Assigning power to lower experience or prefer not to
level employees can make such decisions
shorten the decision- – Assigning an excessive
making process amount of responsibilities
– Delegation of authority to middle and supervisory
can improve employee managers might make it
morale and decision hard for them to complete
making skills all of their tasks

Copyright © 2004 South-Western. All rights reserved. 8–15

 Decentralization (cont’d)
• Proper Degree of Decentralization
– Depends on the skills of the managers who
could be assigned more responsibilities
 High level managers should retain authority
for tasks requiring their specialized skills.
 Routine decisions about tasks should be
made by employees closely involved with
the tasks; may lead to better decisions.
– Centralization is often necessary to allocate
resources to various divisions in the firm and
maximize the firm’s value.
Copyright © 2004 South-Western. All rights reserved. 8–16
 Downsizing and Decentralization
• Companies have attempted to cut
expenses by eliminating job positions
 Downsizing has resulted in flatter
organization charts with fewer layers of
managers.
 Managerial jobs are eliminated and their
responsibilities are delegated to other
employees (decentralization).
 Downsizing has increased managers’ span
of control and lead to the combination of
various job responsibilities.

Copyright © 2004 South-Western. All rights reserved. 8–17

 Effect of Downsizing on Span of Control

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.4 8–18

Types of Organizational Structure
• Line organization
– Contains only line positions
 Job positions are established to make
decisions that achieve specific goals.
• Line-and-staff organization
– Includes both line and staff positions
 Staff positions support the efforts of line
positions.
– Assigns authority from higher-level
management to employees
Copyright © 2004 South-Western. All rights reserved. 8–19
 Line Organization

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.5a 8–20

 Line and Staff Organization

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.5b 8–21

 Structure and Employee Input
• Structure can be adjusted to obtain
greater employee input
– Matrix organization structure
 Enables various parts of the firm to interact
and focus on specific projects
 Brings together employees with different
perspectives
 No one employee may feel responsible for
project
 Reduces time available for completing
normal tasks
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 A Matrix Organization for a Special Project
to Design a New Computer System

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.6 8–23

 Structure and Employee Input
• Intrapreneurship
 Structure can be adjusted to obtain greater
employee input
– Encouraging employees to offer ideas for
changes that enhance the firm’s value.
– Assigning employees to act as if they were
entrepreneurs running their own companies.
• Informal Structure
 Allows employees to substitute for each
other to complete tasks on time.
 Reduces amount of manager involvement.

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 The “grapevine”
• The informal communication network
among employees
– Advantages
 Friendships increase job satisfaction
 Allows information to flow from top to
bottom of the organization and vice versa.
– Disadvantages
 Employees may get incorrect or
unfavorable information.
 Employee morale can be affected.

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 Departmentalizing Tasks
• Assign tasks and responsibilities to
different departments
– By employee functions
– By type of product produced
– By geographic location
– By type of customer

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 Departmentalizing by Function

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.7 8–27

 Departmentalizing by Product

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.8 8–28

Departmentalizing by Product and Function

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.9 8–29

Flow of Information Across Departments

Copyright © 2004 South-Western. All rights reserved. Exhibit 8.10 8–30

 Chapter Summary
• Structure identifies responsibilities for
each job position and relationships
among positions
– Line-and-staff
– Matrix
– Intrapreneurship
• Main methods of departmentalization
– Function – Product
– Location – Customer
Copyright © 2004 South-Western. All rights reserved. 8–31