8.1 Defining Organizational Structure

Organizational structure is the formal arrangement of jobs within an organization. When managers develop or change the structure, they are engaged in organizational design.

Organizational Design. Organizational design is a process that involves decisions about six key elements:

Work Specialization

It is about dividing of work activities in an organization into separate job tasks.

The essence of work specialization is that an entire work activity is not done by one individual, but instead is broken down into tasks with each task completed by a different person.

Work specialization increases productivity however, at some point, it could cause human diseconomies; boredom, fatigue, poor quality, increased absenteeism and high turnover.

Departmentalization

Departmentalization is the basis by which jobs are grouped together is called departmentalization.

Every organization will have its specific way of classifying and grouping groups.

There are five common forms of departmentalization:

8.1 Defining Organizational Structure

Functional departmentalization: It groups jobs by functions performed, for example, engineering, production, marketing and finance. Because this approach permits employees to do specialized tasks, it creates a high degree of efficiency. However, in functional departmentalization it may be difficult to coordinate products and services, which could result in diminished responsiveness to the needs of customers and when employees are assigned to functional departments, they tend to identify with the functional departmental goals rather than with organizational goals or customer needs.

Product departmentalization: It groups jobs by product lines. For example, a computer company is structured into three divisions; computer, software and consulting services. This structure allows employees to develop expertise in both a function and a line of products or sieves. A salesperson in the computer division can develop specialized product knowledge in selling computer systems without knowing about software or consulting services; the salesperson is likely to produce more sales revenues by focusing on computer systems rather than trying to sell software and consulting. The primary disadvantage is duplication and that it can be difficult to achieve coordination across the different product departments.

8.1 Defining Organizational Structure

Geographical departmentalization: It groups jobs on the basis of geographical region. It allows an organization to focus on customer needs that may vary by geographic region or market. For example, an organization of a fast food company with United States and Canadian, Latin American, European and Asian divisions. This structure allows each division manager to satisfy customer tastes and preferences in the region. American and Canadian menus may focus on hamburgers; the menu may add chicken burgers in India, since beef is a forbidden food for many Indians, and noodle soup for China; and the European menu may make wine available to French, Italian and Spanish customers who customarily drink wine with meals. The primary disadvantage is that it can lead to duplication of resources and it can be difficult to coordinate departments that are literally thousands of miles from each other.

Process departmentalization: It groups jobs on the basis of product or customer flow. Work activities follow a natural processing flow of products or even of customers. This type of departmentalisation supports an efficient flow of work activities. Its primary disadvantage is that it can be used with only a certain types of products.

8.1 Defining Organizational Structure

Customer departmentalization: It groups jobs on the basis of specific and unique customers who have common needs or problems that can best be met by having specialists for each. For example, American Express is organized into departments that cater to consumers (Cards, Travel & Entertainment, Financial Advisors, and Banking) and business people (Corporate Card Services and Merchant Services). The primary disadvantage of customer departmentalisation, like product departmentalisation, it leads to duplication of resources. It can also be difficult to achieve coordination across different customer departments. In addition, the emphasis on meeting customers' needs may lead workers to make decisions that please customers but hurt the business. Large organizations often combine most or all of these forms of departmentalization.

Chain of Command

The chain of command is the line of authority extending from upper organizational levels to the lowest levels, which clarifies who reports to whom.

There are three other related concepts which are authority, responsibility and unity of command.

Authority: It refers to the rights inherent in a managerial position to tell people what to do and to expect them to do it. An organization's managers, who are in the chain of command, are granted a certain degree of authority to do their job of coordinating and overseeing the work of other people.

8.1 Defining Organizational Structure

Responsibility: As managers assign work to employees, those employees assume an obligation to perform any assigned duties. This obligation or expectation to perform is known as responsibility. Responsibility is the duty to perform assigned tasks.

Unity of command: Lastly, the unity of command principle states that a person should report to only one manager. Without unity of command, conflicting demands and priorities from multiple bosses can create problems.

Span of Control

It determines the number of levels and managers an organization has.

A manager with a small span of control supervises a small number of subordinates and can closely monitor the work of each subordinate.

Small spans of control are usually associated with many levels of management, which gives rise to a tall vertical organization structure.

Larger spans of control mean more responsibility is pushed to lower levels and result in fewer management levels.

Executives at well-managed companies such as General Electric take pride in having fewer levels separating top management from first-level operative employees who deal with customers or produce the product.

8.1 Defining Organizational Structure

A large span of control works best when there are routine tasks, highly trained subordinates, competent managers, similar jobs with comparable performance measures and subordinates who prefer autonomy.

Centralization and Decentralization

Centralization describes the degree to which decision-making is concentrated at upper levels of the organization.

Centralized companies can coordinate activities in a consistent ways across diverse units or departments of an organization.

With decentralization, decision-making authority is pushed to lower levels in the organization.

Decentralization is often more effective in rapidly changing environments where it is necessary to be responsive to changing customer needs and tastes.

Formalization

It refers to how standardized an organization's jobs are and the extent to which employee behaviour is guided by rules and procedures.

If a job is highly formalized, then the person doing the job has little discretion over what is to be done.

8.1 Defining Organizational Structure

An organization with high formalization provides employees with many documents that specify the "right way" to conduct business with customers or interact with other employees.

These documents include policy manuals, job descriptions, procedures, memos, and rulebooks.