Organizational Behavior
Block
IV
THE ORGANIZATION SYSTEM
UNIT 17
Foundations of Organizational Structure 1-17
UNIT 18
Decision Making 18-37
UNIT 19
Power and Politics 38-55
UNIT 20
Organizational Culture 56-73
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Organizational Behavior
Block
IV
THE ORGANIZATION SYSTEM
UNIT 17
Foundations of Organizational Structure 1-
UNIT 18
Decision Making 18-
UNIT 19
Power and Politics 38-
UNIT 20
Organizational Culture 56-
Expert Committee
Dr. J. Mahender Reddy Prof. S S George
Vice Chancellor Director, ICMR
IFHE (Deemed to be University) IFHE (Deemed to be University)
Hyderabad Hyderabad
Prof. Y. K. Bhushan Dr. O. P. Gupta
Vice Chancellor Vice Chancellor
IU, Meghalaya IU, Nagaland
Prof. Loveraj Takru Prof. D. S. Rao
Director, IBS Dehradun Director, IBS, Hyderabad
IU, Dehradun IFHE (Deemed to be University)
Hyderabad
Course Preparation Team
Prof. Ramalingam Meenakshisundaram Ms. Hadiya Faheem
IFHE (Deemed to be University) IFHE (Deemed to be University)
Hyderabad Hyderabad
Ms. Pushpanjali Mikkilineni Mr. Mrinmoy Bhattacharjee
IFHE (Deemed to be University) IU, Mizoram
Hyderabad Aizawal
Ms. Anurita Jois Ms. Padmaja
IU, Sikkim IU, Meghalaya
Prof. Tarak Nath Shah
IU, Dehradun
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For any clarification regarding this book, the students may please write to The ICFAI
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University Press welcomes suggestions from students for improvement in future editions.
The ICFAI University Press, Hyderabad
Unit 17
Foundations of Organizational Structure
Structure
- Introduction
- Objectives
- Definition of Organizational Structure
- Key Elements in Designing an Organizational Structure
- Types of Organizational Designs
- Organizational Designs and Employee Behavior
- Summary
- Glossary
- Self-Assessment Test
- Suggested Reading/Reference Material
- Model Answers
1. Introduction
The previous unit was about informal organizations and informal communications. This unit is about organizational structure.
Organizational structures lay the foundation for the accomplishment of organizational goals and objectives. The structure of organizations defines the framework within which employees are required to function. It also establishes the authority and responsibilities of all the individuals working in an organization. This, in turn, facilitates coordination among various activities and ensures the smooth functioning of the organization. Therefore, organizational structures have a tremendous impact on the success or failure of organizations.
This unit will explain the key elements in designing an organizational structure, the types of organizational design and will discuss the relationship between organizational design and employee behavior.
2. Objectives
By the end of this unit, students should be able to:
Define Organization Structure Explain the key elements in designing an organizational structure Describe the types of organization design Explain the relationship between organizational design and employee behavior
Pr
odu
cti
vity
Foundations of Organizational Structure
Figure 17.1: Economies and Diseconomies of Work Specialization
(High)
(Low) Work specialization^ (High)
Source: “Organization Design & S tr uctu r e, ” Managers and Management,
http://www.suu.edu/faculty/johnsonr/3180/ch7.ppt
Departmentalization by product: Large and complex organizations consisting of a wide array of product portfolios generally resort to departmentalization by product. In this method, the organization is split into a number of Strategic Business Units (SBU), each producing a particular product or service. The SBUs are independent of each other and provide wide scope for the personal development and growth of employees. Departmentalization by geography: In this method, grouping is based upon territories and regions. This helps organizations customize their products to suit the c u sto mer s! tastes and preferences and formulate strategies depending on the intensity of competition in the region. For example, a company can have marketing departments in the northern, eastern, southern, and western regions of a country. Departmentalization by process: In this method, the organization is divided into different departments based upon the work processes. For instance, a company manufacturing alloys may have different departments for the processes of hot rolling, cold rolling, casting, pressing, etc. Departmentalization by customer: Financial services companies serve a variety of customers such as individual customers, corporate customers, overseas customers, etc. Thus, organizations can form departments based upon the type of customers.
The Organization System
Activity: Suggest the most suitable form of departmentalization for each of the businesses given below and justify your answer: Shri Munshi Lal & Chand Company (Chand & Company) is a Lucknow-based company that manufactures and distributes a wide range of food products. The company!s product portfolio includes Chand biscuits, Chand barfi, and Chand mixture. Within a few years of its inception, the company!s products gained huge popularity all over Uttar Pradesh. Therefore, Chand & Company decided to expand its operations to cover the entire northern region of India. Which form of departmentalization do you think should the company adopt? MeGa Sys Pvt. Ltd. is a BPO situated in Bangalore that provides technical and non-technical support to its customers. The non-technical support includes answering inbound and outbound calls (related to general queries) of the customers. On the other hand, technical support services (to the customers) are categorized into various processes depending upon the technology of the products and services offered by the company (operating system, accounting package, etc.). To bring in more efficiency into its activities, the company plans to departmentalize its organizational structure depending upon the various functions in the organization. Suggest a type of departmentalization that would meet the requirements of MeGa Sys Pvt. Ltd. Answer:
Chain of command
Stephen Robbins defined the chain of command as the unbroken line of authority that extends from the topmost level to the lowest level of an organization hierarchy and clarifies reporting relationships within the organization. The concept of chain of command can be better understood with the help of the concepts of authority and unity of command.
Authority: This refers to the superior!s right to order the subordinate to act in a particular manner (i.e. regarding the performance of organizational tasks). The subordinates are also under an obligation to carry out the orders given by the superior.
Unity of command: According to unity of command, an employee should not report to more than one superior. If an employee is assigned tasks by more than one superior, it could lead to confusion and conflicts, affecting the performance of the employee.
The Organization System
communication that enables employees to receive information quickly and accurately. Since there are many employees at the same level, the efficiency of communication in flat structures depends heavily on the horizontal channel. Unless there is a high level of cooperation among employees, communication may not flow quickly.
Decision making tends to be fast in flat structures because of the limited number of layers. As there are only few managers to handle a lot of responsibilities, they are compelled to delegate some of them to their subordinates. This encourages decentralization.
Example: Departmentalization in ANZ ANZ Press manufactures and supplies paper to a leading newspaper company in I ndia. During an internal audit of the company!s accounts, the accounts o fficer noticed numerous instances of cash embezzlement. After thorough scrutiny, he discovered the root cause for the embezzlements. I t was found that the com pan y !s accounts department was divided into the expenses and receipts department. These departments were again subdivided depending upon the nature of the transactions -- capital or revenue. However, the employees of all these departments were supervised by a single accounts officer. As a result, the accounts officer was unable to thoroughly observe and control the activities of all the employees in the accounts department. Taking advantage of the situation, some of the employees had cleverly manipulated the accounts and misappropriated huge amounts. On discovering this, the accounts officer appointed two new officials, one each for the revenues and receipts departments, to bring more transparency into the operations and also to wield better control and supervision.
Compiled from various sources.
Centralization/Decentralization
In centralized organizations, power and authority are vested with the top management in the organizational hierarchy. In other words, the decision-making power lies with a single authority. Further, centralization can be functional, geographical, or analytical.
Functional Centralization: Here, the organization establishes a separate department for every function in the organization. These departments carry out their respective functions for all the business units of the organization. Geographical Centralization: All operations of an organization are performed in one geographic region. Analytical: Here , use of centralization depends upon the extent to which decentralization takes place in the organization. For instance, in a centralized organization, a manager may opt to delegate a few responsibilities to his subordinates.
Decentralization refers to the delegation of authority and decision-making power to all levels of the organization. Decentralization too can be functional, geographical, or analytical.
Foundations of Organizational Structure
Geographic Decentralization: Here, different business units situated in different geographic locations perform all the operations. Functional Decentralization: The organization does not set up different departments for different functions. All the subsidiaries or business units perform all the functions. Analytical: Here, use of decentralization again is dependent on the discretion of the manager. A manager may resent delegating responsibilities to subordinates in a decentralized organization, if he/she does not trust his subordinates.
Formalization
Formalization refers to the extent to which the rules and procedures of an organization govern the roles and responsibilities of employees in their work place. Organizations employ control over the employees with the help of these rules and procedures. The rules and procedures can be explicit or implicit.
Explicit rules and procedures: Explicit rules are written descriptions of the roles and responsibilities of the job to be done by the employees.
Implicit rules and procedures: When the rules and procedures are not written in books or manuals but it is imperative that the employees adhere to them, then they are called implicit rules.
Activity: SunRise is a shoe retailing company based in Lucknow. Over a period, the organization set up two more business units, one each at Agra and Varanasi. The power and authority was vested with managers at the Lucknow office and the managers of the two units (at Agra and Varanasi) did not have any decision-making powers. For instance, if the manager at the business unit in Agra estimated that there would be greater demand for products in a particular season and that he needed to stock extra levels of inventory, then he was required to discuss this with the head office situated in Lucknow. By the time he convinced the higher authority regarding the relevance of his unit!s needs, the decision was delayed. As a r e su l t, the unit lost out on valuable potential sales. Therefore, the managers of the business units at Agra and Varanasi decided to appeal to the top management to bring about a change in organizational structure. What according to you would be the ideal organizational structure for SunRise? Answer:
Foundations of Organizational Structure
c. Formalization d. Centralization
- Which of the following alternatives are definitely advantages of a flat organization structure?
i. Fewer levels in the hierarchy ii. It ensures smooth flow of communication enabling employees to receive information quickly and accurately iii. It provides an opportunity for good interaction between the manager and the subordinates
iv. Because of the limited number of layers, decision-making tends to be fast in such an organizational structure
a. i, ii, and iii b. i, ii, and iv c. i, iii, and iv
d. ii, iii, and iv
5. Types of Organizational Design
The three most commonly used types of organizational designs are:
Simple structure
Simple structures are characterized by centralized authority with a low degree of formalization, wide span of control, and a few departments. The main feature of simple structures is that the decision-making power is completely held by a single authority. The management of simple structures is also relatively simple because of fewer hierarchical levels. This type of organizational structure is most suitable for small organizations.
The bureaucracy
The bureaucratic model of organization was founded in the early 1900s by Max Weber (Weber), a pioneer in modern sociology. According to him, the model complied with the values of Western culture which emphasized rationality. Weber believed that the bureaucratic model was rational in its approach. However, one major setback of this model is that during organizational restructuring, bureaucracy becomes a major barrier to implementation of change.
According to Weber, the following are the characteristics of a bureaucratic organization:
Work specialization: Bureaucratic organizations must clearly define the roles and responsibilities of employees, to avoid confusion regarding roles. Also the employees must be given the required authority to carry out their tasks effectively.
Division of labor: Division of labor enables the employees to gain expertise in a particular skill. But repetition of the same task gives rise to boredom, fatigue, and stress in employees. Division of labor also divides people into blue collar (workers) and white collar employees and widens the gap between them, both in the organization and the society.
The Organization System
Abstract rules: Weber proposed that an organization should have well-defined rules and regulations which would ensure that the employees worked in a coordinated manner to achieve the goals of the organization. Impersonality of managers: According to Weber, managers of bureaucratic organizations must be devoid of feelings such as affection, enthusiasm, hatred, and passion. Only then, would they be able to act in an unbiased manner with subordinates and be able to take rational decisions. Hierarchy : Weber advocated a hierarchical structure for organizations in which the activities of employees at each level are monitored by employees at higher levels. Hierarchy ensures unity of command in the organization. It bestows power upon a few people to control and coordinate the activities of lower level employees. Hierarchy generally encourages vertical communication. Bureaucratic organizations are characterized by a hierarchical structure. In this system, every member in the organization is accountable for his/her actions. Authority flows from the top to the bottom and the decision-making power is vested with a few top officials. Vertical communication prevails in such organizations. Organizations that adopt rigid hierarchical structure discourage creativity and entrepreneurship in organizations. They cannot promptly respond to dynamic changes in market conditions and would lose ground to competitors. The matrix organization The matrix organization is a combination of two complementary structures – project structure and functional structure (Refer Figure 17.4). The matrix organization structures are not characterized by „unity of command.! Every subordinate in the organization has to obey orders given by the functional head and the project manager.
Figure 17.4: Matrix Structure
Product A (^) Product B Product C
Marketing
Human Resources
Customer Care
Information Technology
Source: „Matrix! ing your operations – A lesson in organizational structure,
http://www.prophix.com/pdfs/The_Matrix_Model.pdf.
The Organization System
Activity: Marvel India Pvt. Ltd. (Marvel) is a cement manufacturing company. It supplies cement to different construction companies in the state of Andhra Pradesh. The company has a simple organizational structure, characterized by a centralized authority, few departments, and a wide span of control. The heads of different departments report to a single authority, i.e., the company!s managing direc to r. Marvel recently accepted a prestigious long-term project from the Government of India (GoI). Since the project was huge, the company decided to appoint a project head who would be responsible for all the activities related to the GoI project. The project manager was allowed to outsource the services and sources required for the completion of the project to various departments of Marvel. As a result, the various departmental heads would now report to both the managing director as well as the project head. Keeping this in mind, Marvel decided to make suitable changes in its organizational structure. Suggest the changes required to be made in the organizational structure of Marvel India Pvt. Ltd.
Answer:
Check Your Progress
- Which of the following is definitely a characteristic of an organization with a simple organizational structure? i. Wide span of control
ii. Few departments
iii. Centralized authority
iv. High degree of formalization
a. Only i, ii, and iii b. Only i, ii, and iv c. Only i, iii, and iv d. Only ii, iii, and iv
- In what kind of organizational structure is decision-making power for the entire organization vested in one person at the top? a. Bureaucracy b. Simple structure c. Matrix structure d. None of the above
Foundations of Organizational Structure
- What are the disadvantages of division of labor? a. Decrease in productivity and efficiency of an organization b. Repetition of the same task gives rise to boredom, fatigue, and stress in employees c. Division of labor segregates people into blue and white collar employees, and widens the gap between them, both in the organization and the society. d. Both (b) and (c)
- Which of the following statements are definitely true about organizations adopting a rigid hierarchical structure? a. They discourage creativity and enterprenuership b. They cannot promptly respond to dynamic changes in market conditions c. Authority flows from the top to the bottom and the decision-making power is vested with a few top officials. d. All of the above
- Which of the following structures combines the features of project design with those of a functional one? a. Tall structure b. Simple structure c. Bureaucratic structure d. Matrix structure
- Matrix structure is a modern structure for organizational design. Which of the following alternatives refer to the main advantage of this structure? a. It facilitates coordination between various complex functions of the organization. b. It ensures unity of command in the organization c. It enables the organization to allocate functional specialists among different departments effectively d. It encourages vertical communication.
6. Organizational Design and Employee Behavior
One cannot conclude that a specific organizational structure will definitely lead to improved employee performance and increased job satisfaction. It has been observed that the personal preferences of individuals play a major role in shaping their organizational behavior. Individuals who prefer to be guided in their work by standard rules and procedures are comfortable with tasks that require a low level of skills, and can be performed mechanically. Such employees are most productive in mechanistic structures where there is a high degree of work specialization. Some employees are able to work to their full potential only when they are under minimum supervision. They are most productive in organization structures where there is a wide span of control. And employees with high self-esteem and self-confidence prefer making their own decisions and hence show more productivity in decentralized organization structures. Therefore, it is difficult to relate organizational design to employee behavior in organizations.
Foundations of Organizational Structure
In simple structures, there is centralized authority and a wide span of control. The decision-making power and authority are vested with the top management. Bureaucratic organizations are characterized by work specialization and division of labor, abstract rules and regulations, impersonal managers, and hierarchy. The matrix organization is a combination of pure project structure and pure functional structure.
8. Glossary
Decentralization – Decision discretion is pushed down to lower level employees.
Formalization – The degree to which jobs within the organization are standardized. Span of control – The number of subordinates a manager directs.
9. Self-Assessment Test
- Define organizational structure. How do the following elements help in effective designing of an organizational structure a) formalization b) chain of command c) span of control and d) centralization and decentralization?
- Briefly describe the various types of organizational structures.
10. Suggested Reading/Reference Material
“Organizat io n al Str u ct u r e,” http://choo.fis.utoronto.ca/FIS/Courses/LIS1230/LIS1230sharma/od2.htm. “Organizational Structures,” http://www.martinfowler.com/apsupp/accountability.pdf.
11. Model Answers
1. (a) Departmentalization The process in which jobs are grouped together to bring coordination among organizational tasks is called departmentalization. Chain of command is defined as the unbroken line of authority extending from the topmost level to the lowest level of an organization and clarifies reporting relationship within the organization. Span of control refers to the ratio of managers to (immediate) subordinates. The degree to which rules and procedures govern the roles and responsibilities of employees is called formalization. 2. (b) Departmentalization by product Departmentalization by product involves breaking down an organization into small, independent units called Strategic Business Units, each of which produces a particular product or service. Departmentalization by function involves grouping people with similar skills into one unit, helping organizations utilize employee skills efficiently and achieve economy of scale. Departmentalization by process refers to the division into departments based on processes performed. Departmentalization by geography involves grouping of jobs on the basis of territory.
The Organization System
3. (d) i, ii, iii, and iv All the alternatives provided are benefits of work specialization. The practice of work specialization improves employee productivity and speeds up production in an organization. It is cost-effective to train employees in a single sub-task. If an employee has to perform all tasks for production of a particular product, a lot of time and energy is wasted in switching from one task to another. Also, the organization has to invest time and money in training each employee in different tasks. Work specialization allows organizations to allocate tasks to employees depending on their abilities, resulting in improved employee productivity and efficiency. 4. (b) In organizations following functional decentralization, there is a separate department for each function and it carries out that function for all business units of the organization. E xce pt „b! all other alternatives are true. „b! is false as in organizations following functional decentralization, there are no departments exclusively performing a particular function. All functions are performed by subsidiaries and business units. 5. (c) Formalization The degree to which rules and procedures govern roles and responsibilities of employees is referred to as formalization. Bureaucracy is an organizational design while span of control is the ratio of managers to subordinates. Centralization refers to the concentration of power and authority at the topmost level of the organization. 6. (b) i, ii, and iv
E xce pt alternative „iii! all others are advantages of a flat organization structure. Alternative „iii! is an advantage of tall organization structure.
7. (a) Only i, ii, and iii Except iv, all other alternatives are characteristics of simple organization. The characteristics of simple organization are: wide span of control, few departments, centralized authority, and low degree of formalization. 8. (b) Simple structure A firm with a simple organization structure has a wide span of control, few departments, centralized authority, and a low degree of formalization. Simple structures are easily managed as they have only a few levels of hierarchy (two to three). In simple structures, the decision-making power for the entire organization is vested in one person. This structure is generally used in small organizations like retail stores and small consultancies. 9. (d) Both (b) and (c) Only (b) and (c) are the disadvantages of division of labor. „a! is not a disadvantage as division of labor gives enough scope for employees to obtain expertise in a particular skill, which increases productivity and efficiency of an organization.