Organizational Structures (on the basis of functions & Divisions)
On The Basis Of Functions &
Divisions (Product, Geographic,
Organizational Structure refers to the differentiation (differences
in the orientations among the managers if different departments
and differences in formal structure among these departments)
and integration (quality of the state of collaboration for achieving
unity) of activities and authority, role and relationships.
An organization structure specifies the various job tasks and
shows how them same are formally divided, grouped, and
It provides an appropriate framework for authority relationship. It
indicates the hierarchy of authority and the reporting
Choice of an organization’s strategy (stability strategy/growth
strategy) is determined by three basic factors (contingency
factors): (i) the organization’s size, (ii) technology used by the
organization (for converting the financial, human and physical
resources into products and services), and (iii) environmental
Organization design aspects broadly include how the
organization is structured, the types and numbers of jobs, and
the processes and procedures used to:
handle and pass information
plan, develop and manage resources
innovate and handle crises
PURPOSES OF THE ORGANIZATION DESIGN
to support the organization’s strategy. The structure should be
designed in such a way as to assure the realization of the
organization’s goals and objectives.
to arrange resources in the most efficient and effective way
to provide for the effective division of tasks and accountabilities
among individuals and groups
to ensure effective co-ordination of the organization’s activities
and clarify the decision-making processes
to enhance and elucidate the lines of communication up, down and
across the organization
to permit for the effective monitoring and review of the
to endow with mechanisms for coping with change in markets,
products and the internal and external environments
to aid the handling of crises and problems
to help to motivate, manage and give job satisfaction to
individual members of the organization
to provide for management succession
PRINCIPLES OF GOOD ORGANIZATIONAL DESIGN
The various parts of the structure should be divided into
specialist areas. These specialist areas need to be interlinked.
The number of levels in the structure, sometimes referred to as
the scalar chain, should be as few as possible.
The span of control will vary according to the nature of the jobs
and the organization, but it should not be so narrow that it
results in a structure with too many levels, or too broad to allow
There should be what has been described as unity of command.
For this the reporting positions and authority need to be clearly
Every post in the structure should have a clear role and add
value to the way the organization functions.
The extent to which the organization should be centralized or
decentralized will need to be determined by reference to a
number of factors. These include the nature and type of
industry, geographical dispersion, history, environment,
resources available etc.
The structure must be designed to take account of changes in
the environment, which can include the economy, legislation,
markets, technological developments, geography, cultural
environment, and social environment.
SIZE AND ORGANIZATION DESIGN
Size as a key structural variable is subject to two schools of
thought. The first approach, often called the “bigger is better”
model, presupposes that the per unit cost of production
decreases as the organization grows. In effect, bigger is said to
be more efficient.
The second approach i.e. “small is beautiful” revolves on the law
of diminishing returns. Large and impersonal organizations are
said to trigger apathy and alienation, with resulting problems
such as turnover and absenteeism.
Recent research hints that when designing their organizations,
managers should stick to a middle ground between “bigger is
better” and “small is beautiful” because both models have been
oversold. The best that managers can do is check the
productivity, quality, and efficiency of divisions, departments,
and profit centers.
ENVIRONMENT AND ORGANIZATIONAL
Environmental complexity is an estimate of the magnitude of
the problem and opportunities in the organization’s
environment. This is identified by three main factors:
a) Environmental Richness
b) Environmental Interdependence
c) Uncertainty and Volatility
Dynamism relates to the stability or instability of the
environment. It is presumed that when the task and
environmental uncertainty contingency is low, the mechanical
structure and when the task and environmental uncertainty
contingency is high, an organic structure produces high
STRATEGY AND ORGANIZATION DESIGN
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. Basically
two types of strategies are popular at present:
These are in terms of cost focus and product focus. According to
Michael Porter, companies need to differentiate and place
themselves differently from their competitors in order to build
and sustain a competitive advantage. These strategies are shown
in Figure 2.
As middle and lower-level managers bring about minor
modifications and adjustments to solve specific problems and
capitalize on specific opportunities, they and their firms may
learn new skills.
These skills may be recognized by senior management and give
them the opportunity to adjust, modify, and build upon a generic
strategy to develop a competency strategy. In the process of
building upon its capabilities, the firm may actually move generic
strategies and/or combine elements of two generic strategies.
Figure 3 illustrates, specific strategic choices or decisions reflect
how the dominant coalition perceives environment constraints
and the organization’s objectives.
In summary, strategy influences structure and structure influences
strategy. Strategic choice theory and research teaches managers at least
two practical lessons. First, the environment is just one of many co
determinants of structure. Second, like any other administrative process,
organization design is subject to the byplays of interpersonal power and
TECHNOLOGY AND ORGANIZATION DESIGN
Two important technological contingencies that influence the
type of organizational structure are the variety and
analyzability of work activities.
Variety refers to the number of exceptions to standard
procedure but can occur in the team or work unit.
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). These situations, such as
automobile assembly lines, have high formalization and
centralization as well as standardization of work processes.
These situations call for an organic structure, one with low
formalization, highly decentralized decision-making authority,
and coordination mainly through informal communication among
High-variety and high-analyzability tasks have many exceptions
to routines, but these exceptions can usually be resolved
through standard procedures. Work units that fall into this
category should use an organic structure, but it is possible to
have somewhat greater formalization and centralization due to
the analyzability of problems.
HISTORY present structure may have developed over a number
of years, as functions have been added, changed or deleted. It is
also more likely to have determined the current structure
The organization’s if there have been relatively little pressures on
the organization to adapt to changing circumstance.
CUSTOMERS AND MARKETS
The organization structure is also affected by the type of market
and customers it serves, and in a customer-responsive
environment this should be one of the main determinants of
structure. Customer-based structure is more likely to lead to
long-term success for the organization and it gives a clear focus
to the organization.
The processes used within the organization also affect the
structure. A production line process consists of a number of
distinct tasks carried out by people specializing in those tasks at
different stages of the process.
There are of course disadvantages to this approach, primarily in
terms of maintaining the motivation and morale of production line
operatives and there is less focus on the customer. The advantages
of organization of the basis of process or technology is that it
allows for task specialization which means that people can develop
a high degree of skill and the emphasis on the outputs from a
particular process can result in high productivity.
People in the organization affect the structure in a number of
ways. Structures do not just appear, they are the result of
people’s views and beliefs and their approach to managing the
The geographical spreading of an organization affects its structure
mainly because of its need to be near raw materials or customers.
When there is a strong need to provide products or services within a
particular geographical area, the organization may be divided into
regions or areas, with each being a fully self-contained, miniature
version of the parent organization. The advantages of a
geographically based structure is that it makes firm able to provide
a complete service at one location and a degree of autonomy can
provide for more efficient decision-making and increase job
PRODUCTS AND SERVICES
The structure may be determined by the particular products and
services provided. Large and diverse organizations have separate
divisions because they are dealing with very different products and
Span of Management(Span of Control)
It is the ability of a manager to effectively supervise a finite
number of people.
Effectiveness & efficiency in a organization is determined by the
no. of people a manager can effectively handle.
It is of two types:-
TYPOLOGY OF ORGANISATION STRUCTURES
Line Organization and Line and Staff Organization
Functional Organization Structure
Product Organisation Structure/ Divisional Structure
Formal and Informal Organization
Centralization and Decentralization
Mechanistic and Organic Structures
Line organization is the simplest form of organization structure.
It is based on the scalar principle, which states that authority and
responsibility should flow in a direct line vertically from the
highest level of the organization to the lowest level.
The primary emphasis in the line organization is upon the
One of the advantages of the line organization is that it
facilitates decision making and execution because there is a
definite authority at each level of the hierarchy. However, the
disadvantage is that if a wrong decision is made at the top level,
the same is carried out simply without anybody down the line
venturing to point out its deficiencies.
LINE AND STAFF ORGANISATION
Most business organizations, except the very small, have this
type of structure.
In line and staff organization, the line authority remains the
same as it does in the line organization i.e. the authority flows
from top to bottom; and the line executives perform the major
functions; the staff functionaries support and advise the line
executives. For example, for sound management of human
resources, the line managers are provided specialized assistance
through personnel/Human Resource managers. As staff
functionaries are employed to perform supportive role, they do
not have any power of command in the organization (Figure 2).
The main advantage of line and staff organization is that the staff
specialists relieve the line executives of the botheration of concentrating on
specialized functions like selection, training, development, wage and salary
administration, accounting, public relations etc. However, the disadvantage
of this structure is that since functionaries are not accountable for the
results, they may not be performing their duties effectively.
FUNCTIONAL ORGANISATION STRUCTURE
This is the most widely used form of organization structure. Here
the tasks are grouped together on the basis of common
functions. The functional structure suits best to the small to
medium organizations producing one or a few products.
The main advantages of this type of structure is that the
organization can facilitate both people utilization and
coordination in the service of the whole organization. The
functional grouping also provides opportunities for promotion
and career development.
One of the major disadvantages of this form of organization is
the growth of sectional interest which may conflict with the
needs of the organization as a whole.
PRODUCT ORGANISATION STRUCTURE /
This form of organization structure is adopted by large companies
producing a wide range of products. Here, the activities are
grouped on the basis of the individual products manufactured by
the company. The organization structure of a large multi-product
pharmaceutical company is illustrated in Figure 4.
One of the advantages of the product organization is that it
enables diversification of the products to take place with minimal
effort. Another advantage is that it can cope better with
technological change by grouping people with expertise and their
specialized equipment in one major unit. The main disadvantage
of the product organization is that each product division may
promote its own product group in a way that creates problems to
other product divisions of the company.
Organizations that are spread over a wide area may find
advantages in organizing along geographic lines so that all the
activities performed in a region are managed together.
Companies that market products globally sometimes adopt a
geographic structure. In addition, experience gained in a regional
division is often excellent training for management at higher
Some of the advantages of this structure are
Serve local needs better
More effective communication between firm and local customers
N o r t h e r n
R e g i o n
W e s t e r n
R e g i o n
S o u t h e r n
R e g i o n
E a s t e r n
R e g i o n
C o r p o r a t e
M a n a g e r s
C E O
C o r p o r a t i o n
Some of the Disadvantages are:-
Conflict between local and central management
Duplication of resources and functions
L a r g e B u s i n e s s
C u s t o m e r s
S m a l l B u s i n e s s
C u s t o m e r s
E d u c a t i o n a l
I n s t i t u t i o n s
I n d i v i d u a l
C u s t o m e r s
C o r p o r a t e
M a n a g e r s
C E O
C o r p o r a t i o n
Market structure is used to group employees on the basis of specific
market the company sells in. A company could have 3 different markets
they use and according to this structure, each would be a separate
division in the structure.
The hybrid form combines features of both functional and divisional
forms. When an organization starts to get very large, functions that
are considered important to each product are decentralized to the
units; however, some functions like finance and accounting are
centralized at headquarters for practical reasons (Figure 5).
The important advantages of hybrid structure are:
The overall organization enjoys the benefits of both functional and
product (decentralized) structures.
It provides the opportunity to improve coordination both within and
It enables the organization to pursue an adaptive strategy within
the product divisions while at the same time achieving efficiency in
the functional departments. It helps in proper alignment of
corporate and divisional goals.
A major disadvantage of the hybrid structure is that it often leads to
excessive duplication of activities between functions and divisions.
Another disadvantage is its tendency to create conflict between
headquarters and divisional functions.
FORMAL AND INFORMAL ORGANISATION
The formal organization structure refers to a structure of
clearly defined jobs, each bearing a definite amount of
responsibility and authority.
The formal organization lays down formal procedures, rules and
regulations, which guide the behavior of individuals performing
The informal organization is the outcome of social interaction
that takes place between the individuals of the formal
organization. When people work together they tend to form
informal work groups, often spontaneously, because of physical
proximity, commonality of interest etc.
Unlike the formal organization, the informal organization is
unstructured and not given. Generally, it is an unofficial
organization born out of a formal organization.
An informal organization has its own structure, roles, procedures,
norms and values which are unwritten and are evolved through
consensus among the members of the informal groups. The
communication patterns are not fixed and as such communication
may flow in any direction.
It serves as a useful channel of communication and it lightens the
workload of the management, if the latter gives due importance
to the informal workgroups.
It reduces the undesirable effects of the rigidities of the formal
organization and also provides a safety valve for employee
CENTRALISATION AND DECENTRALISATION
The term Centralization refers to concentration of decision
making at a single point in the organization. In contrast, when
the top management gives maximum, though not complete,
discretion to the lower level personnel in the organization to
make decisions, then it can be said that there is decentralization
in the organization.
In a decentralized organization, action can be taken more
quickly to solve problems, and more people provide inputs into
decisions. With most of the large companies now preferring to
make organizations more flexible and responsive, there has been
a marked change towards decentralized decision making.
The main advantages of decentralization are:
It reduces the burden of the top management by freeing them
from many operational decisions, and enables them to
concentrate on their strategic responsibilities
It can contribute to staff motivation by enabling middle and
lower level managements to get a taste of responsibility, and by
encouraging the use of knowledge, innovation, and initiative by
The main disadvantages of decentralization are:
It requires greater coordination by senior management to ensure
that individual units in the organization are not working against
the interests of the whole organization
Decentralization does require a plentiful supply of capable and
well-motivated managers, who are able to cope with increased
responsibility which decentralization brings about.
A vertical organization is that in which the size of the
hierarchical chain of command is long i.e. the number of
hierarchical levels are high.
The main advantages of the vertical organization are:
They provide better communication of the organization’s
mission, values, and goals to all employees
These organizations have the ability to sustain a very high degree
of specialization of functions and roles.
The principal disadvantages are:
Too many hierarchical levels consume more time for
communication and the same may lead to delays in decision
The scope for initiative and risk taking at operational levels
As the traditional vertical, hierarchical structures of the
organizations are being considered inappropriate to the
requirements of the changing environment, an increasing
number of modern organizations prefer the use of horizontal
The horizontal structure facilitates cooperation, teamwork, and
customer orientation rather than a functional orientation.
Horizontal structures are created around three to five core
processes for the time rather than traditional departmental
The vertical hierarchy is flattened to reduce the levels of
supervision. This is done by combining the fragmented tasks,
eliminating work that fails to add value, and by cutting to the
minimum activities within each process.
Multi-disciplinary/ cross functional self-managed teams
(composed of personnel from different functional areas like
finance, marketing, human resource, quality control and
operations) are created to handle the core processes, and each
team are entrusted with a core process.
For horizontal structure to work, employees are brought into
direct contact with customers as well as suppliers.
All employees should be provided with all data, and they should
be trained for analyzing and use the data to make effective
decisions as team members.
All employees are encouraged to develop multiple skills; and
those who develop are rewarded.
The main advantages of horizontal organization are:
Decisions can be taken more quickly to solve problems
A horizontal structure has fewer problems of coordination.
One of the disadvantages of the horizontal structure is the
absence of proper reporting to superiors by the subordinates
because of decentralization.
When an organization undertakes a big project or a number of
small projects, it creates project organization(s) for the
completion of the same. This is done because the existing
functional structure of the organization may not be suitable to
complete the projects which are time bound and are subject to
high standards of performance as in the case of aero space and
A project organization is separate from and independent of
functional departments of the company. Headed by a Project
Manager, every project organization consists of a team of
specialists drawn from different functional areas of the company
or from outside.
The project organization is suitable when the company gets a one-
time assignment or a huge contract or when the company faces a
unique challenge. The main advantages of the project organization
The participating specialists of the project team get opportunity for
prompt, expeditious and effective accomplishment of the goals of
It facilitates speedy communication between the project manager
and the team members
It provides flexibility in handling various tasks.
The major disadvantages of the project organization are:
The entire project becomes meaningless, if the project manager fails
to coordinate the activities of the project properly
The members of the project organization have to sever the contacts
with the mainstream organizational life.
The job of the project manager becomes very difficult because he
has to deal with specialists from a number of diverse fields.
The matrix organization combines two forms of
departmentalization— functional and product.
It is built around a project which is headed by a Project
Manager. The Project Manager is also known as Product Manager
as he is responsible for the output (product) of the project. The
project teams comprise of employees (specialists) drawn from
different functional departments such as the Human Resources,
Finance, Production, Marketing, and Research & Development
Departments of the Company.
Thus, the employees of the matrix have two bosses: their
Functional Departmental Managers and their Project Manager.
Some of the advantages of the matrix structure are:
It facilitates coordination when the organization has multiple
complex and interdependent activities
It ensures the effective utilization of the services of the people
with highly specialized skills
The direct and frequent contact between the different functional
specialists in the matrix ensures better communication and more
The major disadvantages of the matrix structure are:
This structure breaks the unity-of-command concept. Reporting to
one boss introduces role conflict and role ambiguity
It fosters power struggle between product (project) managers and
functional managers who share the same set of resources
A matrix organization incurs higher costs than an organization with
a conventional hierarchy.
The matrix structure is used in advertising agencies, aerospace firms,
R & D laboratories, construction companies, hospitals, government
agencies, universities, management consulting firms, and
DESIGNING ORGANIZATION FOR FUTURE
Features of Futuristic Organization:-
Organization of resources based upon common boundary of
Flexible & loose nature of organization.
Streamlining of operating processes.
Localized planning and decision making.
Elimination of middle level management.
Focus on Multiple Skills and broad job description.
Organizational Culture based upon mutual trust, review progress
and problem solving drills.
EMERGING CONCEPT OF ORGANIZATION
The Modern Organization should reap benefits of
standardization and at the same time give processes greater
It will allow rapid changes in design and product & rapid
responses to market demands.
Organization Structure should be integrated with shared values,
beliefs and assumptions the employees enjoy.