Chapter 6 – Organizing the Business
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I.
What is Organizational Structure?
Organizational structure is the specification of the jobs to be done within an organization and the ways in
which those jobs relate to one another.
A. Organization charts:
Organizational charts are prepared to clarify structure and to show employees where they fit into the
firm’s operations. The chain of command represents the hierarchy of who reports to whom in the
organization.
B. Determinants of organizational structure
Numerous factors influence the planning and creating of an efficient organizational structure. Managers
not only consider the organization’s purpose, mission, and strategy, but also the organizations size,
technology and environmental changes.
II.
The Building Blocks of Organizational Structure
The first step in developing the structure of any business involves three activities: specialization,
departmentalization, and establishing the decision-making hierarchy.
A. Specialization
Job specialization, a natural part of an organization’s growth, is the process of identifying the specific jobs
that need to be done and designating the people who will perform them. Job specialization may even
involve breaking jobs into small components prior to assigning them to individuals.
1. Specialization and growth: In a very small organization, the owner may perform every job. As the firm
grows, however, so does the need to specialize jobs so that others can perform them.
B.
Departmentalization: Departmentalization is the grouping of similar or related jobs into local units.
Departmentalization allows the firm to treat each department as a profit center – a separate company unit
responsible for its own costs and profits. Several types of departmentalization exist:
1. Product Departmentalization: Organizations are divided according to the products or services being
produced.
2. Process Departmentalization: Organizations are divided according to production processes used to
create a good or service.
3. Functional Departmentalization: Organizations are divided according to a group’s functions or
activities. Examples include a firm’s production, marketing, human resources, accounting and finance
departments.
4. Customer Departmentalization: This grouping of job simplifies shopping by providing identifiable store
segments.
5. Geographic Departmentalization: Organizations are divided according to the areas of the country or
world they serve.
6. Multiple forms of Departmentalization: Larger companies tend to adopt different types of
departmentalization for various levels.
C. Establishing the decision-making hierarchy
Establishing the Decision-Making Hierarchy
The decision-making hierarchy is created by assigning tasks, performing tasks, and distributing authority.
1. Distributing authority: Centralization and decentralization
Some managers make the conscious decision to retain as much decision-making authority as possible at
the higher levels of the organizational structure; others decide to push authority as far down the hierarchy
as possible.
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(i)
(ii)
(iii)
(iv)
III.
Central organizations: In a centralized organization, authority is held by upper-level management.
Decentralized organizations: In a decentralized organization, authority is delegated to lower
levels of management
Tall and Flat organizations: Tall organizations are multi-tiered, characterized by many layers of
employees; flat organizations have few layers of employees.
Span of control: A manager’s span of control is the number of people managed by one supervisor;
many factors can lead to a wide or narrow span of control.
2.
The Delegation process
Delegation begins when responsibility is granted to a subordinate from a supervisor. Responsibility is the
duty to perform an assigned task; authority is the power to make decisions necessary to complete the task.
Accountability is the obligation employees have to their manager for the successful completion of the
assigned task.
3.
Three forms of authority
Forms of authority result when individuals are delegated authority and responsibility in a firm. Various
forms of authority may be found in any given company.
i.
Line authority: This authority flows vertically up and down the chain of command
ii.
Staff authority: This authority is found among departments of advisors and counselors,
including specialists, such as lawyers, engineers, accountants, and human resources
personnel. These individuals help line departments in making decisions but do not have
authority to make decisions.
iii.
Committee and Team authority: This is the authority that is granted to committees and teams
that play central roles in the firm’s daily operations. Employees are typically empowered to
plan and organize their own work with minimal supervision.
Basic Forms of Organizational Structure
Four basic forms of organizational structure reflect the general trends followed by most firms: Functional,
Divisional, Matrix, and International.
A. Functional structure
Often used by most small and medium-sized firms, functional organizations divide job responsibilities by
functional areas, such as marketing and finance.
B.
Divisional structure
Corporate divisions usually operate under this structure as relatively autonomous businesses – under the
larger corporate umbrella. Divisions are departments that resemble separate businesses in that they
produce and market their own products.
C.
Matrix structure
Sometimes a “combination” structure – one that combines two separate structures – works better than
either simpler structure alone. A so-called matrix structure is organized along two dimensions, instead of
just one, by combining, for example, a functional and a divisional structure.
D. International structure
International organizational structures have been developed in response to the need to manufacture,
purchase, and sell in global markets.
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E.
IV.
Organizational Design in the Twenty-first Century
Among the most popular new forms of organization are team organization, virtual organization, and
learning organization.
1. Team organization: Team organization relies mostly on project-type teams; people float from one
project to another as dictated by their skills and the demand of the projects.
2. Virtual organization: This organization has little or no formal structure; this organization exists only in
response to its own needs
3. Learning organization: The learning organization works to integrate continuous improvement with
continuous employee learning and development.
Informal Organization
Frequently, the informal organization – everyday social interactions among employees that transcend formal
jobs and job interrelationships – effectively alters a company’s formal structure.
A. Informal groups
Informal groups are groups of people who decide to interact among themselves. Informal organizations
can be just as powerful as formal organizations.
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B.
Organizational Grapevine
The grapevine, or the rumor mill, is an informal communication structure in which people communicate
through ways that transcend the formal communication processes.
C.
Intrapreneuring
A relatively new concept, Intrapreneuring is encouraged among businesses as a way of enhancing
creativity and flexibility in large, bureaucratic structures.