Unit – 3 ORGANIZATIONAL DESIGN

Classical, Neoclassical and Contingency approaches to organizational design; Organizational

theory and design, Organizational structure (Simple Structure, Functional Structure, Divisional
Structure, Matrix Structure).

Organizational theory:

Organizational theory is the study of how organizations function, how they are structured, and
how they interact with their external environments. It encompasses a wide range of
perspectives, models, and approaches that seek to understand and improve the design,
operation, and behavior of organizations.

Key Concepts in Organizational Theory

1. Organizational Structure:
o Organizational structure refers to how tasks are allocated, who reports to whom,
and the formal layout of the organization’s roles and responsibilities. Structures
can vary widely, from hierarchical to flat, centralized to decentralized, and can
be influenced by factors such as the organization’s size, strategy, and external
environment.
2. Organizational Culture:
o Organizational culture involves the shared values, beliefs, norms, and practices
that shape the behavior and attitudes of members within the organization.
Culture affects everything from decision-making processes to employee morale
and can be a critical factor in an organization’s success or failure.
3. Organizational Behavior:
o Organizational behavior studies the actions and attitudes of individuals and
groups within organizations. It focuses on understanding how people interact
within organizations, the dynamics of teamwork, leadership styles, motivation,
communication, and conflict resolution.
4. Organizational Design:
o Organizational design refers to the process of shaping an organization’s
structure and roles to align with its goals and environment. It involves
determining how tasks are divided, how authority is distributed, and how
resources are allocated to achieve the organization’s objectives efficiently and
effectively.
5. Organizational Change:
o Organizational change examines how organizations evolve over time, how they
adapt to internal and external pressures, and the processes by which change is
managed. This includes understanding the forces that drive change, the barriers
to change, and strategies for successful change management.
 6. Organizational Environment:
o The organizational environment encompasses all external factors that influence
an organization, such as economic conditions, technology, competition,
regulations, and social trends. Understanding the environment is crucial for
organizations to adapt and remain competitive.

Major Approaches in Organizational Theory

1. Classical Approach:

The Classical approach focuses on efficiency, productivity, and the formal structure of
organizations. It is based on principles of management such as division of labor,
hierarchy, and centralization. Notable theorists include F. W. Taylor (Scientific
Management), Henri Fayol (Administrative Theory), and Max Weber (Bureaucracy).

2. Neoclassical Approach:

The Neoclassical approach emerged as a reaction to the limitations of the Classical

approach, emphasizing the importance of human relations, social factors, and employee
satisfaction. It incorporates ideas from behavioral sciences and focuses on how
organizational structures can be more flexible and responsive to human needs.

3. Contingency Approach:

The Contingency approach argues that there is no one best way to organize; instead,
the best structure depends on various situational factors such as the environment,
technology, size, and strategy of the organization. This approach highlights the need
for organizations to adapt their structure and practices to fit their specific circumstances.

4. Systems Approach:

The Systems approach views organizations as open systems that interact with their
environment. It emphasizes the interdependence of various organizational components
(e.g., departments, processes) and the need for alignment between the organization and
its external environment. This approach considers the organization as a whole,
including its inputs, processes, outputs, and feedback loops.

5. Modern Approaches:

Modern approaches often incorporate elements from multiple theories and emphasize
flexibility, innovation, and responsiveness to change. Postmodern approaches
challenge traditional assumptions about organizations, focusing on power dynamics,
identity, and the role of discourse in shaping organizational reality.
Applications of Organizational Theory

 Improving Organizational Performance: By understanding different organizational

structures and behaviors, leaders can design more effective organizations that align with
their goals and environments.
 Leadership and Management: Organizational theory provides insights into different
leadership styles and how they affect organizational effectiveness.
 Organizational Change Management: Theories help guide the processes of
implementing change, understanding resistance, and ensuring successful adaptation.
 Human Resource Management: Insights from organizational theory inform how
organizations can motivate employees, manage teams, and create a positive work
culture.

Conclusion

Organizational theory provides a comprehensive framework for understanding the complex

dynamics within organizations. It draws from a variety of disciplines, including sociology,
psychology, economics, and management, to offer insights into how organizations are
structured, how they operate, and how they can be improved. Through various approaches,
organizational theory helps leaders and managers design organizations that are effective,
efficient, and adaptable to the ever-changing business environment.

Organization Structure:
Organisational structure defines how job tasks are formally divided , grouped and coordinated.
An organizational structure is a system that outlines how certain activities are directed in order
to achieve the goals of an organization. These activities can include rules, roles, and
responsibilities. Organizational structure is the formal arrangement of jobs within the
organization and when it is shown as a figure it is called organizational chart. When managers
create an organizational structure, they are in the process of organizational design.

Elements/principles of organization:
1. Work specialization –

• Specialization facilitates division of work into units for efficient performance.

• Based on the specialization, to increase the output, work was broken down and given
to individuals considering their area of specialization. This came to be known as
division of labour.
• Specialization enables application of specialized knowledge which betters the quality
of work and improves organizational efficiency. At the same time, it can also influence
fundamental work attitudes, relationships and communication.

• Work can be specialized both horizontally and vertically (Anderson, 1988).

 • Vertical specialization in a research organization refers to different kinds of work at
different levels, such as project leader, scientist, researcher, field staff, etc.

• Horizontally, work is divided into departments like genetics, plant pathology,

administration, accounts, etc.

• Work specialization is very useful in organization wherein various jobs require

differing types of skills, some very specialized skills while few lower levels of skills.
• disadvantages such as boredom, fatigue, stress, increased absenteeism, high turnover
are overcome. In some organizations, to avoid this, employees are assigned a wide
range of tasks.

2. Departmentalization –
The manner in which jobs are grouped is termed as departmentalization. They include:

a. Functional departmentalization –It refers to the grouping of activities or jobs involving

common functions. eg : Production Manager, Accounting Manager, Human Resources
Manager, Purchase Manager etc. It is the basic form of departmentalization.
b. Geographical departmentalization – grouped by geographical region eg: Sales Manager-
Northern region, Sales Manager-Eastern region, etc

c. Product departmentalization –refers to the grouping of jobs and activities that are associated
with a specific product. grouped by product line eg: Light vehicles Manager, Autoline
Managers etc

d. Process departmentalization – grouped by product or customer flow eg: Bottling plant

Manager, Finishing department Manager etc
e. Customer departmentalization – grouped based on specific customers eg: Manager Retails,
Manager Wholesales

Many organizations have a combination of these depending on the size of the organization.
If it is a huge manufacturing organization with intense process-controlled operations, then, they
will have functional departmentalization for their various functional domains as well as process
departmentalization for their vast processes.

Furthermore, if it is a multinational organization, then geographical departmentalization may

also be present.

3. Chain of command - The chain of command is the line of authority. It indicates who reports
to whom starting from the top to the bottom of the hierarchy
• Line authority is when managers uses his authority to direct the work of an employee.
Line authority is a direct order passed from a superior to a subordinate for performing
 certain actions regarding sales, production. Examples of line authority delegates
include managers, supervisors, and CEOs of a company.

• Staff authority functions are called support functions that are to support, assist or advice
the line functions (such as production and sales), but do not have any authority over
them. An example of staff authority, the cost accountant advises the sales manager on
which products have the highest margins, and so are the most valuable products to sell.

• Three concepts important to chain of command are authority, responsibility and unity
of command.

• Authority: the rights inherent in a managerial position.

• Responsibility: the obligation or expectation to perform. When managers assign work
using their authority, employees should take up the responsibility and be accountable
for that work.
• Unity of command: states that every individual should report to one Manager. This
will minimize conflict.
4. Span of Control

• It is defined the number of levels to which the manager is responsible.

• In other words, this refers to the number of specialized activities or individuals
supervised by one person.

• Deciding the span of control is important for coordinating different types of activities
effectively.

5. Centralization and Decentralization - An organizational structure is either centralized or

decentralized. Traditionally, organizations have been structured with centralized leadership
and a defined chain of command. Decision making in a centralized type of organizational
structure is at higher levels. The military is an organization famous for its highly centralized
structure.

• Decentralization refers to decision making at lower levels in the hierarchy of authority.

Earlier, For example, Johnson & Johnson is a company that's known for its
decentralized structure.

• Every organizational structure contains both centralization and de-centralization, but to

varying degrees. The extent of this can be determined by identifying how much of the
decision making is concentrated at the top and how much is delegated to lower levels.

• Modern organizational structures show a strong tendency towards de-centralization.

• According to Luthens (1986), centralization and de-centralization could be according
to: geographical or territorial concentration or dispersion of operations; functions; or
extent of concentration or delegation of decision making powers.
6. Formalization - refers to the extent to which jobs within the organization are specialized.
Formalization is the extent of standardization of jobs so that employees can easily follow the
standards, rules and regulations.

• Formalization is required for consistency and control.

• The degree of formalization can vary widely between and within organizations; An
example of high formalization in a company would be a large financial institution, such
as a bank.
• This type of organization would have strict rules and regulations to follow, with a clear
hierarchy of roles and responsibilities.
Types of organisational structure
1. Classic organisational structure

• Simple design/hierarchy

• Bureaucratic organisation
• Divisionalised organisation

• Functional organisation

2. Neo classical organisational structure

• Flat structure

3. Modern organisational design

• Project organisation

• Matrix organisation

• Team structure
• Boundary less organisation

CLASSICAL ORGANIZATIONAL DESIGN:

1. Line / simple organisational Structure:
A line organisation has only direct, vertical relationships between different levels in the firm.
There are only line departments-departments directly involved in accomplishing the primary
goal of the organisation. For example, in a typical firm, line departments include production
and marketing. In a line organisation authority follows the chain of command.

• This structure is usually found in small and single-person-owned organizations.

• The basic requirement of a simple centralized structure is that it has only one or two
functions, and a few people who are specialists in critical functions.

• The manager is generally an expert in all related areas of functions and is responsible
for coordination.
• Thus, the organization has only two hierarchical levels. However, this structure has to
become more complex for diversification or other reasons.
• The most common organizational structure type that follows a direct chain of
command.
• A chain of command, the highest-level executive has the highest power over the
decision-making process. Simple structure is a basic organizational design structure
with low departmentalization, little work specialization, wide spans of control,
centralized authority (typically the owner has most of the power) and little
formalization or rules that govern operation.
 • On one hand, this structure enables organizations to streamline business processes,
develop clear career paths, and reduce conflicts.
• On the other hand, a hierarchical structure slows down decision-making and may hurt
employee morale.

Pros of hierarchical org. structures

• Obvious chain-of-command.
• Clearly defined reporting structure and individual responsibilities.
• Sets clear career path growth.
• Departments and teams create a sense of “we’re in this together”.

Cons of hierarchical org. structures

• Bureaucracy, processes, and red-tape slow down innovation.

• More resistant to change.
• Employees at the bottom of the org structure feel like they don’t have an impact.

2. Bureaucratic Organization

In large organizations and under well defined conditions, organization structure may be
bureaucratic. The essential elements of a bureaucratic organization are:

• the use of standard methods and procedures for performing work; and
• a high degree of control to ensure standard performance.

Mintzberg (1981) has identified two types of bureaucracies. They are standard and professional
bureaucracy. Standard bureaucracy is based on efficient performance of standardized routine
work. Professional bureaucracy depends upon efficient performance of standardized but
complex work. Thus, it requires a higher level of specialized skills.
The structure of standard bureaucracy is based on functions, large technical staff and many
mid-level managers. In contrast, professional bureaucracy has few mid-level managers.

3. Functional Authority Structure

• The most widely used structure is the functional or centralized type because this
structure is the simplest.
• A functional structure groups tasks and activities by business function, such as
production/operations, marketing, finance/accounting, research and development, and
management information systems.
• Each department has a designated leader highly experienced in the job functions of each
employee supervised by them.
• The jobs or positions in an organisation can be categorized as:

(i) Line position: a position in the direct chain of command that is responsible for the
achievement of an organisation’s goals and
(ii) Staff position: A position intended to provide expertise, advice and support for the
line positions.
The line officers or managers have the direct authority (known as line authority) to be exercised
by them to achieve the organisational goals. The staff officers or managers have staff authority
(i.e., authority to advice the line) over the line. This is also known as functional authority.
An organisation where staff departments have authority over line personnel in narrow areas of
specialization is known as functional authority organisation. Exhibit 10.4 illustrates a staff or
functional authority organisational structure.
4. Divisional Organisational Structure:
• refers to a multiproduct or service design that separates different products or services
to facilitate management planning and control.
• Different divisions in the organization can further have simple centralized or functional
designs, depending upon their size and activities.
 • This type of organizational design is favoured when different kinds of products or
services require different kinds of management.

• Divisional structure consists of separate semi autonomous unit or division. With one
coporation there may be different divisions, each division has own targets to achieve.

• Manager is completely responsible for success or failure of division.

• EX:Walmart stores Inc- organised by its division-Wal-mart Realty, Walmart
International, Speciality stores and supercentres.
In this type of structure, the organisation can have different basis on which departments are
formed. They are:
(i) Function, (ii) Product, (iii) Geographic territory, (iv) Project and (iv) Combination approach.
 Advantages Disadvantages

Accountability is clear Can be costly

Allows local control of local situations Duplication of functional activities

Creates career development chances Requires a skilled management force

Promotes delegation of authority Requires an elaborate control system

Leads to competitive climate internally Competition among divisions can

become so intense as to be dysfunctional

Allows easy adding of new products or Can lead to limited sharing of ideas and
regions resources

Allows strict control and attention to Some regions/products/customers may

products, customers, and/or regions receive special treatment

NEO CLASSICAL DESIGN:

• The neoclassical writers offered the following organizational structure:

• Flat Structure: In the case of flat structure, the wide span of control in an organization
helps in motivating the employees more effectively, a shorter chain of communication
and it is free from hierarchical control.
• In a flat organizational structure, there are few middle managers between employees
and top managers.
• The structure requires less supervision, increases employee involvement, and boosts
trust in the workplace. Due to its simple nature, a flat organization structure, also called
a “flatarchy”, is typically used by small businesses and startups.

Pros of flat org. structures

• More responsibility for employees.

• Open communication.
• Clear path of approval.
• Implementation happens fast.

Cons of flat org. structures

• Not scalable.
• Relies on one person to be the decision-maker.
 • Leads to employees with generalized skillsets, with a lack of specializations.

MODERN ORGANISATIONAL DESIGNS

5. Project Organisational Structure:

• Project design is used to solve complex problems that need input from different
departments or areas of expertise
• People from various departments form a team. Each person contributes their specialized
knowledge.
• These teams are temporary and focus on specific projects. Once the project is
completed, the team doesn’t go back to their original departments but instead moves on
to a new project.
• This type of structure exists alongside the usual department-based structure within an
organization.

A common example of a project design structure is in the construction industry, particularly in

large-scale projects like building a skyscraper.

Example: Building a Skyscraper

• Team Formation:
• Architects: Provide the design and blueprint of the building.
• Engineers: Handle the structural integrity, electrical systems, and plumbing.
• Construction Managers: Oversee the day-to-day construction activities.
• Financial Analysts: Manage the budget and cost.
• Marketing Team: Plan how to market or sell the spaces in the building.
• How It Works:
• Each of these experts comes from different departments or firms but forms a
team specifically for this project.
• They work together to ensure the skyscraper is built on time, within budget, and
according to the design specifications.
• Once the skyscraper is completed, the team disbands, and each member moves
on to another project, often forming new teams with different individuals
depending on the next project's needs.
6. Matrix Organisational Structure:

• Matrix Organisational Structure is complex of all designs because it depends upon both
vertical and horizontal flows of authority and communication
• In contrast, functional and divisional structures depend primarily on vertical flows of
authority and communication. A matrix structure can result in higher overhead because
it creates more management positions.
• Other disadvantages of a matrix structure that contribute to overall complexity include
dual lines of budget authority (a violation of the unity-of-command principle), dual
sources of reward and punishment, shared authority, dual reporting channels, and a need
for an extensive and effective communication system.
• Despite its complexity, the matrix structure is widely used in many industries, including
construction, health care, research, and defense.
• Examples of organizations with a matrix structure include: Caterpillar, Phillips, Texas
Instruments.
• Within a matrix organizational structure, team members report to several managers at
once.
• Having multiple supervisors allows for company-wide interaction and faster project
delivery. For instance, when answering to functional managers and project managers,
employees have a chance to collect experience outside their team. While functional
managers can help to solve job-specific issues, project managers can bring in
knowledge or talents from other departments.
• If you go after a matrix organizational structure, you’ll need to find a way to avoid
authority confusion and prevent conflicts between managers.
Advantages
Project objectives are clear

Employees can clearly see results of their work

Shutting down a project is easily accomplished

Facilitates uses of special equipment/ personnel/facilities

Functional resources are shared instead of duplicated as in a divisional

structure

Disadvantages
Requires excellent vertical and horizontal flows of communication
Costly because creates more manager positions

Violates unity of command principle

Creates dual lines of budget authority

Creates dual sources of reward/punishment

Creates shared authority and reporting

Requires mutual trust and understanding

3. Team-based structure

• A team-based organizational structure creates small teams, are capable of solving

problems and making decisions without bringing in third parties. Team members are
responsible for managing their workload and have full control over the project. Team-
based organizations are distinguished by little formalization and high flexibility. This
structure works well for global organizations and manufacturers.
• Examples of organizations with a team-based structure include: Apple, Cisco, Google.

Pros of team-based org. structures

• Drives growth and innovation.

• Promotes lateral career moves (career change where an individual moves from one
position to another with little change in their salary, title, or level)
• Provides experiences across departments and teams.
• Less emphasis on management.
• Is more agile.
• Cons of team-based org. structures
• No clear authority.
• Career path growth is not clear.
• Not formalized.

4. Boundary less structure

• In this, there is no predefined structure, so its flexible.

• Company uses team approach, since no boundary.
• Managers may use virtual, modular, network organisational structure.
• Virtual- Here, small number of permanent employees, specialists will be
hired(outsourced) when needed.
• Ex: subcontractors, freelancers
• Modular-applicable most in manufacturing business
• Workdone outside of company from different suppliers. Each suppler produces a
specific piece of final product. When all pieces are done organisation assembles final
product.
• Network- Companies outsource major business functions in order to focus more on
what they are in business to do.

Examples of organizations with a network structure include: Dow Chemical

• A network structure goes far beyond your internal company structure. Typically, a
network organization outsources independent contractors or vendors to complete the
work.
• In a network organization, teams are built from full-time employees as well as freelance
specialists – this way, in-house workers can spend most of their time focusing on the
 work they specialize in. Such an approach allows companies to adapt to market changes
and obtain the missing skills fast.
• Working with individuals that aren’t integrated into your company culture results in
lower formalization and higher agility.

Pros of network org. structures

• Promotes organizational agility and flexibility.

• Fosters collaboration across employees.
• Cultivates better understanding of industry, products, and customers.
• Creates a web of work-related relationships.
• Creates highly-specialized skillsets in employees.

Cons of network org. structures

• Extremely complex and convoluted.

• Lower formalization.
• High turnover.
• Feeling of inequality between full-time employees and contractors/freelancers.
• Difficult to know who has final approval.

To conclude,

Choosing the organizational structure:

• Organization design is a continuous process. While a simple design is needed for

simple strategies, complex designs are necessary when organizational strategies involve
complex interactions.
 • The choice of any type of organizational design should be in consonance with the
organizational requirements, strategy and environment. The simple centralized and
bureaucratic organizational design based on functional departmentation focuses on
work and is thus better suited for getting work done efficiently. The team or project
type of organizational design is appropriate where inputs from several functional areas
are required. The divisional structure is appropriate if performance and results are to be
assessed. Matrix and adhocratic designs focus on coordination and relationship.

Factors that influence design of structure:

The factors that influence design of structure include:

1. Strategy: Research shows that certain structural designs work best with different
organizational strategies. The flexibility and free-flowing style of information will be more
suitable for organizations that are innovative in his strategic makeup and hence organic
structured organization. Organization that requires strict controls on costs are aligned to
mechanistic structured organization.

2. Size: Large organization tend to have more specialization, departmentalization,

centralization and hence are likely to be mechanistic, while small organization may not have
much impact on the structure.

3. Complexity: When organization is large, its operation is interrelated using advanced

technology. Complexity necessitates the need for greater control and coordination which
influences the structure.

4. Technology: organizations adapt to different structures based on the technology they use for
production. Also, it depends on whether their organization follows unit, mass or process
production. More routine the organization is, it is more natural to follow a mechanistic structure
while organization that adopt a nonroutine technology, are more likely to follow an organic
structure.

5. Environmental uncertainty: Organizations face stable vs dynamic and simple vs complex

environmental uncertainty. Managers try for minimizing the environmental uncertainty. In
stable simple environments, mechanistic structure will be more suitable while in dynamic
complex environment, organic structure will come in handy.