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Types of Organizational Structure

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Everything you need to know about the Types of Organizational Structure.

Structure of an organisation which results from the organising process is the basic framework within which the decision-making behaviour of an executive takes place.

It is an established pattern of relationships among the components of the organisation. March and Simon have stated that “organisation structure consists simply of those aspects of pattern of behaviour in the organisation that are relatively stable and change only slowly.”

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Some of the types of organizational structure are:-

1. Line Organization 2. Functional Organization 3. Line and Staff Organization 4. Committee Organization 5. Project Organization 6. Matrix Organization 7. Divisional Structure 8. Organic Structure 9. Simple Structure 10. Network Structure.

Learn about the Various Types of Organizational Structure


Types of Organizational Structure – Line, Functional, Line and Staff, Committee, Project and Matrix Organization

The following are the various types of organization structure:

1. Line Organization

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2. Functional Organization

3. Line and Staff Organization

4. Committee Organization

5. Project Organization

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6. Matrix Organization

The following analysis gives the nature, merits and demerits of these structures:

Type # 1. Line Organization:

It is also known as Scalar organization or Military form of organization. It is the oldest form of organization. Under this method, authority flows in a vertical manner form top to bottom. Each position in the structure has an authority over a lower position. Line executives are directly involved in the performance of the activities of an enterprise and are called the ‘doers’.

Line organization is of two types, viz., Pure Line Organization and Departmental Line Organization. Under pure line organization all perform same type of work at any level. On the other hand, under departmental line organization, each department performs different type of work.

Merits of Line Organization:

1. It is simple to understand and easy to establish.

2. Each individual knows clearly to whom he is responsible.

3. It provides unit of command.

4. It helps in taking quick and effective decisions.

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5. It ensures personal contact between workers and manager.

6. It ensures discipline between the employees and employer.

Demerits of Line Organization:

1. There is concentration of authority at the top level. It leads to autocratic control.

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2. Communication flows from top to bottom. There is no participation of workers.

3. It lacks specialization as a line manager is responsible for both planning and execution of work.

4. Overburdens the top executives and they cannot perform their work properly.

Suitability:

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In spite of these limitations, it is suitable for small concerns where there are fewer levels of authority.

Type # 2. Functional Organization:

This concept was devised by F.W. Taylor. It is based on the functional foremanship. Under this method, the structure of the enterprise is classified into different functional areas. Each functional area is headed by a specialist who has full control of that function over the organization and gives instructions direct to the personnel, rather than through the chain of command.

Each chief manager is in charge of a particular activity. For example, chief finance manager is in charge of finance function of all the three units. Thus, he enjoys functional authority over the employees of other departments also.

Merits of Functional Authority:

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1. It helps to reap the benefits of specialization

2. Subordinates can make use of the expertise of functional experts

3. The burden of top executive is reduced as each expert looks after only one function.

4. It leads to joint supervision by different experts

5. There is expert and better control can be exercised by functional experts

6. It provides better scope for expansion and diversification

Demerits of functional organization:

1. It is against the principle of unity of command as the subordinate is responsible to a number of superiors

2. Lower level people are not given an opportunity for all round experience and hence they do not fit into top level positions.

3. The complex nature of functional organization with its cross relationship creates a confusion among workers

4. The decision making is very slow as involvement of many experts is required

5. There is a scope of lack of coordination as each specialist thinks of only his function and ignores other functions.

Suitability:

It is suitable to all kinds of organization provided applied at higher levels. At lower levels too many cross relationship creates confusion throughout the organization.

Type # 3. Line and Staff Organization:

Line and staff organization is a combination of functional and line structure. Line authority flows from top to bottom and the line executive is directly concerned with the accomplishment of primary objectives. They are actual doers and generally do not possess specialized knowledge to solve complex problems.

To provide specialized assistance to line mangers, staff positions are created. Staff means a stick in the hand for support. Thus, staff helps the line executives in their work. They play the role of an advisor.

The other approach views that line and staff are two kinds of authority. According to this approach, line authority is defined as a direct authority which a superior exercises over his subordinates to carry out orders and instructions. The exercise of this authority is always downwards, that is, form a superior to a subordinate. Staff authority involves giving advice to line managers to carry on the operation. The flow of this authority may be in any direction depending on the need of such an advice. It is common that in actual practice, some variations may exist. The variations are more pronounced in the case of staff authority.

The distinction between line and staff though not rigid, is important because staff must be provided if the growing organization is to accomplish its goals. The differentiation between line and staff is necessary for the following reasons.

In line and staff organization, the line authority remains the same in the organization. But staff executives are attached with line executives who help them by providing necessary advice on important matters. Staff executives have no power to command subordinates in other departments.

It is clear that PA to Managing Director, Personnel Manager and Budget Manager play role of staff executives. In most business units, staff executives are used for collecting data required for taking decisions and to provide expert advice to line managers.

Merits of Line and Staff Organization:

a. This combination provides for specialized knowledge where staff executives guide and advise line executives.

b. It reduces the burden of line executives because staff carries on detailed investigation of each activity.

c. Better decisions are possible as expertise of the staff is used.

d. It is flexible in the sense that staff can be added to line executives.

Demerits of Line and Staff Organization:

I. Always it creates confusion as it is very difficult to define the authority relationship between line and staff.

II. Staff executives are not accountable and they may not take the tasks seriously.

III. There is always constant conflict between line and staff because the nature of their functions differs from each other.

Line and Staff Conflict:

Line and staff relationship implies that both are complimentary in nature. However, there are frequent instances of conflict between line and staff in the organizations, resulting in friction.

The various factor leading to line-staff conflict can be grouped into three categories as follows:

1. Apprehensions of line mangers,

2. Apprehensions of staff, and

3. Nature of line-staff relationship.

1. Apprehensions of Line Managers:

Line executives are the actual doers who responsible for the accomplishment of goals.

From their view point staff executives create conflicts in the following ways:

a. Lack of Responsibility:

Line executives feel that staff enjoy authority and lack responsibility. They are accountable. If anything goes wrong, they blame line executives, but assume credit for success. The imbalance between authority and responsibility leads to conflict between line and staff.

b. Encroachment of Line Authority:

Sometimes, instead of providing guidance and advice, staff may interfere with the work of line executives and try to force their recommendations on them leading to conflict.

c. Dilution of authority:

The introduction of staff makes the line executives to feel that their authority will be diluted. This fear of insecurity creates conflict.

d. Theoretical bias:

Staff executives are academicians. They provide ideas and suggestions which may, sometimes, lack practical application as they are away from the actual operational scene.

Apprehensions of Staff Executives:

Staff executives are experts in their area of operation and feel that it is line executives who are responsible for conflicts for the following reasons:

a. Lack of Proper Authority:

Staff executives feel that they lack proper authority to get their ideas implemented. It is left to the line executives either to accept or reject the advice given by the staff. They don’t even consult while taking decisions. This creates frustration and leads to conflict.

b. No Proper Use of Staff:

Line executives do not make proper use of staff advice. Mostly they take decisions without consulting staff and communicate the same after it is implemented. Normally, line executives consult staff only as a last resort when they face a problem.

c. Resistance to New Ideas:

Line executives always resist new ideas. They do not like change and feel that new ideas are meant to find defects in their existing operations. This creates conflict.

Nature of Line-Staff Relationship:

The following defects lead to conflicts between line and staff:

a. Lack of Demarcation between Line and Staff:

Authority and responsibility relationship between line and staff is not clearly defined in most cases. This leads to overlapping activities and creates gaps in the relationship. This is one of the causes of conflict.

b. Different Background:

Staff executives are younger and better qualified. They often look down at line executives. This creates mistrust and hatred between them.

c. Lack of Proper Understanding of Authority:

As there is no clear cut demarcation between authority and responsibility there will be encroachment of each other’s authority. Besides, the staff in order to get their suggestions accepted by line executives may approach common superior which frustrates line executives.

Resolving Conflict between Line and Staff:

The effectiveness of line people depends to a large extent on how they make use of staff. Staff people are needed in the organization because line people may not able to solve the problems which require specialized knowledge.

For making proper use of staff, following points are important:

(i) Staff people should be involved right from the initial stages of planning of an activity rather than when the problem becomes critical. When they are involved at the level of planning, many of the problems may

(ii) In order to make proper use of staff, they should not be kept busy in unimportant work-because it does not serve any meaningful purpose. Instead, they should be assigned critical work in the area other.

(iii) There should be encouragement and education to line people as to how to make maximum use of staff effectively. Line people cannot make use of staff unless they know what a specialist can do for them. At the same time, staff people also have a responsibility to let line people know how they can contribute for the better performance of line activities.

(iv) If line people take some actions directly affecting staff activities without consulting staff people, they should be informed immediately about such actions. The information will help in removing misunderstandings. If any, created in the minds of staff people.

Type # 4. Committee Organization:

A committee is a group of persons who consciously and deliberately formed to discuss a problem and provide solutions to overcome it. They meet on an organized basis to discuss and deal with the matter placed before it.

The following are the characteristics of a committee:

a. A committee is a group of people. There must be a minimum of two people and there is no limit for maximum.

b. The scope of committee is limited to the extent of task assigned to it.

c. Democratic principle of ‘One man one vote’ is followed

d. It may be executive committee or non-executive committee. Executive committee takes decisions and implements them. Non-executive committee only provides suggestions and recommendations.

Merits of Committee Organization:

1. Pooling of knowledge and experience- Knowledge and experience are pooled together to take joint decisions on the principle of two heads are better than one.

2. Motivation through participation- Members are allowed to participate in the decision making process. It makes them more committed to the decision.

3. Effective and proper coordination- Through coordination of experts bringing together diverse viewpoints many problems could be solved effectively.

4. Tool for management development- Every member has an opportunity for learning from the experience and mistakes of others. Thus it helps for management development.

5. Representation of diverse interest groups- When different interest groups are represented in a committee, conflicting views can be easily settled through motivation and participation.

6. Effective communication- By convening a committee any information can be easily passed on the all members of the organization.

7. Consolidation of authority- It enables management to consolidate splintered authority. This is helpful to a manager who has limited authority with which he cannot solve the problem without simultaneous exercise of authority by other managers related to the problem.

Demerits of Committee Organization:

The committee is one made of the unfit, selected by the unwilling to do the unnecessary.

The excessive or lack of use of committees creates problems to the management as follows:

a. It is costly and time consuming activity. The cost incurred is far below its benefits.

b. Committees do not help in taking quick decisions.

c. To arrive at unanimous decisions agreements are arrived at on the basis of a compromise which may not be really a right decision, Compromise is not the solution.

d. When unanimous decisions are taken by dominant members, a few persons may accept them under pressure.

e. Committees fix group responsibility where no individual can be made accountable. This leads to inefficiency.

f. Committee is a tool to misuse to delay or avoid or to take unpleasant decision.

Type # 5. Project Organization:

The use of the project organization has increased in the last few years. It is currently being employed in numerous undertakings engaged in the execution of construction activities, turnkey projects and research and development projects. The project organization can take various forms, but the important characteristic that distinguishes it from other forms is once the project is completed the organization is disbanded or phased out.

By definition, project management involves, “the gathering of the best available talent to accomplish a specific and complex undertaking within time, cost and quality parameters, following by the disbanding of the team upon completion of the undertaking”.

The group members then go on to another project, return to their permanent home department in the organization, are given jobs elsewhere in the organization, or, in some cases, are phased entirely out of the firm.

Merits of Project Organization:

a. It allows maximum utilization of specialization

b. It is tailor-made to meet specific needs of a particular project

c. It provides more flexibility in handling resources by allocating them when they are needed.

Demerits of Project Organization:

I. It has a limited time and creates a feeling of uncertainty and insecurity among people in the organization.

II. Lack of proper vertical authority makes the job of a project manager difficult. He is responsible for the completion of the project but without authority over people in the project.

III. Undue influence of specialists from diverse field makes the decision making very difficult.

Type # 6. Matrix Organization:

It is a combination of project organization and functional organization.

“Any organization that employs a multiple command system that includes not only multiple command structure but also related support mechanism and an associated organization culture and behaviour pattern.” — Paul R. Lawrence and Stanley M. Davis

It is clear from the above that matrix organization leads in overlapping of command, control and behaviour pattern.

Merits of Matrix Organization:

1. It focuses attention on a single project and facilitates better control.

2. It is more flexible than traditional organization

3. It provides motivation for the people engaged in a project

4. It leads to better utilization of services of professionals.

Demerits of Matrix Organization:

1. People receive instructions and order both from functional and project managers. Thus, it violates unity of command.

2. The complex relationship leads to confusion and makes coordination difficult. Subordinates are not in a position to identify their superiors.

3. In the absence of mutual trust and confidence, in sharing the resources and in taking joint decisions, conflicts arise.

4. As people are drawn from various departments, there is a lack of commitment and morale is low.


Types of Organizational Structure – With Advantages and Disadvantages

There are different structures, which can be given to an organization.

Some of the common types are:

1. Line Organization Structure

2. Line and Staff Organization Structure

3. Functional Organization Structure

4. Matrix Organization Structure.

1. Line Organization Structure:

This is the oldest as well as the most common type of organization. It is still used by many concerns especially the small ones. It is also known as the military system as this type of organization is usually found in the army.

In the line organization, the line of authority moves directly from the top level to the lowest level in a step-by-step manner. It is straight and vertical. The top-level management takes all major decisions and issues directions for actual execution. The general manager, for example, issues order to various departmental managers.

Thereafter, the departmental manager issues instructions to works manager. The works manager will issue instructions to foreman. In this manner, the orders and instructions will be issued to the workers working at the lowest level.

Thus authority moves downward and also step-by-step. The responsibility, on the other hand, moves in the upward direction. The authority is greatest at the top and reduces through each successive level down the organizational scale.

Some of the advantages of line organization structure are as follows:

i. Simplicity:

Line organization structure is easy to understand and followed by superiors and subordinates. It is simple and clear as regards authority and accountability.

ii. Prompt Decisions:

Line organization facilitates prompt decision-making at all levels as the authority given is clear and complete.

iii. Discipline:

It brings discipline in the organization due to unity of command, delegation of authority and direct accountability.

iv. Economical:

Line organization is economical as experts are not appointed.

v. Attraction to Talented Persons:

Line organization brings out talented workers and develops in them quality of leadership. It offers opportunities of self-development to employees,

vi. Quick Communication, High Efficiency, Flexibility and High Employee Morale are some more advantages of line organization structure.

Some of the limitations of line organization structure are as follows:

i. Heavy Burden on line Executives:

The line executives are given too many duties and responsibilities. Even the quality of the decisions of executives may suffer due to heavy burden of duties and responsibilities.

ii. Non-availability of Services of Experts:

There is absence of skilled experts in line organization. Expert assistance is not available promptly when needed by line executives.

iii. Favoritism:

There is wide scope for favoritism in the line organization. Leadership of departmental executive is autocratic due to heavy concentration of powers. He may favour some employees at the cost of others.

iv. Too Much Dependence on Limited Executives :

In the line organization, all powers are concentrated in the hands of a few executives. Naturally, the success and stability of the entire organization depends on their personal skill, initiative and interest.

v. Rigidity:

There is rigidity in the working of line organization.

vi. Delays in Communication, Limited Freedom to Employees and Un- suitability to Modern Large Business Units are some more demerits of line organization.

2. Line and Staff Organization Structure:

Though line structure is suitable for most organizations, especially small ones, it is not effective for larger companies. This is where the line and staff organizational structure comes into play. In line and staff organization structure, the line authority remains the same as in line organization i.e. it flows from top to bottom.

The main difference is that specialists are attached to line managers to advise them on important matters. Line managers are more involved in the core activities of the business.

They have little time to analyse all information for many decisions. They do not have expertise in all technical areas. Staffs are specialists, who help line authority in discharging their duties. Staff authority is used to support the line authority.

In most organizations, the staff is used for help in handling details, gathering data for decision-making, and offering advice on specific managerial problems. The staff investigates and supplies information and recommendation to managers who make decisions.

Line and staff structure has gained popularity because certain problems of management have become very complex and in order to deal with them, expert knowledge is necessary, which can be provided by the staff officers.

For example, a production manager (a line authority) does not have enough time and experience to handle labor relation problems. Staffs (who are specialists) help them in doing so. Similarly, finance, law, and public relations departments may be set up to advice on problems related to finance and accounting, law and public relations.

Some of the characteristics of line and staff organization are:

i. Planning and execution:

There are two aspects of administration in this organization, viz., planning and execution.

ii. Role of Authority:

The line managers have authority to take decisions as they are concerned with actual production. The staff officers lack such authority.

iii. Guidance from Staff:

The staff provides guidance and advice to line executives when asked for. Moreover, line executives may or may not act as per the guidance offered.

iv. Exercising Control:

The staff manager has authority over subordinates working in his department.

v. Scope for Specialization:

There is wide scope for specialization in this organization as planning work is given to staff and execution work is given to line executives.

vi. Possibility of Conflicts:

Conflicts between line and staff executives are quite common in this organization but can be minimized through special measures.

vii. Suitability:

Line and staff organization structure is suitable to large- scale business activities.

Some of the advantages of line and staff organization are:

i. Better Decision:

Staff specialists help the line executives in taking better decisions by providing them with expert advice adequate information of the right type at the right moment.

ii. Flexibility:

Line and staff organization is more flexible as compared to line organization as general staff can be employed to help line managers at various levels.

iii. Proper Weightage:

Many problems that are ignored or poorly handled in line organization can be properly covered in line and staff organiza­tion by the use of staff specialists.

iv. Reduction of Burden:

Staff specialists relive the line managers of the burden of concentrating on specialized functions like accounting selecting and training, public relations etc.

v. Specialized Knowledge :

Line managers get the benefit of specialized knowledge of staff specialists at various levels.

vi. Unity of Command:

Under this system, experts provide special guidance without giving orders. Since it is the line manager who only has the right to orders, the enterprises take advantage of functional organization while maintaining the unity of command i.e. one subordinate receiving orders from one boss only.

Some of the disadvantages of line and staff organization are:

i. Delay in Decision-making:

The process of decision-making is delayed, as line executives have to consult staff experts before finalizing the decisions. The decisions of line managers are likely to be delayed due to this lengthy procedure.

ii. Buck Passing Among Executives:

The line bosses are concerned with actual execution of work. However, they depend on staff experts for guidance. If something goes wrong, the attempt is made to pass on the blame by one party to the other. Thus, there is shifting of responsibility or buck-passing.

iii. Conflicts between Line and Staff Executives:

In this organization, quarrels and conflicts between line managers and staff specialists are quite common. The line managers are generally not interested in the advice offered by experts. Secondly, specialists feel that the line bosses lack knowledge of new ideas. Such conflicts lead to bitterness.

iv. Costly Organization:

Line and staff organization is a costly organiza­tion as the line executives are supported by highly paid staff executives who are experts. All this adds to the overhead expenses and the cost of production increases.

v. Complicated Operation:

Line and staff organization is too complicated in actual operation because of dual authority, division of functions and too much dependence on staff. The unity of command principle is violated.

vi. Internal Discipline is Affected Adversely:

The internal discipline is likely to be affected adversely due to decentralization and division of loyalty of subordinates.

3. Functional Organization Structure:

This structure is an extension of the line and staff organization. In this type of organization the employees are grouped together according to their similar tasks, skills or activities. All works of the same type are grouped together and brought under one department managed by an executive who is an expert.

Thus there are separate functional departments, for the major functions of the business e.g. engineering or production, purchase, sales, finance personnel etc. Each department performs its specialized function for the entire organization.

For example, the purchase department deals with purchases on behalf of the entire organization, and so on. Now-a-days almost all business concerns usually follow some sort of functional plan to carry out the primary functions of business. However, it is the rare to find a pure functional organization and there is always an element of line organization mixed with it.

Some of the advantages of functional organization structure are:

i. Facilitates specialization:

Functional organization structure facilitates division of work and specialization. Each boss has specialized knowledge of his functional area. He is in a better position to guide and help the workers.

ii. Benefits of large-scale operations:

Functional organization offers the benefit of economy of large-scale operation. In this organization, one administrative unit manufactures all products. The available machinery, equipment and facilities are used fully for large-scale production.

iii. Facilitates effective coordination:

Functional organization facilitates effective coordination within the function. This is possible as one boss is in-charge of a particular function and he looks after all activities, which come within that function.

iv. Operational flexibility:
Functional organization possesses operational flexibility. Necessary changes can be introduced easily to suit the needs of the situation without any adverse effect on the efficiency.

v. Ensures effective supervision :

Functional organization facilitates effective supervision by the functional heads and foremen. Due to specialization, they concentrate on the specific functional area and also keep effective supervision on their subordinates.

Some of the disadvantages of functional organization structure are:

i. Absence of Unity of Command:

Unity of command is absent in the functional organization as each worker gets orders and instructions from several bosses.

ii. Fixing Responsibility is Difficult:

In functional organization, responsi­bility is difficult to fix on a specific person. This is because the respon­sibility itself is divided among many.

iii. Unsuitable to Non-manufacturing Activities:

Functional organization can be introduced in the case of manufacturing activities. However, its application to non-manufacturing activities such as marketing, etc. has not been successful.

iv. Costly:

Functional organization is costly, as more specialists are required to be appointed.

v. Creates Confusion among Workers:

Functional organization is based on specialization as function is taken as a base for dividing the work. The authority is overlapping and the responsibility is divided. This confuses workers.

vi. Conflicts Among Foremen, Delays in Decision Making and Limited Discipline within the Departments are some more demerits of functional organization.

4. Matrix Organization Structure:

Matrix organization structure is a group or team that is formed on temporary basis for accomplishment of a given project. In matrix organization a project manager is appointed to coordinate the activities of a project. Persons are drawn from the various functional departments. Upon completion of project these people lay return to their original departments. Thus the functional staff has two bosses

The arrangement is found suitable where the organization is engaged in contractual project activities and there are many project managers, as in a large construction company or engineering firm.

Some of the advantages of matrix organization structure are:

i. Matrix structure focuses on a single project, permitting better control and planning to complete the project in a specified time period.

ii. It helps in development of persons by widening their scope and they can contribute maximum to organization.

iii. It improves motivation as people can focus on a particular project but in traditional structure it cannot happen.

iv. It also improves communication by discarding hierarchical system which is more time consuming.

Some of the disadvantages of matrix organization structure are:

i. It violates the principle of unity of command as there are two superiors a person has to work for. There may be rise of more conflicts.

ii. Informal relations are formed during matrix organization functioning and it may increase complexity in organizational relationship.

iii. Problems regarding appraisal may occur as employee works for two departments at a time.

iv. Costs can be increased if more managers (i.e. project managers) are created through the use of project teams.


Types of Organizational Structure – Functional and Divisional Structure: With Advantages and Disadvantages 

1. Functional Structure:

Functional structure involves grouping of employee positions into departments as per the organisation’s functions. Each department will have specialised and similar skills, expertise, work activities and resource use. This structure emphasises functional specialisation and active information sharing within each function.

For example- a CA with certain years of experience will be employed in the Finance department to manage the accounts of the organisation. Similarly, a scientist with diploma/degree in engineering and certain years of experience in Research & Development (R&D) will be employed in the R&D department to conduct research, testing and discovering new product designs in an organisation. This way, a functional structure will have employees with specialised functions and activities to perform depending upon the mission and objectives of the organisation.

Features of Functional Structure:

1. There exists a centralised authority that makes decisions for the organisation.

2. The structure involves standardised procedures for a standardised product/service provided by the organisation and availability of specialised and technical know­ledge.

3. Jobs are specialised, organised and grouped under homogenous sub-groups or business units leading the efficiency among employees at all levels of the organisa­tion.

4. The structure ensures that the organisation’s product/service is produced at low costs.

Advantages of Functional Structure:

(i) In-Depth Development of Expertise:

Specialisation leads to focus on specific areas in order to gain productive efficiency within the entire organisational structure. Employees will be accordingly, managed by an authority with certain experience in that particular speciality. This person in authority can understand and review their sub­ordinates’ work and ensure high productivity in the business unit.

(ii) Clearer Career Path within Function:

Employees of similar skills can work cohesively with each other by teaching/training and guiding each other on a particular concentrated area. This may help employees to learn, develop and lead a growing career path.

(iii) Ease of Coordination within Function:

The chain of command is linear with every employee knowing their lines of communication within their teams, lines of communication between sub-units and the line of communication with the centralised authority. This makes coordination between employees easy.

(iv) Efficient Use of Resources:

Grouping of similar areas of expertise could entail efficient use of resources within an organisation. Equipment and personnel are not repeated across departments. Also, every business unit can easily communicate within and across business units facilitating efficient use of resources.

(v) Possible Economies of Scale:

Functional structure is believed to be effective for an organisation that provides a single product/service. The organisation correspondingly focuses on standardised procedures for providing a product/service with standard features, which ensures minimum costs of production. Minimum costs due to standardised features along with less margin of error can possibly lead to economies of scale.

(vi) Possible Competitive Advantage:

Competitive advantage refers to an attribute or advantage a business may have over its competitors, by generating high revenues or by garnering a higher market share. This attribute could be either associated with a unique feature in their product or a lower costs of production.

Disadvantages of Functional Structure:

(i) Backlog of Decisions:

Backlog refers to accumulation of uncompleted work and with decisions concentrated at superior or top-level management could lead to possible losses and held responsible for possible profits or losses incurred by the organisation.

(ii) Problems during Sequential Tasks:

Employee groups organised in specialised units along the functional lines can be unaware or uninformed about activities in other units. This may lead to employees not being able to understand the priorities and/or initiatives of other work groups. This could further cause employees to place their department before the company’s goals and to resent other business units.

(iii) Restricted Approach:

Functional structures are tight and not flexible or easily adaptable because they follow sequential tasks across departments. This creates bureaucracy (rigid rules and procedures) that limits any possible change within the organisation. When there are any shifts in the market, or changes in technology or innovation, such organisations take time to react as this information needs to travel across the chain of command. This rigidity within the structure may not be useful in dynamic environments.

(iv) Difficulty in Inter-Departmental Coordination:

Functional structure in large organisations can lead to complex inter-relationships within and between the depart­ments. There are also possibilities of clashes and conflicts between departments. When the business faces real problems, the departments lose out the bigger objective of overall growth for the business due to possible miscommunication and unaccountability.

(v) Narrow Training but not Overall Development:

Each employee focuses on specialisation on one part of job rather than an all-inclusive training that can lead only to overall individual growth (personal and professional).

2. Divisional Structure:

Divisional structure is synonymous to decentralisation, which implies transferring powers of decision-making and accountability across employees or business units that are separate businesses within a broad organisational framework. Businesses in divisional structure operate autonomously and are grouped either on the basis of geographic locations, different customers segments they cater to products.

Departmentation based on geographic locations is common among businesses that operate over wide geographic areas. Activities in a given geographical area can be grouped and assigned to a manager or a senior subordinate. For example- Kirloskar Brothers Ltd. (KBL), which is one of the largest producers of industrial, project and agricultural pumps in India, have manufacturing plants in five different locations across Maharashtra, Madhya Pradesh, Tamil Nadu and Gujarat and plant managers in these plants may have been granted autonomous powers for operations. Additionally, KBL also has global presence in countries like Egypt, China, USA, etc., with supporting decision­ making powers to relevant subordinates in these countries.

Organisations can also group their activities in accordance to their customers’ interests, tastes and preferences. Owners / Managers arrange business activities that can cater to the daily requirements of clearly defined customer groups. For example- KBL’s, caters to different needs of their varied customer segments. They cater to specific customers in different industries like Building and construction, Power sector, etc.

Organisations with diverse product lines have product divisional structures. Such organisations require specialised efforts to produce quality-driven products defined by the markets. Accordingly, businesses require varied technologies for production along with diverse distribution systems.

For example- KBL offers multiple products under the ‘Pumps and Pumping Solutions’ like pumps, valves, hydro turbines etc. Product organisation structure can also exist among service companies like financial institutions who provide diverse financial products like mutual funds, banking services, insurance policies, etc., requiring different licenses, expertise and knowledge. Examples include HDFC, ICICI, etc.

Advantages of Divisional Structure:

(i) Accountability:

The resources for a particular product /service are deployed and concentrated on a single product/service or process under a single management (manager/groups). This makes the management responsible and accountable for the production (standardisation, procedures, etc.), distribution and sales of one or few related products. For example- Nestle’s Milk Products & Nutrition division will have a distinct management team responsible for the production, packaging, distribution and sales of milk and milk-related products.

(ii) Product Specialization:

Organisations with divisional structures are adaptable and can target specific customers through product specialisation. Each division focuses on specialised efforts on a particular product/service or market and employees in this division can shift the direction of their businesses to respond to changes in local conditions. For example- M & M Ltd. can possibly create a different division for Hatchbacks in different parts of the rural India where there are large number of nuclear families.

(iii) Local Decisions:

As decision-making in few areas is shifted or transferred from top management to divisional management, the divisional management can make decisions on improving working conditions in the business unit depending upon the changes in the local market conditions. The performance of the divisional management is evaluated on the basis of the performance of the overall business unit.

(iv) Multiple Offerings:

Divisional structure is most suited for businesses with complex, multiple and diverse product lines which converts a large organisation into smaller profit-centres.

(v) Speed:

Divisional units are able to respond easily and quickly with changes to the local market conditions. For example, during a slowdown in the local markets, a company in the Pune’s automobile cluster (in Maharashtra) had decided to operate the assembly plant on three out of six working days to avoid overhead costs and possible layoffs.

Disadvantages of Divisional Structure:

(i) Costs:

As specialised resources are targeted toward autonomous divisional units, each unit is designed to be self-sufficient. This may also lead to duplication of efforts because every business unit will have their independent supporting activities like accounting, HR, marketing, R&D, etc., leading to high costs.

(ii) Economies of Scale:

With possible duplication of efforts across divisional units, the organisation may be unable to operate under economies of scale. This however, can be attainable if the divisions may have integrated processes within their organisational framework. For example, Nestle India’s Instant food and Beverage units may have different processes but they can have an integrated mode of distribution/delivery to retail units.

(iii) Rivalries:

Self-sufficiency among autonomous divisional units can often lead to little or no communication with other units within an organisation. Divisional units can also put their own goals ahead of their parent company’s goals causing unnecessary rivalry and may become an obstacle to achieve the overall corporate goals.

(iv) Creation of Silos:

A silo literally means a tall tower used to store food-grains. Creation of silos in the context of management can be inferred as creation of several departments or groups in isolation from one another, which makes it difficult to communicate, share information or transfer skills and business practices across the organisation. It may also become to cross-sell products / services between the divisions.

(v) Conflicts and Diversion from Strategic Focus:

Rivalries and creation of silos can increase inter-departmental conflicts. Departments may argue about allocation of resources and support services requiring managers to efforts to sort out disputes among each other. The focus could get diverted to solving disputes rather than focusing on the overall organisational goals and disputes.


Types of Organization Structure – Functional Structure, Divisional Structure, Organic Structures, Simple Structure, Matrix Structure and Network Structure

Most organizations are designed, or evolve, to have elements of both hierarchy and more flexible, organic structures within. Organic structures are more informal, less complex and more “ad-hoc” than hierarchical structures. They rely on people within the organization using their initiative to change the way they work as circumstances change.

Hierarchical Structure:

(i) Complexity- High- with lots of horizontal separation into functions, departments and divisions.

(ii) Formality- High- Lots of well-defined lines of control and responsibility.

(iii) Participation-Low- Employees lower down the organization have little involvement with influence on decision making.

(iv) Communication-Downward- Information starts at the top and trickles down to employees.

Organic Structure:

(i) Complexity – Usually lower- Less differentiation or functional separation.

(ii) Formality- Lower- No real hierarchy and less formal division of responsibilities.

(iii) Participation – Higher participation- lower level employees have more decision making.

(iv) Communication- Lateral, upward, & downward communication- Information flows through the organization with fewer barriers.

1. Functional Structure:

In a functional structure, functions viz. accounting, marketing, Human Resource etc. are quite separate; each led by a senior executive who reports to the CEO. The advantage can be efficiency and economies of scale where functional skills are paramount. The main disadvantage is that functional goals can end up overshadowing the overall goals of the organization.

2. Divisional Structure:

In a divisional structure, the company is organized by office or customer location. Each division is autonomous and has a divisional manager who reports to the company CEO. Each business unit is typically structured along functional lines. The advantage here relates to local results, as each division is free to concentrate on its own performance.

The disadvantage is that functions and effort may be duplicated. For example, each division may have a separate marketing function, and so risk being inefficient in its marketing efforts.

3. Organic Structures:

It includes simple, flat structures, matrix organizations and network structures.

4. Simple Structure:

Often found in small businesses, the simple organization is structure is flat. It may have only two or three levels; employees tend to work as a large team with everyone reporting to one person. The advantages are efficiency and flexibility, and responsibilities are usually clear. The main disadvantage is that this structure can hold back growth when the company gets to a size where the founder or CEO cannot continue to make all the decisions.

5. Matrix Structure:

In a matrix structure, people typically have two or more lines of report. For example, a matrix organization may combine both functional and divisional lines of responsibility. The advantage is that the organization focuses on divisional performance whilst also sharing functional specialist skills and resources.

6. Network Structure:

Often known as a lean structure, this type of organization has central, core functions that operate the strategic business. It outsources or subcontracts non-core functions which, depending on the type of business, could include manufacturing, distribution, information technology marketing and other functions.

This structure is very flexible and often can adapt to the market almost immediately. The disadvantage is inevitable loss of control; dependence on third parties and the complexity of managing outsource and sub-contract suppliers.


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