WEEK 6

DECISION MAKING – DEFINITION & MEANING

Introduction

Decision making is an indispensable component of management process and a manager‘s life

is filled with making decisions after decisions. Managers see decision making as their central
job because they constantly choose what is to be done, who is to do, when to do, where to do,
and how to do. Looking at the role of decision making in management, William Moore has
equated it with management when he says that ―Management means decision making‘.
Decision making though permeates all managerial functions, is at the core of planning
because it is the planning where major decisions are made which set the organisational tone.
It is the stage at which major decisions regarding setting of organisational objectives,
formulating major plans, laying down of policies, procedures, rules, etc are made.
Collectively, the decisions of managers give form and direction to organisational functions.

Decision making is both managerial function and organisational process. It is managerial

function because it is a fundamental responsibility of every manager. It is organisational
process because many decisions transcend the individual managers and become the product
of groups, teams, committees, etc. In fact, more important decisions are made by group of
managers rather by managers individually. Therefore, managers should develop decision
making skills and acquaint themselves with the dynamics of decision making because of the
following reasons:

1. Managers spend a great deal of their time in making decisions. In order to develop
their decision-making skills, it is necessary that they know how to make effective
decisions.

2. Managers are evaluated on the basis of quality of their decision making. To

improve the quality of decisions, they should know how quality of decision
making can be improved.

Understanding on the concept of Decision and Decision making,

Individuals in organisations make decisions. That is, they make choices from among two or
more alternatives. Decision-making is almost universally defined as choosing between
alternatives. Decision-making is a critical activity in the lives of managers. The decisions a
manager faces can range from very simple, routine matters for which the manager has an
established decision rule (programmed decisions) to new and complex decisions that require
creative solutions (non-programmed decisions).

The word "decision" is derived from the Latin words "de ciso" which means, "cutting away"
or to come to a conclusion. A decision is the selection of a course of action. According to
Felex M Lopez, "a decision represents a judgement; a final resolution of a conflict of needs,

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means or goals; and a commitment to action made in the face of uncertainty, complexity or
even irrationality."

According to Shull et al have defined decision making as follows:

―Decision making is a conscious human process involving both individuals and social
phenomenon based upon factual and value premises which conclude with a choice of one
behavioural activity from among one or more alternatives with the intention of moving
toward some desired state of affairs.‖

Components of Decision-making

Decision-making involves certain components like:

1. Decision environment: Every decision is made within a decision environment, which

is defined as the collection of information, alternatives, values, and preferences
available at the time of the decision. An ideal decision environment would include all
possible information, all of it accurate, and every possible alternative. However, both
information and alternatives are constrained because the time and effort to gain
information or identify alternatives are limited. The time constraint simply means that
a decision must be made by a certain time. The effort constraint reflects the limits of
manpower, money, and priorities. Since decisions must be made within this
constrained environment, we can say that the major challenge of decision-making is
uncertainty and a major goal of decision analysis is to reduce uncertainty. We can
almost never have all information needed to make a decision with certainty, so most
decisions involve an undeniable amount of risk.

The fact that decisions must be made within a limiting decision environment suggests
two things. First, it explains why hindsight is so much more accurate and better at
making decisions that foresight. As time passes, the decision environment continues
to grow and expand. New information and new alternatives appear–even after the
decision must be made. Armed with new information after the fact, the hindsighters
can many times look back and make a much better decision than the original maker,
because the decision environment has continued to expand.

The second thing suggested by the decision-within-an-environment idea follows from

the above point. Since the decision environment continues to expand as time passes, it
is often advisable to put off making a decision until close to the deadline.

2. Effects of Quantity on Decision-making: Many decision-makers have a tendency

to seek more information than required to make a good decision. When too much
information is sought and obtained, one or more of several problems can arise.

(a) A delay in the decision occurs because of the time required to obtain and process
the extra information. This delay could impair the effectiveness of the decision or
solution.
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 (b) Information overload will occur. In this state, so much information is available
that decision-making ability actually declines because the information in its entirety
can no longer be managed or assessed appropriately.

Example: A manger spent a day at an information-heavy seminar. At the end of the

day, he was not only unable to remember the first half of the seminar but he had also
forgotten where he parked his car that morning.

(c) Selective use of the information will occur. That is, the decision-maker will
choose from among all the information available only those facts which support a
preconceived solution or position.

(d) Mental fatigue occurs, which results in slower work or poor quality work.

(e) Decision fatigue occurs, where the decision-maker tires of making decisions.
Often the result is fast, careless decisions or even decision paralysis–no decisions are
made at all.

3. Decision Streams: A common misconception about decision-making is that

decisions are made in isolation from each other: you gather information, explore
alternatives, and make a choice, without regard to anything that has gone before. The
fact is, decisions are made in a context of other decisions. The typical metaphor used
to explain this is that of a stream. There is a stream of decisions surrounding a given
decision, many decisions made earlier have led up to this decision and made it both
possible and limited. Many other decisions will follow from it.

Examples:

(a) When you decide to go to the park, your decision has been enabled by many
previous decisions. You had to decide to live near the park; you had to decide to buy a
car or learn about bus routes, and so on. And your previous decisions have
constrained your subsequent ones: you can't decide to go to a park this afternoon if it
is three states away. By deciding to live where you do, you have both enabled and
disabled a whole series of other decisions.

(b) When you enter a store to buy a VCR or TV, you are faced with the preselected
alternatives stocked by the store. There may be 200 models available in the universe
of models, but you will be choosing from, say, only a dozen. In this case, your
decision has been constrained by the decisions made by others about which models to
carry.

RATIONALITY IN DECISION MAKING

The various steps or process involved in rational decision making

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When a manager makes a decision, it is in effect the organisation‘s response to a problem. As
such, decisions should be thought of as means rather than ends. Every decision is the
outcome of a dynamic process which is influenced by multiple forces. This process is
presented in figure 1. However, this process should not be interpreted to mean that decision
making is a fixed procedure. A process is basically a dynamic concept rather than static.
Events and relationships are dynamic, continuous, and flexible and must be considered as a
whole in which many factors interact; a force affecting others and being affected by others.
Therefore, the decision making process as presented in figure 1 should be seen as sequential
process rather than a series of steps to enable the decision maker to examine each element in
the progression that leads to a decision. Moreover, the process reveals that it is more
applicable to non-programmed decisions than to programmed ones. Problems that occur
infrequently are unstructured, and are characterised by a great deal of uncertainty regarding
their outcome, require the manager to utilise the entire process. For frequently occurring,
structured problems, it is not necessary to consider the entire process. If a policy is
established or a specific rule or procedure developed to handle such problem arises.

Specific objective

The need for decision making arises in order to achieve certain specific objectives. Every
action of human being is goal directed. This is true for decision making also which is an
action. Therefore, the starting point in any analysis of decision making involves the
determination of whether a decision needs to be made. In fact, setting of specific objective
itself is an outcome of an earlier decision. However, since the objective setting is an outcome
of earlier decision, this may not be considered truly as the first step of decision process but
provides framework for further decisions.

Problem Identification

Since a particular decision is made in the context of certain given objectives, identification of
problem is the real beginning of decision making process. A problem is a felt need, a question
thrown forward for solution. It is the gap between present and desired state of affairs on the
subject-matter of decision. It is just like the diagnosis of patient by the doctor. When a doctor
makes a diagnosis, he has a normal, healthy person and he also has a fairly clear concept of
what a healthy person is. With this model as the desired result, he looks for disparities in the
patient‘s actual state of health or factors which indicate that his future health will fall short of
normal. In the case of management decision, however, a manager cannot rely on a commonly
accepted norm such as healthy person. The objectives, if set precisely and specifically on the
subject matter of decision, will provide clue in identifying the problem and its possible
solution. Further, in management, a problem exists whenever one faces a question whose
answer involves doubt and uncertainty. If there is no solution to the problem, it cannot be
treated as problem from decision point of view, though the consequences of not solving this
problem may be terrible. A problem can be identified much clearly, if managers go through
diagnosis and analysis of the problem.

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1. Diagnosis. The term ‗diagnosis‘ has come from medical science where it is used as
the process of identifying from its signs and symptoms. A symptom is a condition or
set of conditions that indicates the existence of a problem. For eg. A patient has
certain symptoms on the basis of which his disease can be identified. Symptoms
occupy an essential place in the problem solving process for they signal the existence
of problem and guide the search for the underlying problem. For eg. If an organisation
has high turnover of its employees, it indicates that something is wrong with the
organisation. The symptom of high turnover may provide the clue to the real problem
and managers can overcome the problem by taking appropriate action. Often
managers fail to diagnose the problem correctly and sometimes they treat symptom as
problem. Therefore, they should do this exercise very carefully. Diagnosing the real
problem implies knowing the gap between what is and what ought to be, identifying
the reasons for the gap, and understanding the problem in relation to higher objectives
of the organisation.

2. Analysis. While the diagnosis of problem gives the understanding of what should be
done in terms of decision making, analysis of problem takes it a step further. The
analysis of the problem requires finding out who would make decision, what
information would be needed and from where the information is available. This
analysis may provide managers with revealing circumstances that help them to gain
an insight into the problem. The whole approach of analysis of problem should,
however, be based around critical factors like the availability of information for
making decision, criticality of decision, and the time available for making decision.
For eg, information may be available from external and internal sources and some of
the information may not be available at all. Similarly, the critically of decision will
determine the level at which the decision can be made. Thus, diagnosis and analysis
of problem requiring decision will clarify what is needed and when the alternatives
for doing the thing can be sought.

3. Search for Alternatives

A thorough diagnosis defines both a specific problem and the situation in which the
problem exists. With this definition in mind, a decision maker seeks possible
solutions. A problem can be solved in several ways; however, all the ways cannot be
equally satisfying. Further if there is only one way of solving a problem, no question
of decision arises. Therefore, the decision maker must try to find out the various
alternatives available in order to get the most satisfactory result of a decision.
Identification of various alternatives not only serves the purpose of selecting the most
satisfactory one, but it also avoids bottlenecks in operation as alternatives are
available if a particular decision goes wrong. However, it should be borne in mind
that it may not be possible to consider all alternatives either because some of the
alternatives cannot be considered for selection because of obvious limitations of the
decision maker or information about all alternatives may not be available. Therefore,
while generating alternatives, the concept of limiting factor should be applied. A
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 limiting factor is one which stands in the way of accomplishing a desired objective. If
these factors are identified, managers will confine their search for alternatives to those
which will overcome the limiting factors. For eg, if an organisation has limitation in
raising sizable finances, it cannot consider projects involving high investment.

A decision maker can use several sources for identifying alternatives: from his or her
own past experience, practices followed by others, and using creative techniques. Past
experience, applied in most cases of decision making, takes into account the actions
taken by the decision maker in the past with obvious differences between the former
challenges and the present one. The successful action of the past may become an
alternative for the future. This is a very simple approach but has obvious limitations
because there may be some much change in the decision context that old action
becomes totally irrelevant. Copying from the experience of others is another way of
generating alternatives. Thus, alternatives used by successful decision makers can be
thought of as alternatives of decision making. This is also practised by many
organisations after making suitable amendments in the light of changed decision
context. Importing of technology from foreign countries with suitable changes is good
example of this type of alternatives. The third method of generating alternatives is
through creative process where various exercises are taken to generate entirely new
ideas.

4. Evaluation of alternatives

After the various alternatives are identified, the next step is to evaluate them and
select the one that will meet the choice criteria. However, all alternatives available for
decision making will not be taken for detailed evaluation because of the obvious
limitations of managers in evaluating all alternatives. The energy of managers is
limited and psychologically most of them prefer to work on plans that have good
prospect of being carried out. In narrowing down the number of alternatives, two
approaches can be followed: constraint on alternatives and grouping of alternatives of
similar nature. The decision maker develops a list of limits that must be met by a
satisfactory solution. He may treat these limits as constraints, that is, he may check
proposed alternatives against limits, and if an alternative does not meet them, he can
discard it. In the second approach, various alternative does not meet them, he can
discard it. In the second approach, various alternatives can be grouped into classes on
specific criteria important to decision making. A representative alternative one group
may be selected for future analysis. Then having found the group that shows up the
best, decision maker can concentrate on alternatives within this group. This method is
very helpful in decision making regarding the location of plant, warehouse, etc.

Having narrowed down the alternatives which require serious consideration, the
decision maker will go for evaluating how each alternative may contribute towards
the objectives supposed to be achieved by implementing the decision. Evaluation of
various alternatives dissects an alternative into various tangible and intangible factors.

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 Tangible factors are those which can be quantified because they are quite obvious like
the cost per unit, investment required, output to be received, etc. such factors can be
measured easily, though their happening may not be measured with certainty; for eg,
demand projection at a given price in a particular alternative. As against these,
intangible factors are mostly qualitative and cannot be measured in terms of quality.
Therefore, some definitions can be used for such factors, for eg, in a plant location,
various non-economic factors like psychological problem arising out of displacement
of persons from the plant site, ecological balance, etc. have to be taken into account
which cannot be quantified. In evaluating an alternative, both these factors have to be
taken into account. For determining the impact of a factor, various quantitative
techniques have been developed.

5. Choice of alternative

The evaluation of various alternatives presents a clear picture as to how each one of
them contributes to the objectives under question. A comparison is made among the
likely outcomes of various alternatives and the best one is chosen. Choice aspect of
decision making is related to deciding the most acceptable alternative which fits with
the organisational objectives. It may be seen that the chosen alternative should be
acceptable in the light of the organisational objectives. Thus, it is not necessary that
the chosen alternative is the best one. This concept is based on the satisficing
approach rather than the maximising approach of decision making. In choosing an
alternative, the decision maker can go through three approaches: experience,
experimentation, and research and analysis.

6. Action

Once the alternative is selected, it is put into action. Truly speaking, the actual process
of decision making ends with the choice of an alternative through which the
objectives can be achieved. However, decision making, being a continuous and
ongoing process, must ensure that the objectives have been achieved by the chosen
alternative. Unless this is done, managers will never know what way their choice has
contributed. Therefore, the implementation of decision may be seen as an integral
aspect of decision.

Once the creative and analytical aspects of decision making through which an
alternative has been chosen are over, the managerial priority is one of converting the
decision into something operationally effective. This is the action aspect of decision
making. The basic difference between decision making as an analytical process and
action is that the former requires the use of conceptual skills since it translates the
abstract ideas into reality. For example, suppose that there is a change in consumers‘
tastes. This change is very abstract and cannot be seen unless some specific
techniques and measurements are applied. How this change can provide opportunity
to the organisation is mostly a conceptual exercise requiring managers to interpret
what changes are taking place and what products or services will be preferred in the
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 changed situation. Action, on the other hand, relates to putting a decision into practice
so that objectives of decision are achieved. This practice will provide further for
evaluating the soundness of the decision and, if need be, a change in the decision.

Implementation of a decision requires the communication to subordinates, getting

acceptance of subordinates over the matters involved in the decision, and getting their
support for putting the decision into action. The decision should be effected at
appropriate time and in proper way to make the action more effective. The
effectiveness of action is important because it is only effective action through which
organisational objectives can be achieved, and right decisions help in effective action.

7. Results

When the decision is put into action, it brings certain results. These results must
correspond with objectives, the starting point of decision-making process, if good
decision has been made and implemented properly. Thus, results provide indication
whether decision making and its implementations is proper. Therefore, managers
should take up a follow-up action in the light of feedback received from the results. If
there is any deviation between objectives and results, this should be analysed and
factors responsible for this deviation should be located. The feedback may also help in
reviewing the decision when conditions change which may require change in
decision. Therefore, a successful manager is one who keeps a close look at the
objectives and results of the decision and modifies his decision according to the
changes in the circumstances.‘

INTRODUCTION TO ORGANIZING: ORGANIZATION STRUCTURE & ITS

CONCEPTS

What is Organizing?

Organising as a function of management involves division of work among people whose

efforts must be co-ordinated to achieve specific objectives and to implement pre-determined
strategies. Organisation is the foundation upon which the whole structure of management is
built. It is the backbone of management. After the objectives of an enterprise are determined
and the plan is prepared, the next step in the management process is to organise the activities
of the enterprise to execute the plan and to attain the objectives of the enterprise. The term
organisation is given a variety of interpretations. In any case, there are two broad ways in
which the term is used. In the first sense, organisation is understood as a dynamic process and
a managerial activity which is necessary for bringing people together and tying them together
in the pursuit of common objectives. When used in the other sense, organisation refers to the
structure of relationships among positions and jobs which is built up for the realisation of
common objectives.

Organising – has The Process

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Organisation is the process of establishing relationship among the members of the enterprise.
The relationships are created in terms of authority and responsibility. To organise is to
harmonise, coordinate or arrange in a logical and orderly manner. Each member in the
organisation is assigned a specific responsibility or duty to perform and is granted the
corresponding authority to perform his duty. The managerial function of organising consists
in making a rational division of work into groups of activities and tying together the positions
representing grouping of activities so as to achieve a rational, well coordinated and orderly
structure for the accomplishment of work. According to Louis A Allen, "Organising involves
identification and grouping the activities to be performed and dividing them among the
individuals and creating authority and responsibility relationships among them for the
accomplishment of organisational objectives." The various steps involved in this process are:

1. Determination of Objectives: It is the first step in building up an organisation.

Organisation is always related to certain objectives. Therefore, it is essential for
the management to identify the objectives before starting any activity.
Organisation structure is built on the basis of the objectives of the enterprise. That
means, the structure of the organisation can be determined by the management
only after knowing the objectives to be accomplished through the organisation.
This step helps the management not only in framing the organisation structure but
also in achieving the enterprise objectives with minimum cost and efforts.
Determination of objectives will consist in deciding as to why the proposed
organisation is to be set up and, therefore, what will be the nature of the work to
be accomplished through the organisation.

2. Enumeration of Objectives: If the members of the group are to pool their efforts
effectively, Notes there must be proper division of the major activities. The first
step in organising group effort is the division of the total job into essential
activities. Each job should be properly classified and grouped. This will enable the
people to know what is expected of them as members of the group and will help in
avoiding duplication of efforts. For example, the work of an industrial concern
may be divided into the following major functions – production, financing,
personnel, sales, purchase, etc.

3. Classification of Activities: The next step will be to classify activities according to

similarities and common purposes and functions and taking the human and
material resources into account. Then, closely related and similar activities are
grouped into divisions and departments and the departmental activities are further
divided into sections.

4. Assignment of Duties: Here, specific job assignments are made to different

subordinates for ensuring a certainty of work performance. Each individual should
be given a specific job to do according to his ability and made responsible for that.
He should also be given the adequate authority to do the job assigned to him. In
the words of Kimball and Kimball, "Organisation embraces the duties of

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 designating the departments and the personnel that are to carry on the work,
defining their functions and specifying the relations that are to exist between
department and individuals."

5. Delegation of Authority: Since so many individuals work in the same

organisation, it is the responsibility of management to lay down structure of
relationship in the organisation. Authority without responsibility is a dangerous
thing and similarly responsibility without authority is an empty vessel. Everybody
should clearly know to whom he is accountable; corresponding to the
responsibility authority is delegated to the subordinates for enabling them to show
work performance. This will help in the smooth working of the enterprise by
facilitating delegation of responsibility and authority.

What is Organisation Structure?

We all know that, Organisation Structure is a part of Organising. An organisation structure

shows the authority and responsibility relationships between the various positions in the
organisation by showing who reports to whom. Organisation involves establishing an
appropriate structure for the goal seeking activities. It is an established pattern of relationship
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."
The structure of an organisation is generally shown on an organisation chart. It shows the
authority and responsibility relationships between various positions in the organisation while
designing the organisation structure, due attention should be given to the principles of sound
organisation.

Significance of Organisation Structure are as follows:

1. Properly designed organisation can help improve teamwork and productivity by

providing a framework within which the people can work together most effectively. 2.
Organisation structure determines the location of decision-making in the organisation.
3. Sound organisation structure stimulates creative thinking and initiative among
organisational members by providing well defined patterns of authority. 4. A sound
organisation structure facilitates growth of enterprise by increasing its capacity to
handle increased level of authority. 5. Organisation structure provides the pattern of
communication and coordination. 6. The organisation structure helps a member to
know what his role is and how it relates to other roles.

What is Organisation Design?

Organisation design is a part of organising. Organisation design may be defined as a formal,

guided process for integrating the people, information and technology of an organisation.
Organisation design involves the creation of roles, processes, and formal reporting
relationships in an organisation. One can distinguish between two phases in an organisation
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design process: strategic grouping, which establishes the overall structure of the organisation,
(its main sub-units and their relationships), and operational design, which defines the more
detailed roles and processes. It is used to match the form of the organisation as closely as
possible to the purpose(s) the organisation seeks to achieve. Through the design process,
organisations act to improve the probability that the collective efforts of members will be
successful. Thus it may said to be a process for improving the probability that an organisation
will be successful.

Organisation design is the process of developing or changing an position in the organisation

structure. It involves the six key elements in designing an org. structure. They are

• Work specialization

• Departmentalization

• Chain of command

• Span of control

• Centralization and decentralization, and

• Formalization

Let‘s see each key element of Organisation design.

1. Work specialization: Jobs are given based on the employees work specialization – it
means, the importance of work specialization is the entire job cannot be done by one
individual, it is broke down into tasks and each tasks need to be given to each and
every individual in the organisation.

2. Departmentalization: it is the basis by which jobs are grouped together is called as

Departmentalization. The five forms of departmentalization includes functional,
product, geographical, process, and customer departmentalization.

3. Chain of command: this is the continuous line of authority that extends from upper
organisational level to the lowest levels and it also clarifies who has to report to
whom. For eg. If I encounter with any problem in the org, I should know to whom I
am supposed to report to.

4. Span of control: it means, a manager or a supervisor can control only 6 no of

employees in the organisation. If it exceeds, the manager will lose control in
improving the efficiency and productivity of employees.

5. Centralization and decentralization: It is the degree to which the decision making is

concentrated at a single point in the org. in centralization; the top management takes
key decisions without getting input from others. Vice versa for Decentralization, the

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 decisions will be taken by the managers who are closest to the action and they are
held responsible for the results of the particular activity.

6. Formalization – it is the degree to which jobs within the organisations are

standardized and extent to which employee behaviour is guided by rules and
regulations or procedure.

It is a set of formal rules and regulations, and it has to be followed by everyone in the
org.

Purpose of organising

• It Divides the work to be done into specific jobs and departments.

• It Assigns job for each employee and also helps in grouping these jobs into depts.

• It assigns tasks and responsibilities associated with individual jobs.

• It coordinates diverse organizational tasks by connecting with each other.

• It clusters jobs into units.

• It establishes relationships among individuals, groups, and departments.

• It establishes formal lines of authority indicating the reporting relationship between

who has to report to whom.

• Assigns and organizes organizational resources among various positions by

delegating authority.

FACTORS AFFECTING ORGANISATION STRUCTURE

What is organising and organisation structure?

Organizing is the deployment of resources to achieve strategic goals. It determines how the
firm‘s resources are arranged and coordinated.

A. Strategy that indicates what needs to be done, while organizing shows how to do it. It
is reflected in
1. the division of labour that forms jobs and departments.
2. formal lines of authority.
3. mechanisms for coordination.

B. Organization structure is a formal system of relationships that determines lines of

authority and the tasks assigned to individuals and units.
1. The vertical dimension indicates who has the authority to make decisions and
who is expected to supervise which subordinates.

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 2. The horizontal dimension is the basis for dividing work into specific jobs and
tasks and assigning those jobs into units.

Factors Affecting Organizational structure

Organizational Structure or Framework is an outline depicting the authority and

communication guidelines followed by a company. The organization Framework usually
includes different policies, rules and regulations along with responsibilities assigned to each
position inside the organization. There are several critical factors that affect the appropriate
structure for an organization. The factors affect the organizational structure can be either
internal or external. The Organization Structure for a company is created by a business
consultant or by the people inside the company. The following five factors are the most
common: size, life cycle, strategy, environment, and technology.

 Organizational size

1. There is historical evidence that an organization‘s size significantly affects its

structure.
2. Large organizations—employing 2,000 or more employees—tend to have more
work specialization, horizontal and vertical differentiation, and rules and
regulations than do small organizations.
3. The relationship is not linear; the impact of size becomes less important as an
organization expands.
a) Example, once an organization has around 2,000 employees, it is already
fairly mechanistic—an additional 500 employees will not have much effect.
b) Adding 500 employees to an organization that has only 300 members is
likely to result in a shift toward a more mechanistic structure.

The larger an organization becomes, the more complicated its structure. When an
organization is small — such as a single retail store, a two‐person consulting firm, or a
restaurant — its structure can be simple.

In reality, if the organization is very small, it may not even have a formal structure. Instead of
following an organizational chart or specified job functions, individuals simply perform tasks
based on their likes, dislikes, ability, and/or need. Rules and guidelines are not prevalent and
may exist only to provide the parameters within which organizational members can make
decisions. Small organizations are very often organic systems.

As an organization grows, however, it becomes increasingly difficult to manage without more

formal work assignments and some delegation of authority. Therefore, large organizations
develop formal structures. Tasks are highly specialized, and detailed rules and guidelines
dictate work procedures. Inter-organizational communication flows primarily from superior
to subordinate, and hierarchical relationships serve as the foundation for authority,
responsibility, and control. The type of structure that develops will be one that provides the
organization with the ability to operate effectively. That's one reason larger organizations are

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often mechanistic—mechanistic systems are usually designed to maximize specialization and
improve efficiency.

 Organization life cycle

Organizations, like humans, tend to progress through stages known as a life cycle. Like
humans, most organizations go through the following four stages: birth, youth, midlife, and
maturity. Each stage has characteristics that have implications for the structure of the firm.

 Birth: In the birth state, a firm is just beginning. An organization in the birth stage
does not yet have a formal structure. In a young organization, there is not much
delegation of authority. The founder usually ―calls the shots.‖
 Youth: In this phase, the organization is trying to grow. The emphasis in this stage is
on becoming larger. The company shifts its attention from the wishes of the founder
to the wishes of the customer. The organization becomes more organic in structure
during this phase. It is during this phase that the formal structure is designed, and
some delegation of authority occurs.
 Midlife: This phase occurs when the organization has achieved a high level of
success. An organization in midlife is larger, with a more complex and increasingly
formal structure. More levels appear in the chain of command, and the founder may
have difficulty remaining in control. As the organization becomes older, it may also
become more mechanistic in structure.
 Maturity: Once a firm has reached the maturity phase, it tends to become less
innovative, less interested in expanding, and more interested in maintaining itself in a
stable, secure environment. The emphasis is on improving efficiency and profitability.
However, in an attempt to improve efficiency and profitability, the firm often tends to
become less innovative. Stale products result in sales declines and reduced
profitability. Organizations in this stage are slowly dying. However, maturity is not an
inevitable stage. Firms experiencing the decline of maturity may institute the changes
necessary to revitalize.

Although an organization may proceed sequentially through all four stages, it does not have
to. An organization may skip a phase, or it may cycle back to an earlier phase. An
organization may even try to change its position in the life cycle by changing its structure.

As the life‐cycle concept implies, a relationship exists between an organization's size and age.
As organizations age, they tend to get larger; thus, the structural changes a firm experiences
as it gets larger and the changes it experiences as it progresses through the life cycle are
parallel. Therefore, the older the organization and the larger the organization, the greater its
need for more structure, more specialization of tasks, and more rules. As a result, the older
and larger the organization becomes, the greater the likelihood that it will move from an
organic structure to a mechanistic structure.

 Strategy

A . How Does Strategy Affect Structure?

1. An organization‘s structure should facilitate goal achievement.
a) Strategy and structure should be closely linked.
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 b) Example, if the organization focuses on providing certain services—police
protection in a community—its structure will be one that promotes
standardized and efficient services.
c) Example, if an organization is attempting to employ a growth strategy by
entering into global markets, it will need a structure that is flexible, fluid,
and readily adaptable to the environment.
2. Accordingly, organizational structure should follow strategy. If management
makes a significant change in strategy, it needs to modify its structure as well.
3. The first important research on the strategy-structure relationship was Alfred
Chandler‘s study of close to 100 large U.S. companies.
4. After tracing the development of these organizations over fifty years and
compiling extensive case histories, Chandler concluded that changes in
corporate strategy precede and lead to changes in an organization‘s structure.
a) Organizations usually begin with a single product or line.
b) The simplicity of the strategy requires only a simple form of structure to
execute it.
c) Decisions can be centralized and complexity and formalization will be low.
d) As organizations grow, their strategies become more ambitious and
elaborate.
5. Research has generally confirmed the strategy-structure relationship.
a) Organizations pursuing a differentiation strategy must innovate to survive.
(1) An organic organization matches best with this strategy because it is
flexible and maximizes adaptability.
b) A cost-leadership strategy seeks stability and efficiency. Each of these
strategies requires a structure that helps the organization reach its
objectives. In other words, the structure must fit the strategy.
(1) Stability and efficiency help to produce low-cost goods and services and
can best be achieved with a mechanistic organization. It means,
Companies that want to be the first on the market with the newest and best
product probably are organic, because organic structures permit
organizations to respond quickly to changes. Companies that elect to
produce the same products more efficiently and effectively will probably
be mechanistic.

 Environment

1. Mechanistic organizations are most effective in stable environments.

2. Organic organizations are best matched with dynamic and uncertain
environments.
3. The environment is the world in which the organization operates, and includes
conditions that influence the organization such as economic, social‐cultural,

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 legal‐political, technological, and natural environment conditions.
Environments are often described as either stable or dynamic.
4. In a stable environment, the customers' desires are well understood and
probably will remain consistent for a relatively long time. Examples of
organizations that face relatively stable environments include manufacturers of
staple items such as detergent, cleaning supplies, and paper products.
5. In a dynamic environment, the customers' desires are continuously
changing—the opposite of a stable environment. This condition is often
thought of as turbulent. In addition, the technology that a company uses while
in this environment may need to be continuously improved and updated. An
example of an industry functioning in a dynamic environment is electronics.
Technology changes create competitive pressures for all electronics industries,
because as technology changes, so do the desires of consumers.
6. Global competition, accelerated product innovation, knowledge management,
and increased demands from customers for higher quality and faster deliveries
are examples of dynamic environmental forces.
7. Mechanistic organizations tend to be ill-equipped to respond to rapid
environmental change.

In general, organizations that operate in stable external environments find mechanistic

structures to be advantageous. This system provides a level of efficiency that enhances the
long‐term performances of organizations that enjoy relatively stable operating environments.
In contrast, organizations that operate in volatile and frequently changing environments are
more likely to find that an organic structure provides the greatest benefits. This structure
allows the organization to respond to environment change more proactively.

Technology

1. Every organization uses some form of technology to convert its inputs into
outputs.
2. To attain its objectives, the organization uses equipment, materials, knowledge,
and experienced individuals and puts them together into certain types and
patterns of activities.
a) Example, workers at Whirlpool build washers, dryers, and other home
appliances on a standardized assembly line.
b) Example, employees at Kinko‘s produce custom jobs for individual
customers.
c) Example, employees at Bayer AG in Pakistan work on a continuous flow
production line for manufacturing its pharmaceuticals.

Advances in technology are the most frequent cause of change in organizations since they
generally result in greater efficiency and lower costs for the firm. Technology is the way
tasks are accomplished using tools, equipment, techniques, and human know‐how.

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In the early 1960s, Joan Woodward found that the right combination of structure and
technology were critical to organizational success. She conducted a study of technology and
structure in more than 100 English manufacturing firms, which she classified into three
categories of core‐manufacturing technology:

 Small‐batch production is used to manufacture a variety of custom, made‐to‐order

goods. Each item is made somewhat differently to meet a customer's specifications. A
print shop is an example of a business that uses small‐batch production.
 Mass production is used to create a large number of uniform goods in an
assembly‐line system. Workers are highly dependent on one another, as the product
passes from stage to stage until completion. Equipment may be sophisticated, and
workers often follow detailed instructions while performing simplified jobs. A
company that bottles soda pop is an example of an organization that utilizes mass
production.
 Organizations using continuous‐process production create goods by continuously
feeding raw materials, such as liquid, solids, and gases, through a highly automated
system. Such systems are equipment intensive, but can often be operated by a
relatively small labour force. Classic examples are automated chemical plants and oil
refineries.

Woodward discovered that small‐batch and continuous processes had more flexible
structures, and the best mass‐production operations were more rigid structures.

Once again, organizational design depends on the type of business. The small‐batch and
continuous processes work well in organic structures and mass production operations work
best in mechanistic structures.

VARIOUS FORMS OF ORGANISATION STRUCTURE

There are two types of Organisation structure under which the organisation can be divided
into 1 is Mechanistic Structure and 2 is Organic Structure

Let’s understand the difference between Mechanistic Structure and Organic Structure

Mechanistic/Classical/Traditional Organic/Contemporary/Modern
organisation structure organisation structure

•It has High specialized function. It means • Cross-functional teams – here ppl from
the org. will have functions that are highly different functional areas form as teams and
skilled. work together on a particular project.

• It has a Rigid departmentalization. • Cross-hierarchical teams – the ppl who

have formed as teams, they will monitored by
any of the top/head of the higher level
authorities.

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• It has a Clear chain of command. So that, • Free flow of information – here it has a free
you can clearly know who are the superiors flow of information from all levels of
and the subordinates. management.

• It has narrow spans of controls, since the • Wide spans of control – it has a wide or
jobs are highly skilled a person cannot broad span of control – it is more than then
supervise large no of people. The limited specified limit.
number of people a manager can guide or
supervise is 6.

• It is strictly centralized org, where all the • Decentralization - It is strictly decentralized

decisions are taken only by the top org, where all the decisions making are lies
management. in the hands of various heads or positions
who are closest to the action and held
responsible for results of the activity.

• It has high formalization, which is guided • Low formalization – it has low rules and
by strict rules and regulation. regulations to be followed by the employees
in the organisation.

The organisational design those are existing in various traditional organisations.

The Traditional Organizational Designs that are followed in traditional times are

1. Simple structure 2. Functional structure and 3. Divisional structure

 Simple structure - the structure which followed was having Low

departmentalization, wide spans of control, centralized authority, little formalization

 Functional Structure

This is the most widely used form of organisation structure because of its simple logic
and common sense appeal. Here the tasks are grouped together on the basis of common
functions. So, all production activities or all financial activities are grouped into a single
function which undertakes all the tasks required of that function. A typical chart of a
functional organisation is presented in Figure.

The functional structure suits best to the small to medium organisations producing one or a
few products, where the goals of the organisation emphasise functional specialisation,
efficiency and quality. When the activities or jobs are grouped keeping in mind the functions
to be performed then it is called functional structure. These functions are organized in to
separate departments. For example, in a manufacturing concern division of work into key
functions will include production, purchase, marketing, and personnel.

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Functional organization has been divided to put the specialists in the top position throughout
the enterprise. This is an organization in which we can define as a system in which functional
department are created to deal with the problems of business at various levels. Functional
authority remains confined to functional guidance to different departments. This helps in
maintaining quality and uniformity of performance of different functions throughout the
enterprise.

The concept of Functional organization was suggested by F.W. Taylor who recommended the
appointment of specialists at important positions. For example, the functional head and
Marketing Director directs the subordinates throughout the organization in his particular area.
This means that subordinates receives orders from several specialists, managers working
above them.

 Divisional Structure

This form of organisation 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. Thus, one finds autonomous ―little companies within the
company adopting this type of organisation structure. As such, within each of these little
independent units, we find all important functions viz. production, marketing, finance and
human resources. The organisation structure of a large multi-product pharmaceutical
company is illustrated in Figure.

An organization which is very large in size and is producing more than one product, they
need to evolve a design to cope with the complexity. The activities related to one product are
grouped under one division. The organizational structure consists of separate divisions, each
such division has its own manager. Within each division, functions like production,
marketing, finance etc. are performed. In other words, each division tends to adopt a
functional structure. However, functions may vary across divisions in accordance to their
product line.

The modern organisational design that are followed in the modern days by most of the
organisations.

 Team Structure – it means the entire organisation is formed by groups or teams. And
there exists flexible chain of command. Flexible Chain of command means the
instructions and orders can be given by any individual from team members but not
restricted with only one.

Team structure refers to the composition of an individual team or of a multi-team

system. Team structure is an integral part of the teamwork process. A properly structured
patient care team is an enabler for and the result of effective communication, leadership,
situation monitoring, and mutual support.

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• Advantages: Employees are more involved and empowered.
Reduced barriers among functional areas.

• Disadvantages: No clear chain of command. Pressure on teams to

perform.
 Matrix/project structure

Some organizations find that none of the afore-mentioned structures meet their needs. One
approach that attempts to overcome the inadequacies is the matrix structure, which is the
combination of two or more different structures. Functional departmentalization commonly is
combined with product groups on a project basis.

For example, a product group wants to develop a new addition to its line; for this project, it
obtains personnel from functional departments such as research, engineering, production, and
marketing. These personnel then work under the manager of the product group for the
duration of the project, which can vary really. These personnel are responsible to two
managers.

The matrix structure groups employees by both function and product. This structure can
combine the best of both separate structures. A matrix organization frequently uses teams of
employees to accomplish work, in order to take advantage of the strengths, as well as make
up for the weaknesses, of functional and decentralized forms.

An example would be a company that produces two products, "product a" and "product b".
Using the matrix structure, this company would organize functions within the company as
follows: "product a" sales department, "product a" customer service department, "product a"
accounting, "product b" sales department, "product b" customer service department, "product
b" accounting department.

Matrix structure is amongst the purest of organizational structures, a simple lattice emulating
order and regularity demonstrated in nature.

 Weak/Functional Matrix: A project manager with only limited authority is assigned to

oversee the cross- functional aspects of the project. The functional managers maintain control
over their resources and project areas.

 Balanced/Functional Matrix: A project manager is assigned to oversee the project. Power is

shared equally between the project manager and the functional managers. It brings the best
aspects of functional and projectized organizations. However, this is the most difficult system
to maintain as the sharing power is delicate proposition.

 Strong/Project Matrix: A project manager is primarily responsible for the project.

Functional managers provide technical expertise and assign resources as needed.

In theory at least, top management is responsible for arbitrating such conflicts, but in practice
power struggles between the functional and product manager can prevent successful
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implementation of matrix structural arrangements. Besides the product/function matrix, other
bases can be related in a matrix. Large multinational corporations that use a matrix structure
most commonly combine product groups with geographic units. Product managers have
global responsibility for the development, manufacturing, and distribution of their own
product or service line, while managers of geographic regions have responsibility for the
success of the business in their regions.

To put it in simple terms, a / matrix project structure that assigns specialists from different
functional areas to work on projects but who return to their areas when the project is
completed. Project is a structure in which employees continuously work on projects. As one
project is completed, employees move on to the next project.

 Boudaryless structure

General Electric Chairman, Jack Welch, coined the term boundaryless organisation. The
boundaryless organisation seeks to remove the vertical and horizontal boundaries within the
organisation and to break down external barriers between the company and its customers and
suppliers. Once the management removes the vertical boundaries, the structure of the
organisation looks more like a silo than a pyramid. To break down the vertical boundaries,
the management adopts the following strategies:

i. Creating cross-hierarchical teams (which includes top executives, middle managers,

supervisors, and operative employees);

ii. Encouraging participative decision making; and

iii. Making use of 360 degree performance appraisal (peers and others above and below
the employee evaluate his / her performance).

To reduce the barriers to the horizontal boundaries, the management adopts the following
strategies:

i. Replacing the functional departments with cross-functional teams and organising

activities around processes;

ii. Using lateral transfers; and

iii. Rotating people into and out of different functional areas.

The external boundaries can be reduced through practices like strategic alliances,
customer- organisation linkages and telecommuting (mainly with the networked
computers).

To put it in simple terms, it is a structure not limited to any sort of boundaries or limits. It
removes External and Internal Boundaries, but uses virtual, network, and modular.

 Virtual Organisation (with Network Structure)

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A virtual organisation is a small, core organisation that outsources major business functions.
It is highly centralised, with little or no departmentalisation. The virtual organisation creates
network relationships with other organisations / agencies located anywhere in the world for
the purpose of contracting out functions like manufacturing, distribution, marketing, R & D,
etc. The networking is done through the electronic technology. As such, the partnerships
between the virtual organisation and other organisations (far-flung companies) are based on
electronic contracts. The partners are less permanent, less formal, and more opportunistic.
Each partner contributes to the virtual organisation its core capabilities. The managers of the
virtual organisations spend most of their time in coordinating the various activities through
the networking. Examples of virtual organisations include Ford, Harley Davidson, Nike,
Rebok, Mobil Corp., IBM etc.

 Modular Organisation: it means, a manufacturing organisation gets and uses spare

parts from one or more outside suppliers, and then assembles them and produces their
finally assembled products to dealers and that finally reaches its customers.

VARIOUS FORMS OF DEPARTMENTALISATION

What is DEPARTMENTALIZATION?

Departmentalization is the process of breaking down an enterprise into various departments.

How jobs are grouped together is called departmentalization. A Department is an
organization unit that is headed by a manager who is responsible for its activities.
Departmentation and Division of labour are same things. However technically both are
different. Both emphasize on the use of the specialized knowledge, but depratmentation has
higher management level strategic considerations while the division of labour has a lower
level operating considerations.

Aim : To group activities and personnel to make manageable units.

TYPES/METHODS/BASIS OF DEPARTMENTALIZATION

There are five common forms of departmentalization (1) Functional Departmentalization (2)
Geographical Departmentalization (3) Product Departmentalization (4) Process
Departmentalization (5) Customer Departmentalization

FUNCTIONAL DEPARTMENTALIZATION

It groups jobs according to function. Functional departmentalization defines departments by

the functions each one performs such as accounting or purchasing. Every Organization must
perform certain jobs in order to do its work. For example, Manufacturing, Production, R & D,
Purchasing etc. Same kinds of jobs are grouped together in departments. This kind of
departmentalization includes persons with same knowledge or skills (like Accounting
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Department having persons of commerce, Marketing Department having MBA persons). As
in department people with same skill and knowledge are there. Their focus becomes narrow
and they cannot appreciate each other‘s work in the same department.

Advantages :-  Efficiencies from putting together similar specialist and people with common
skills, knowledge, and orientations.  In-depth specialization.  Co-ordination within
functional area.

Limitations :-  Poor communication across functional areas.  Limited view of

organizational goals.

GEOGRAPHICAL DEPARTMENTALIZATION

It groups jobs according to geographic region. Geographical departmentalization is an

arrangement of departments according to geographic area or territory. It divides works well
for international business. Geographical Departmentalization is beneficial when Organization
are spread over a wide area. Even each part or areas have different requirement or interests.
For example, marketing a product in Western Europe may have different requirements than
marketing the same product in Southeast Asia. Market area is broken up into sales territories
like Northern, Southern, West, East. The Salesman appointed for each territory report to their
regional or territorial manager. These manager again reports to the sales manager who is head
of the sales department.

Advantages : -  More effective and efficient handling of specific regional issues that arise. 
Serve needs of unique geographic markets better.

Limitations :-  Duplication of functions.  Can feel isolated from other organizational areas.

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PRODUCT DEPARTMENTALIZATION

It groups jobs by product line. Companies may have multiple products. Like Maruti is
producing Alto, Zen, Swift. Large companies are often organized according to the product.
All common activities required to produce and market a product are grouped together. Major
disadvantages are duplication of resources. Each product requires most of the same functional
areas such as finance, marketing, production etc. For example, Samsung manufactures
Phones, T.V., Tablet etc. For each product, they have same functional department like
marketing, production etc. Thus, it is duplication of functions. Product Departmentalization
has become important for large complex organization.

Advantages :-  Allows specialization in particular products and services.  Managers can

become experts in their industry.  Closer to customers.

Limitations :-  Duplication of functions.  Limited view of organizational goals.

PROCESS DEPARTMENTALIZATION
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It groups Jobs On The Basis Of Product or Customer Flow. Departmentalization is done on
the basis of processing. In manufacturing organizations, the location of manufacturing plant
or department can be at different location due to cost of raw material and even labour
charges. Even departmentalization can be done depending on the types of machines required.
The similar types of machines can be kept at one place e.g. all lathes, all drilling machines,
all shapers etc. Activities are grouped into separate sections, each kept at one place.

Advantages :-  More efficient flow of work activities.

Limitations :-  Can only be used with certain types of products.

CUSTOMER DEPARTMENTALIZATION

It groups Jobs on the basis of specific and Unique customers divisions are set up to service
particular types of clients or customers. Some companies or organization divides the different
units based on customers or markets. For example, any PC manufacturing company like HP
has different divisions like Consumer PC, Commercial PC, and Workstations etc. Nokia
previously had three divisions like Consumer Phone, Business Phone & Smart Phone.
Recently Nokia had changed their departmentalization from customer to process base. Now
there are only two divisions: Hardware and Software base departmentalization. They will also
sell their software to other mobile company. Another example is an educational institution
offers regular and extension courses to cater to the needs of different students groups.

Advantages :-  Customers‘ needs and problems can be met by specialists.

Limitations :-  Duplication of functions.  Limited view of organizational goals.

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WHAT IS SPAN OF CONTROL/MANAGEMENT?

Span of Control is made of two words, viz., "Span" and "Control". Span's literary meaning
says, it is the distance between the tip of a thumb and small finger when palm of hand is fully
stretched out. However, in terms of management and administration, it means the maximum
extend or the number of people that can be reached by.

Control in literary means an ability to instruct, check, adjust or manipulate something as per
one‗s preferred requirement, choice or expectation. However, in terms of management and
administration, it refers to an authoritative power to direct, order or restrain.

Span of Control in management and administration thus refers to the total number of people
(here, subordinates or employees working under) whom a manager or an administrator can
effectively control and supervise.

So, span of control means the number of subordinates whom a superior (manager or
administrator) can effectively supervise. Every superior can supervise a limited number of
subordinates (employees). Therefore, every superior should be assigned or given an authority
to handle only few subordinates.

It states that how many employees can a manager efficiently & effectively manage ? OR The
number of persons who are directly responsible to the executive is called the span of control.
No single executive should have more people looking to him for controlling & guidance than
he can reasonably manage because:- Limited time, Limited available energy.

The numbers of persons which can be effectively supervised by single executive is 6 to 8 in

an average firm. However when activities are routine then executive can supervise 20 to 30.

If span is small, an executive may tend to over supervise & may even do span leading to his
subordinates.
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If span is large, executive may not be able to supervise his subordinates effectively & they
may become careless or feel neglected.

Suppose you have 4000 workers in organization. If you divide those workers in 4 groups then
you need 1000 Managers. If a span is small, you need 1000 managers and will take large
amount of money in terms of Annual Salary of Managers. But Workers will get proper
supervision. Now, if we divide those workers in 8 groups then you need 500 Managers. If a
span is big then you need 500 managers and will save company‘s money.

According to most management experts, at the top level of management, the span of control
should not be more than 1:6 while at the lower level of management, the span of control
should not be more than 1:20. This means, the superior at the top level should not have more
than 6 subordinates under his control. Similarly, the superior at the lower level should not
have more than 20 subordinates under his control. However, these are only theoretical
figures. In practice, the span of control depends on many factors such as nature of work,
ability of superior, ability of subordinates, etc.

Span of Control is also referred by many other names. It is often known as 'Span of
Supervision' or 'Span of Management' or 'Span of Attention'. However, the term 'Span of
Management' suits as the most appropriate name, since control and supervision are the
elements of management.

Historical Discussion of Span of Control

A small, or narrow, span of control results in each manager supervising a small number of
employees, while a wide span of management occurs when more subordinates report directly
to a given manager. A small span of management would make it necessary to have more
managers and more layers of management to oversee the same number of operative
employees than would be necessary for an organization using a wider span of management.
The narrower span of management would result in more layers of management and slower
communications between lower level employees and top level managers of the firm. Recent
moves to downsize organizations and to eliminate unnecessary positions has resulted in many
organizations moving to wider spans of management and the elimination of layers of middle-
level managers.

An argument for a narrow span of control was presented by V.A. Gaicunas, who developed a
formula showing that an arithmetic increase in the number of a manager's subordinates
resulted in a geometric increase in the number of subordinate relationships that a manager
had to manage. According to Gaicunas, managers must manage not only one-to-one direct
reporting relationships, but also relationships with various groups of subordinates and the
relationships that exist between and among individual subordinates. The formula is shown
below: where I is the total number of interactions and N is the number of subordinates.

Therefore, if a manager has two subordinates, there are 6 potential relationships to manage.
However, if the manager's subordinates are increased to three, then the number of

27
relationships is increased to 18. As the number of relationships increased, Gaicunas argued,
the sheer number of interactions would exceed the abilities of the manager.

28