Organizing is the development of the company resources to achieve strategic goals. The deployment of resources is reflected in the company division of labor into specific departments and jobs, formal lines of authority, and mechanisms for coordinating diverse company tasks.

Organization structure

The organizing process leads to the creation of organization structure, which defines how tasks are divided and resources deployed. Organization structure is defined as:

• The set of formal tasks assigned to individuals and departments;
• formal reporting relationships, including lines of authority, decision responsibility, number of hierarchical levels, and span of managers’ control; and
• The design of systems to ensure effective coordination of employees across departments. Ensuring coordination across departments is just as critical as defining the departments to begin with. Without effective coordination systems, no structure is complete.

Characteristics of the business organization structure

A. Organization chart

The set of formal tasks and formal reporting relationships provides a framework for vertical control of the organization. The characteristics of vertical structure are portrayed in the organization chart, which is the visual representation of an organization’s structure.

The plant has four major departments—accounting, human resources, production, and marketing. The organization chart delineates the chain of command, indicates departmental tasks and how they fit together, and provides order and logic for the organization. Every employee has an appointed task, line of authority, and decision responsibility.

B. Work Specialization

Organizations perform a wide variety of tasks. A fundamental principle is that work can be performed more efficiently if employees are allowed to specialize. Work specialization, sometimes called division of labor, is the degree to which organizational tasks are subdivided into separate jobs. Employees within each department perform only the tasks relevant to their specialized function. When work specialization is extensive, employees specialize in a single task. Jobs tend to be small, but they can be performed efficiently. Work specialization is readily visible on an automobile assembly line where each employee performs the same task over and over again. It would not be efficient to have a single employee build the entire automobile, or even perform a large number of unrelated jobs.

Despite the apparent advantages of specialization, many organizations are moving away from this principle. With too much specialization, employees are isolated and do only a single, boring job. In addition, too much specialization creates separation and hinders the coordination that is essential for organizations to be effective. Many companies are implementing teams and other mechanisms that enhance coordination and provide greater challenge for employees.

C. Chain of Command

The chain of command is an unbroken line of authority that links all persons in an organization and shows who reports to whom. It is associated with two underlying principles. Unity of command means that each employee is held accountable to only one supervisor. The scalar principle refers to a clearly defined line of authority in the organization that includes all employees. Authority and responsibility for different tasks should be distinct. All persons in the organization should know to whom they report as well as the successive management levels all the way to the top. The payroll clerk reports to the chief accountant, who in turn reports to the vice president, who in turn reports to the company president.

D. Authority, Responsibility, and Delegation

The chain of command illustrates the authority structure of the organization. Authority is the formal and legitimate right of a manager to make decisions, issue orders, and allocate resources to achieve organizationally desired outcomes. Authority is distinguished by three characteristics:

1. Authority is vested in organizational positions, not people. Managers have

authority because of the positions they hold, and other people in the same positions would have the same authority.

2. Authority is accepted by subordinates. Although authority flows top-down through the organization’s hierarchy, subordinates comply because they believe that managers have a legitimate right to issue orders. The acceptance theory of authority argues that a manager has authority only if subordinates choose to accept his or her commands. If subordinates refuse to obey because the order is outside their zone of acceptance, a manager’s authority disappears.
3. Authority flows down the vertical hierarchy. Positions at the top of the hierarchy are vested with more formal authority than are positions at the bottom. Responsibility is the flip side of the authority coin. Responsibility is the duty to perform the task or activity as assigned. Typically, managers are assigned authority commensurate with responsibility. When managers have responsibility for task outcomes but little authority, the job is possible but difficult. They rely on persuasion

and luck. When managers have authority exceeding responsibility, they may become tyrants, using authority toward frivolous outcomes.

E. Accountability

Accountability is the mechanism through which authority and responsibility are brought into alignment. Accountability means that the people with authority and responsibility are subject to reporting and justifying task outcomes to those above them in the chain of command. For organizations to function well, everyone needs to know what they are accountable for and accept the responsibility and authority for performing it. Accountability can be built into the organization structure. For example, at Whirlpool, incentive programs tailored to different hierarchical levels provide strict accountability. Performance of all managers is monitored, and bonus payments are tied to successful outcomes. Another example comes from Caterpillar Inc., which got hammered by new competition in the mid-1980s and reorganized to build in accountability.

F. Span of Management

The span of management is the number of employees reporting to a supervisor. Sometimes called the span of control, this characteristic of structure determines how closely a supervisor can monitor subordinates. Traditional views of organization design recommended a span of management of about seven subordinates per manager. However, many lean organizations today have spans of management as high as 30, 40, and even higher. For example, at Consolidated Diesel’s team-based engine assembly plant, the span of management is 100.11 Research over the past 40 or so years shows that span of management varies widely and that several factors influence the span.12 Generally, when supervisors must be closely involved with subordinates, the span should be small, and when supervisors need little involvement with subordinates, it can be large. The following section describes the factors that are associated with less supervisor involvement and thus larger spans of control.

G. Delegation

Some top managers at Caterpillar had trouble letting go of authority in the new structure because they were used to calling all the shots, but the new structure was an important part of returning the company to profitability. Another important concept related to authority is delegation. Delegation is the process managers use to transfer authority and responsibility to positions below them in the hierarchy. Most organizations today encourage managers to delegate authority to the lowest possible level to provide maximum flexibility to meet customer needs and adapt to the environment. However, as at Caterpillar, many managers find delegation difficult. When managers can’t delegate, they undermine the role of their subordinates and prevent people from doing their jobs effectively.

H. Line and Staff Authority

An important distinction in many organizations is between line authority and staff authority, reflecting whether managers work in line or staff departments in the organization’s structure. Line departments perform tasks that reflect the organization’s primary goal and mission. In a software company, line departments make and sell the product. In an Internet-based company, line departments would be those that develop and manage online offerings and sales. Staff departments include all those that provide specialized skills in support of line departments. Staff departments have an advisory relationship with line departments and typically include marketing, labor relations, research, accounting, and human resources.

I. Line authority

Line authority means that people in management positions have formal authority to direct and control immediate subordinates. Staff authority is narrower and includes the right to advise, recommend, and counsel in the staff specialists’ area of expertise. Staff authority is a communication relationship; staff specialists advise managers in technical areas. For example, the finance department of a manufacturing firm would have staff authority to coordinate with line departments about which accounting forms to use to facilitate equipment purchases and standardize payroll services.

J. Centralization and Decentralization

Centralization and decentralization pertain to the hierarchical level at which decisions are made. Centralization means that decision authority is located near the top of the organization. With decentralization, decision authority is pushed downward to lower organization levels. Organizations may have to experiment to find the correct hierarchical level at which to make decisions. For example, most large school systems are highly centralized. However, a study by William Ouchi found that three large urban school systems that shifted to a decentralized structure giving school principals and teachers more control over staffing, scheduling, and teaching methods and materials performed better and more efficiently than centralized systems of similar size.

In the United States and Canada, the trend over the past 30 years has been toward greater decentralization of organizations. Decentralization is believed to relieve the burden on top managers, make greater use of employees’ skills and abilities, ensure that

decisions are made close to the action by well-informed people, and permit more rapid response to external changes. However, this trend does not mean that every organization should decentralize all decisions. Managers should diagnose the organizational situation and select the decision-making level that will best meet the organization’s needs.

Factors that typically influence centralization versus decentralization are as follows:

• Greater change and uncertainty in the environment are usually associated with decentralization.

A good example of how decentralization can help cope with rapid change and uncertainty occurred following Hurricane Katrina. Mississippi Power restored power in just 12 days thanks largely to a decentralized management system that empowered people at the electrical substations to make rapid on-the-spot decisions.

• The amount of centralization or decentralization should fit the firm’s strategy.

Top executives at New York City Transit are decentralizing the subway system to let managers of individual subway lines make almost every decision about what happens on the tracks, in the trains, and in the stations. Decentralization fits the strategy of responding faster and more directly to customer complaints or other problems. Previously, a request to fix a leak causing slippery conditions in a station could languish for years because the centralized system slowed decision making to a crawl. Taking the opposite approach, Procter & Gamble recentralized some of its operations to take a more focused approach and leverage the giant company’s capabilities across business units.

• In times of crisis or risk of company failure, authority may be centralized at the top.

When Honda could not get agreement among divisions about new car models, President Nobuhiko Kawamoto made the decision himself.