Organizational structure is an important concept in business management. It affects how a company operates and achieves its goals. In addition, it affects the company’s flexibility in adapting to changes in the business environment.
The organizational structure provides the framework for authority, communication, roles within the company, and how they are organized to facilitate effective decision-making and coordination.
We need to understand several key terms to understand the organizational structure. For example, is a hierarchy level. It is the power and authority arranged vertically in a company. This is usually represented by an organizational chart, which displays the levels of management and their respective responsibilities.
Other terms include:
- span of control
- Chain of command
- Centralization vs. decentralization
Understanding these key terms can help us navigate the organizational structure’s complexity and how it contributes to the company’s success.
Authority refers to legitimate power granted by rules and recognized by others. It becomes the basis for influencing people or situations and being followed by others.
There are several types of authority within a company, including:
- Line authority
- Staff authority
- Functional authority
Line authority is direct because it involves the right to give orders and make decisions. For example, managers have direct authority and responsibility over employees at levels immediately below them. In addition, they also carry out orders and report to managers one level above them.
Staff authority does not confer the right to command. Instead, it is the authority to give advice or support. This authority is usually attached to specialists to provide advice, recommendations, or consultations. However, they do not have any authority or responsibility for anyone in the department they advise.
Functional authority is the legal power to give orders in departments other than their own. This usually comes from an appointment by top management.
For example, a production manager is appointed head of a project. He reserves the right to put anyone on the team – such as calling people in the finance department – and giving orders to them.
After the project is finished, he will return to his original job in production. He no longer has authority over project members from other departments.
Delegation is the extent to which superiors pass down the hierarchy and give subordinates control, authority, and responsibility to make certain decisions or carry out certain tasks or jobs.
Delegation is a way to empower subordinates, for example, by encouraging them to get used to decision-making. Even so, superiors remain responsible for the results of the work delegated.
Delegation is effective if:
- Managers trust subordinates to carry out tasks without constant interference.
- Subordinates have sufficient skills and experience.
- Goals are defined and understood, encouraging shared understanding.
- Subordinates are given enough authority and responsibility
- There are procedures and clearly understood.
- There are schedules and deadlines for task completion, and clearly stated.
Advantages of delegation
- Encouraging subordinates to continuously learn, get used to decision-making, and train staff for more senior positions
- Increase participation and involvement in the organization
- Motivate employees by empowering them
- Helping staff to satisfy the need for self-actualization
- Saves time for managers because it does not handle all decisions
- Gives managers more time to focus on important issues
- Allows managers to see potential employees for promotion
Disadvantages of delegation
- Confusion and poor decisions due to incompetent subordinates
- Failure to meet the manager’s expectations and tarnish the manager’s reputation
- Potential to lose control over subordinates
- Manager’s insecurity when subordinates perform better than him
- Demotivating employees because managers delegate tedious tasks
- Jealousy and tension among staff over not being given similar authority
Delegation comes with accountability. Managers give subordinates the authority to make decisions. And subordinates must carry out roles and tasks responsibly for their actions and must be in accordance with what they should. They also need to be able to explain every decision to the manager.
Levels of hierarchy
Hierarchy levels refer to layers of positions within a company, each with inherent responsibility and authority. It is organized by rank; there are seniors and juniors. For example, in a three-level hierarchy, the organizational structure is divided into three groups: upper, middle, and lower levels.
Hierarchical levels provide clear pathways for delegation, communication, and responsibility. The higher the hierarchy level, the stiffer and slower the organization responds to change.
Different levels have different status and authority. Higher levels have higher status and power and vice versa. Meanwhile, everyone at the same hierarchical level has equal status and authority.
Span of control
The span of control shows how many people are directly responsible for, and report to, a manager. In other words, it shows the number of people a manager is subordinate to.
The span of control affects whether the organizational structure is flat or high. Its adoption usually takes into account the following:
- Management style
- Manager experience and competence
- Nature of work and duties
- Communication effectiveness
- The degree of delegation performed
The span of control can be narrow or wide
- A narrow span of control exists in a tall organizational structure with many hierarchical levels.
- A wide span of control is typical for companies with a flat organizational structure with few hierarchical levels.
The two differ in several ways. Narrow spans of control provide little opportunity for delegation and empowerment. Those at the top can tightly control their employees because they have few subordinates to supervise.
The organizational structure usually creates a distance between those above and below the organization. However, because fewer people supervise, greater communication is encouraged.
Chain of command
The chain of command describes how authority and responsibility are organized. It is the vertical path for formal authority to be followed when making decisions and through which orders are passed down the hierarchy.
On the one hand, the chain indicates to whom the manager has the right to give orders and has authority over them. On the other hand, it shows to whom the employees are responsible and report.
Instructions are passed on from top managers to subordinate managers. The path may involve top managers, middle managers, lower managers, and employees. Some information may be passed from the lower level up through these channels. Thus, the longer the chain of command, the longer the communication and, therefore, the process for making decisions and carrying out instructions or decisions.
How clearly the chain of command is described depends on the organizational structure adopted. It is seen more clearly in tall and flat structures. In contrast, the matrix structure has a more flexible structure. Therefore, the chain of command is more difficult to see.
Bureaucracy shows the relative importance of rules and procedures within the organization, which set detailed routines for carrying out activities. Organizations are bureaucratic when they have many regulations, rules, and defined ways of doing things. The company divides roles clearly through a hierarchical system. And personal initiative or delegation is underdeveloped.
Bureaucratic organizations have the following characteristics:
- Systems are built through formal rules and procedures
- Decisions must have a written record
- Hierarchies and authority levels are clearly defined
- Authority is centered on a higher position in the hierarchy
- Operations have a high degree of specialization
Bureaucracy is important for standardizing processes and ensuring efficiency. It turns employees into specialists rather than generalists, making them more productive. In addition, authorities and responsibilities are clearly defined.
However, bureaucracy often stifles creativity and reduces job satisfaction. It also makes decision-making slow because it has to go through a long hierarchy. Lastly, it is considered to be responsible for the high turnover.
Centralization and decentralization
Centralization and decentralization are related to the extent to which authority and decision-making are devolved between various hierarchical levels. The factors considered whether to choose centralization or decentralization are usually:
- Organization size
- Decision importance scale
- Company culture
- Management Philosophy
Under centralization, all major decisions in business are made by a minority, usually by senior management or the executive board. In other words, authority and responsibility for decision-making rest with those at the top of the hierarchy. Thus, this structure allows quick, controlled, and consistent decision-making because it involves less input from subordinates.
The centralized organizational structure has the following characteristics:
- Power rests with senior managers
- Senior management has more control over the decision-making process
- Senior managers have access to more information
Since senior managers make most of the decisions, they must be competent. Their decisions significantly affect the organization. Thus, bad decisions can be harmful to the organization.
Advantages of centralization advantages:
- Greater business control over people and resources
- Consistent decisions across all departments or divisions
- Easier communication due to limited employee engagement
- Employees work towards a common goal, while senior managers focus on decision making
Disadvantages of centralization
- Organizations are less flexible and tend to be rigid
- Delegation and low involvement by employees
- No new ideas are incorporated into the management system
- Delay in decision making
- Stress because senior managers have to make many decisions
Under decentralization, top managers share responsibility and decision-making authority. Senior managers make critical strategic decisions; others are left to lower managers.
Thus, senior managers are no longer in control of all decisions. Instead, they delegate more and give authority to lower managers.
Advantages of decentralization
- Increase the speed of decision making
- Greater employee participation and encourage them to be more enthusiastic
- More responsive decisions, according to the context in which they are taken
- Pushing more empowerment into lower positions leads to higher motivation
- Higher job satisfaction due to increased delegation and trust in lower managers
- Offer greater personal development for all employees
- More flexibility in adapting to changes in the business environment
Disadvantages of decentralization
- Bad decisions because lower managers are incompetent
- Inconsistency in decision-making between top managers and lower managers
- Requires more intense communication to overcome inconsistent decisions
- Ego and narrow view in which managers are more concerned with departments or divisions than with the organization
- Senior managers lose control of the organization
Departmentalization refers to the way in which functions and individuals are grouped into departments or divisions. Each department manages different business functions, such as marketing, production, human resources, and finance. Likewise, the people in it are also adjusted to have different tasks, jobs, and skills.
Departmentalization allows specialization. People focus on specific areas, making them more productive than tackling all functions simultaneously. It becomes necessary as the business grows and operations become more complex.
Apart from being based on business functions, departmentalization can be based on the following:
- Customer type
Delayering means removing layers in the business hierarchy/management layer. It aims to achieve a flatter structure and make the business less bureaucratic, allowing for more flexibility.
Delayering reduces costs because fewer managers need to be hired. In addition, it shortens the paths for communicating and the layers by which decisions are taken and implemented.
However, delayering is often accompanied by downsizing by reducing the number of employees. It can lead to job insecurity and a drop in morale.
Downsizing is permanently reducing the workforce by closing or merging unproductive divisions. It aims to reduce costs and keep the company competitive in the market.
Downsizing usually accompanies delayering to achieve a leaner organization. In addition, it is also common in mergers and acquisitions where the company eliminates or combines certain business functions after the corporate action.