Chapter 9: Organising

A furniture workshop that opens with one owner and two helpers needs no plan of who does what. The owner buys the timber, quotes the price and collects payment himself. Ten years later the same workshop employs sixty people and supplies four dealers. The same order is now booked twice, a machine stands idle because nobody was told to service it, and when a consignment reaches a dealer damaged, no one can say whose lapse it was. What such a workshop has outgrown is not its market but its arrangement. Planning settles what a business intends to do. Someone must still divide that work into jobs, group related jobs into departments, place each department under a manager, give that manager the authority the job needs, and tie the departments back together. That is the function of organising, and what it produces is the organisation structure — the framework of positions and authority relationships within which the firm works. This chapter examines what organising means and why it matters, the steps by which a structure is created, the formal and informal relationships that arise within it, the line, functional and divisional forms it can take, and how authority is delegated and dispersed through it.

Figure

Fig. 9.0-1 — Work Divided On A Workshop Floor Photograph of a furniture workshop in which separate groups of workers are cutting, assembling and finishing at different stations, with a supervisor overseeing the floor.

9.1 Meaning and Nature of Organising

Planning ends in a decision — what the business will do, by when, and with what resources. That decision does not carry itself out. The work has to be divided among people, and the moment it is divided, questions arise that the plan itself cannot answer: who performs which task, who reports to whom, who may take a decision and who must only carry it out.

Organising is the managerial function that answers those questions. It is the process of identifying and grouping the work to be done, bringing together the physical, financial and human resources required for it, and establishing authority relationships among the positions so created.

Organising follows planning, because activities cannot be grouped until it is known what activities there are. It precedes staffing and directing, because people cannot be appointed to posts that do not yet exist, and orders cannot flow along a chain of command that has not been laid down.

9.1.1 Organising as a Process

Viewed as a process, organising consists of three related tasks, each undertaken because the previous one leaves something incomplete.

Identifying and grouping activities — the total work is broken into jobs small enough for one person to perform, and similar jobs are then grouped into departments. Division alone would scatter the work; grouping restores unity of effort.
Assembling resources — machinery, materials, funds and personnel are brought together at each work point, since a department charged with a task but denied the means to perform it can achieve nothing.
Establishing authority relationships — every position is linked to the position above and below it, so that each employee knows from whom orders are to be taken and to whom results must be reported.

Definition

Organising Organising is the process of defining and grouping the activities of the enterprise and establishing the authority relationships among them. — Theo Haimann

9.1.2 Organisation as a Structure

The word ‘organisation’ is used in a second sense as well. It refers not to the process but to what the process leaves behind — the arrangement of positions that remains in place after the grouping is done.

That arrangement is the organisation structure: the system of job positions, the duties attached to each, and the authority relationships between them. It is usually broad at the base and narrow at the top, because each superior can effectively direct only a limited number of subordinates, so successive levels carry fewer positions than the level below.

The structure matters because it settles in advance what would otherwise have to be settled afresh every day. Work flows along it, communication travels along it, and responsibility is fixed by it. A defective structure does not merely inconvenience a firm; it allows the same task to be done twice, or left undone in the belief that another department has attended to it. The distinction between the two senses of the word is set out in Table 9.1.

Table

9.1.3 Features of an Organisation

An organisation, understood as a structure, shows the following features.

Group of persons — an organisation presupposes two or more people, since a single individual working alone has no relationships to arrange.
Common objectives — the members work towards goals set for the enterprise as a whole. The structure is a means to those goals and never an end in itself.
Division of work — the total work is split into specific jobs, so that each person handles a limited range of tasks and gains skill through repetition.
Authority and responsibility relationships — each position carries a defined right to act and a corresponding obligation for results, without which no one could be held answerable.
Communication — the lines of authority also serve as channels along which instructions travel down and information travels up.
Cooperative effort — members are willing to work with one another, since divided work yields a finished product only when the parts are brought together.
Rules and procedures — established rules govern how the work is to be done and how members are to behave, so that conduct does not depend on individual discretion alone.

Business Example

A School as a Structure A school divides its work into teaching, library, sports and office administration. The teaching work is divided further, subject by subject. Each group works under a head who reports to the principal, so that a parent, a teacher or a clerk knows exactly whom to approach on a given matter.

9.2 Importance of Organising

A business may forecast its market correctly and set sound targets and still fail at execution, because a plan states what is to be achieved without stating who is to achieve it. Until the work is divided, grouped and placed under named managers, effort is wasted on tasks nobody needed and lost on tasks everybody assumed someone else had taken up.

Organising supplies that arrangement, and the benefits that follow are the reasons a sound structure is called the backbone of management.

Specialisation — work divided into small, similar jobs allows each employee to perform a limited range of tasks repeatedly. Skill improves with repetition, and tasks are completed faster and with fewer errors than when one person attempts everything.
Optimum use of human resources — because every job is defined before it is filled, a person can be matched to the work his qualifications and aptitude suit. The same definition prevents two employees from being handed overlapping duties.
Clarity of working relationships — each employee knows to whom he reports and to whom he may issue instructions. Confusion over who holds which power is reduced, and responsibility for a lapse can be fixed on a definite position.
Coordination — activities split between departments are deliberately linked again through the authority relationships that join them. Higher-level managers are placed over interrelated activities precisely so that the parts move together towards the same objective.
Effective administration — the lines of authority double as channels of communication, so instructions reach the right desk and information travels back to the person who must act on it. Administration becomes a matter of routine rather than of daily improvisation.
Development of personnel — a manager who delegates routine duties frees himself for more important matters and, in doing so, gives subordinates the chance to take decisions. Junior managers gain the judgement that senior posts later demand.
Adaptation to change — a well-designed structure is built around positions rather than around particular individuals. Work therefore continues when employees leave and new ones join, and new methods or products can be absorbed by adding positions instead of rebuilding the enterprise.
Growth and expansion — an enterprise can take on more activities only if there is a framework to hold them. New departments, product lines and territories can be added to a sound structure without dislocating what already exists.

Business Example

Two Clerks, One Payment In a small trading office where duties were never written down, the same supplier’s bill was passed for payment by two clerks in the same week. Neither had done anything wrong; nobody had been told which of them handled purchases. Defining the job, rather than blaming the clerks, ended the problem.

The Cost of a Defective Structure

The reverse case is equally instructive. Where the structure is ill-defined, decisions are delayed while it is discovered who may take them, work is duplicated, and effort is spent on internal disputes over authority rather than on customers. A poor structure does not merely slow a business down; it can hold back an otherwise profitable enterprise, since every added activity increases the confusion instead of the output.

Figure

Fig. 9.2-1 — Work Divided Across An Office Photograph of an open-plan office in which separate desks or work areas are marked for different departments, with employees working at their own stations.

9.3 Steps in the Process of Organising

Organising is not a single act but a sequence, and the order of the steps is fixed by necessity. Work cannot be grouped before it has been divided, duties cannot be assigned before groups exist, and authority cannot be granted to a person who has not yet been given a duty. The sequence is summarised in FC 9.1.

Flowchart

FC 9.1 — Steps In The Process Of Organising Division of work → Grouping of activities into departments → Assignment of duties → Delegation of authority → Coordination of efforts

9.3.1 Division of Work

The first step is to determine the total work the plans require and to break it into jobs small enough for one person to perform. This is necessary because no individual has the time or the range of skills to carry out the whole work of an enterprise, and because a person who repeats a limited set of tasks performs them better than one who attempts everything.

Care is needed at this stage to see that every activity the objectives call for is identified, since an activity omitted here will remain undone throughout. The activities themselves depend on the nature and size of the enterprise. A manufacturing firm must arrange for production, marketing and finance; a retail store has no production work at all, but must arrange for buying, selling and stock-keeping. Each major activity is then broken into sub-activities until jobs of a workable size are reached.

Business Example

Where the Work Divides A garment manufacturer supplying two states separates cutting, stitching, finishing and packing on the shop floor, and separates purchase, sales, accounts and dispatch in the office. Each of these is a job with a definite beginning and end, which is what makes it possible to hand it to a named employee.

9.3.2 Grouping of Activities

Division leaves the enterprise with a large number of separate jobs and no unity of effort. The second step therefore combines similar or related jobs into larger units — departments, divisions or sections — and places each unit under the charge of a manager. This grouping of related activities into departments is called departmentation.

Definition

Departmentation Departmentation is the process of grouping related activities of an enterprise into departments or divisions, each placed under the charge of a manager who is answerable for its performance.

Departments may be created on several bases. Grouping by function creates departments for production, marketing and finance; grouping by product creates a separate unit for each major product line; grouping by territory creates regional units; and grouping by customer creates units for wholesale and retail buyers. Whichever basis is chosen, the following considerations apply.

Specialisation — related activities should sit together, so that the department develops expertise in one field of work.
Coordination — the grouping should make it easy for departments to work with one another, since activities that depend on each other are difficult to synchronise if they are kept far apart.
Economy — a department should be large enough to justify its own manager and facilities. Too many small departments raise administrative costs without adding output.
Control — the grouping should allow the performance of each unit to be measured and supervised.
Attention — activities important to the enterprise should not be buried inside a large department, where they may receive less attention than they deserve.

9.3.3 Assignment of Duties

Each group of activities is then placed in the charge of an individual best suited to perform it. The match matters: technical work in a manufacturing department belongs with a person qualified in that technology, and financial work with a person trained in accounts. Where duties are assigned without regard to qualification, experience and aptitude, the structure may be sound on paper and still fail in operation.

Assignment is also the point at which the job becomes a person’s own. Once a duty is fixed on an individual, the enterprise knows whom to approach for the work and whom to hold answerable for its results.

9.3.4 Delegation of Authority

A person charged with a duty cannot discharge it unless he is also given the right to take the decisions the duty requires. A production manager asked to maintain output but not permitted to purchase materials or approve overtime has been given an obligation without the means to meet it. Authority is therefore delegated along with the duty, in the measure the duty demands and no further.

As authority is passed down from one level to the next, a chain of superior–subordinate relationships is created, running from the top manager to the employee at the lowest level. Positions are thereby ranked in a definite order, higher positions carrying wider authority than those below them. This step is examined in detail in Section 9.9.

9.3.5 Coordination of Efforts

The last step reverses the effect of the first. Work that was divided among departments and individuals must be brought back together, so that the parts fit and the enterprise moves as one. Interrelationships between positions are defined, timings are synchronised, and each employee is made aware of whose work depends on his own.

Without this step the earlier ones are of little use, since departments left to themselves tend to pursue their own targets. A sales department may promise deliveries the factory cannot meet, and a purchase department may economise on materials the production department cannot work with.

Case Snippet

Case 9.1 — A Firm That Outgrew Its Owner Meher Foods began as a pickle unit run by its owner and four workers, who between them did every task as it arose. Orders have since grown fivefold, twenty-two people are employed, and two consignments were dispatched last month against the same order while a third was never packed. The owner has decided to set up separate sections for purchase, production, packing and dispatch. Q. Name the function of management the owner is performing and state the two steps in its process that Meher Foods has completed by creating these sections.

9.4 Formal Organisation

The structure created by the process described in Section 9.3 is deliberate. Management decides which departments shall exist, what each position shall do, and who shall report to whom, and then records those decisions in writing. The network of relationships so designed is the formal organisation.

Definition

Formal Organisation Formal organisation is the structure of well-defined jobs, each carrying a definite authority and responsibility, deliberately created by management to achieve the objectives of the enterprise.

9.4.1 Meaning and Features

Formal organisation exists on the enterprise’s own terms rather than on the terms of the people who happen to fill its posts. Its main features follow from that fact.

Deliberately created — it is designed by top management, and no part of it arises on its own.
Based on division of work — jobs are defined by the activity to be performed, which is why the same structure can survive a complete change of staff.
Defined authority and responsibility — every position carries a stated right to act and a stated obligation for results, so answerability can be fixed without argument.
Official channels of communication — instructions and reports travel along the chain of positions. The unbroken line of authority running from the top of the enterprise to the bottom is called the scalar chain.
Written rules and procedures — conduct and methods of work are prescribed in advance, and departure from them attracts penalties.
Focus on the job, not the person — the structure describes posts to be filled, not the individuals who fill them at a given time.
Shown on the organisation chart — because the relationships are definite, they can be drawn.

A central rule of this design is unity of command: each subordinate receives orders from, and is answerable to, one superior only. Where two superiors may issue instructions to the same employee, the instructions will sooner or later conflict, and the employee is left to decide which of his seniors to disobey.

Business Example

A Bank Branch on Paper In a commercial bank, the cashier, the clerk handling deposits and the loan officer each have duties laid down in writing, and each reports to the branch manager, who reports in turn to a regional office. A customer’s complaint can be traced to a definite desk because the work of that desk was defined before anyone was posted to it.

9.4.2 Merits

Clarity of duties — the role of each member is stated, so two employees do not perform the same task and no task falls between two desks.
Unity of command — orders reach a subordinate from one superior along the scalar chain, which removes conflicting instructions and divided loyalty.
Easy fixing of responsibility — since duties and reporting lines are defined, the person answerable for a lapse or a result can be identified without enquiry.
Stability — the enterprise runs on positions rather than personalities, so work continues when employees are transferred, retire or resign.
Framework for control — performance can be measured against the duties attached to each post, which makes supervision systematic rather than personal.

9.4.3 Demerits

Rigidity — because conduct is governed by prescribed rules, the structure adjusts slowly to situations the rules did not foresee.
Procedural delay — communication must follow the established chain of command, so a matter needing a quick decision may travel through several levels before it reaches the person empowered to settle it.
Creative talent overlooked — the design values conformity to the defined job, and an employee capable of more than his post requires may find no opening for it.
An incomplete picture — the chart shows how the enterprise is meant to work, not how it actually works. The relationships that people form among themselves are absent from it, and those relationships are the subject of Section 9.5.

9.5 Informal Organisation

People placed together to work do not confine themselves to the relationships the chart prescribes. They eat together, travel together, discover shared interests and form small groups that no manager created and no rule requires. This network of personal and social relationships within the enterprise is the informal organisation.

It arises inside the formal structure and because of it. Employees who sit near one another or whose work brings them into daily contact are the ones most likely to form such groups, so the arrangement management designs largely settles which informal groups will appear.

Definition

Informal Organisation Informal organisation is the network of personal and social relationships among employees which is not established or required by the formal organisation but arises spontaneously as people associate with one another. — Keith Davis

9.5.1 Meaning and Features

Spontaneous origin — it is not planned by anyone. It emerges of itself from social interaction, which is why management can neither create it by order nor abolish it by order.
Voluntary membership — a person joins because he wishes to, and leaves when the shared interest ends.
Based on common interests — shared language, background, hobby or grievance holds the group together, not the work it is paid to do.
Meets social and psychological needs — the group offers belonging, esteem and security, which a defined job by itself cannot supply.
Unwritten standards — behaviour is governed by group norms evolved through mutual consent. Breach of a norm invites disapproval from members rather than any official penalty.
Independent channels of communication — information passes along the group’s own routes, in any direction and at speed. This channel is known as the grapevine.
Cuts across departments — a clerk in accounts, a salesman and a supervisor from the factory may belong to one group, because friendship does not follow departmental boundaries.
No definite structure — the group has no chart, no fixed positions and no permanent form. Its leader is chosen by the members themselves and holds the position only so long as they accept him.

Business Example

A Group That Crosses Departments In a mid-sized firm, employees from stores, accounts and dispatch who take the same bus have formed a settled group. When a supplier’s consignment arrives short, the stores clerk mentions it on the bus and the accounts clerk withholds payment the next morning — days before the written report reaches him.

9.5.2 Merits

Faster communication — information travels along the grapevine without waiting for the official channel, so employees learn quickly of matters that concern them.
Sense of belonging — an employee who is one among hundreds in the formal structure is a person of standing within his group, which improves morale and self-esteem.
Relief from monotony — routine jobs are made tolerable by the opportunity to socialise, and satisfaction at work rises accordingly.
Help in work problems — members share job knowledge and cover for one another, so a colleague’s absence or difficulty is often settled within the group before it reaches a manager.
Feedback to management — reactions to a new policy surface in the group long before they appear in any formal report, giving management an early reading of how a decision has been received.
Support to the formal organisation — the group supplies flexibility and human warmth that the designed structure lacks, and thereby fills gaps the rules leave open.

9.5.3 Demerits

Rumour — the grapevine carries information without verifying it. Where official policy is unclear, half-true reports spread quickly and can damage morale and the reputation of the enterprise.
Resistance to change — groups prefer the existing routine, since a change in methods threatens established relationships. New work practices may therefore be delayed or quietly obstructed.
Conflicting norms — a group may set its own standard of output or conduct, and where that standard falls below what the enterprise requires, the formal goals become difficult to achieve.
Role conflict — an employee belongs to both organisations at once. As a member of the formal structure he is required to keep up the pace of work; as a member of his group he may be expected to slow down to the group’s standard.
Pressure to conform — the group may compel members to follow its norms even when doing so harms the interests of the enterprise.

Working With Informal Groups

Since informal organisation cannot be destroyed, management is left with the task of living with it. The practical course is to recognise which groups exist and who leads them, to take those leaders into confidence when a change is planned, to use informal channels to convey information unofficially, and to see that group norms are turned towards efficient performance rather than against it. Treated as a nuisance, informal groups obstruct; treated as a fact of working life, they can be made to support the formal structure.

9.5.4 Formal and Informal Organisation Distinguished

The two exist side by side in every enterprise. The formal organisation is designed and can be drawn; the informal one grows within it and cannot. Their main points of difference are set out in Table 9.2.

Table

Case Snippet

Case 9.2 — The Bulletin Nobody Read Ansari Textiles announced a change in shift timings through a notice on its board. Within a day the shop floor was discussing a version of the notice that mentioned job cuts, though the notice said nothing of the kind. The rumour was traced to a group of workers from three different departments who regularly sit together at lunch. Q. Name the type of organisation at work here and its channel of communication, and state one way in which the management could have used that channel to its own advantage.

Figure

Fig. 9.5-1 — Employees Of Different Departments Together Photograph of a group of office and factory employees talking informally over tea outside their workplace.

9.6 Line and Line and Staff Organisation

Structures differ from one another on two counts: how authority runs through the enterprise, and on what basis activities are grouped. The first question produces the line and the line and staff forms, discussed in this section; the second produces the functional and divisional forms, taken up in Sections 9.7 and 9.8. The forms are set out in FC 9.2.

Flowchart

FC 9.2 — Forms Of Organisation Structure Organisation structure → Line, Line and staff, Functional, Divisional

9.6.1 Line Organisation

Line organisation is the oldest and simplest form. Authority runs in a straight, unbroken line from the top of the enterprise to the bottom, and all orders and reports travel along it. Every superior has complete command over the subordinates placed under him, and every subordinate is answerable to one superior only, immediately above him. The chain of superior–subordinate positions so formed is the hierarchy of the enterprise.

Definition

Line Organisation Line organisation is a structure in which authority flows in a direct and unbroken line from the top of the enterprise to the lowest level, each subordinate being answerable to one superior only.

Because there are no advisers attached to it, each department is self-contained: the departmental head himself decides every matter arising within his department, technical or otherwise. The form is also called scalar or hierarchical organisation, and sometimes military organisation, since it originated in the army. The last name is now misleading, because modern armies do maintain specialist wings.

Line organisation takes two forms. In pure line organisation, all persons at a given level perform the same kind of work, and the divisions exist only for convenience of supervision — two foremen supervising identical operations, for instance. In departmental line organisation, the enterprise is divided into departments doing different kinds of work, each complete in itself, and one departmental head cannot issue orders to the subordinates of another. The second form is the common one, since the work of an enterprise is rarely identical throughout. A departmental line structure is shown in FC 9.3.

Flowchart

FC 9.3 — Line Organisation Managing Director → Production Manager, Marketing Manager, Finance Manager; Production Manager → Foreman (machine shop), Foreman (assembly shop); each foreman → Workers

9.6.2 Merits and Demerits of Line Organisation

The merits follow from the directness of the chain.

Simplicity — with one line of authority and no advisers, every employee knows his position and his superior, and the structure is easy and inexpensive to set up.
Quick decisions — the executive in charge has full authority over his department and need consult no specialist before acting, so decisions are taken without delay.
Unified control and discipline — one superior directs the whole department, so there are no conflicting orders and no division of loyalty.
Fixed responsibility — authority and responsibility are clearly divided, and every manager can be held answerable for the results of his unit. Blame cannot be passed sideways.
Economy — no specialist staff has to be employed, which keeps administrative costs low.
Easy coordination — since all activities of a department are under one person, their timing and sequence are settled within the department itself.

The demerits follow from the same directness.

Overburden on key executives — one person handles every matter in his department, so his time is consumed by operating detail and little is left for thinking ahead.
Lack of specialisation — no expert advice is available. A manager must decide technical, financial and personnel questions alike, and is likely to be competent in only some of them.
Scope for autocratic rule — an executive with complete authority over a department may take decisions arbitrarily, and subordinates have little opportunity to be heard.
Instability — the enterprise depends on a few key men. The loss of one of them cripples a department, because no one else has been trained in its full range of work.
Unsuitable for large enterprises — as activities multiply, the volume and variety of work exceed what a single line manager can competently handle.

Line organisation is accordingly suited to a small enterprise with few employees, few levels of authority and largely routine work.

Business Example

One Chain, One Trader A cloth wholesaler employing fourteen people runs on a single chain of command. The owner instructs the godown supervisor and the sales supervisor; each instructs his own staff. Nobody advises anybody, and nothing requires it — the whole business turns on buying, storing and selling one class of goods.

9.6.3 Line and Staff Organisation

As an enterprise grows, the work of a line executive increases both in volume and in technical difficulty, and he can no longer supply from his own knowledge everything his decisions require. Specialists are therefore attached to line managers to advise them. The result is line and staff organisation.

Line executives remain in the primary chain of command and continue to be directly concerned with the main objectives of the enterprise — production, purchase, sales. Staff positions, such as a legal adviser, a quality adviser or a personnel officer, are experts in their own fields, are purely advisory in character, and have no power of command outside their own units. Their advice is not binding on the line manager, who remains answerable for the decision he finally takes.

Flowchart

FC 9.4 — Line And Staff Organisation Managing Director → Production Manager, Marketing Manager, Finance Manager (line); Managing Director → Legal Adviser, Quality Adviser, Personnel Adviser (staff); Production Manager → Plant Superintendent → Foreman → Workers

9.6.4 Merits and Demerits of Line and Staff Organisation

Planned specialisation — expert knowledge is brought to bear on managerial problems, while line managers are relieved of work for which they lack the time or the training.
Better decisions — the line executive decides with the benefit of information and advice he could not have assembled himself, so decisions rest on more than his own judgement.
Unity of command retained — staff specialists advise but cannot issue orders to a line manager’s subordinates, so a subordinate still takes instructions from one superior only.
Flexibility and growth — new specialists can be added as new problems arise, without disturbing the existing chain of command.
Development of executives — line managers gain exposure to specialist thinking and staff members gain exposure to operating problems, which prepares both for higher posts.

The form has its own difficulties.

Line–staff conflict — staff specialists tend to feel their advice is ignored, and line managers tend to feel the specialists interfere in work for which they carry no responsibility.
Confusion of duties — where the boundary between advising and deciding is not drawn clearly, neither side is sure how far its powers run, and coordination suffers.
Ineffective staff — a specialist is not answerable for results, so he may press advice without weighing its practical cost, and line managers may blame staff for their own failures.
Expense — two sets of personnel have to be maintained, which a small enterprise cannot justify.
Weakened initiative — a line manager who leans heavily on specialists may cease to exercise his own judgement.

9.6.5 The Two Forms Distinguished

Line organisation suits a small enterprise doing simple work; line and staff organisation suits a large one whose work has become too technical for generalists. The main differences appear in Table 9.3.

Table

9.7 Functional Structure

The commonest basis on which activities are grouped is the function performed. Under a functional structure, each major function of the enterprise is organised as a separate department under a manager who specialises in it, and every part of the business draws on that department for the work it covers.

9.7.1 Meaning and Features

The functions chosen for departmentation are the basic ones — those without which the enterprise could not survive. In a manufacturing firm these are usually production, marketing, finance and personnel; in a retail store they are buying, selling and finance, since nothing is manufactured there at all.

A major function is then broken into sub-functions at the next level down. Production, for instance, may be divided into quality control, processing of materials, and repairs and maintenance. The division may be carried through successive levels for as long as there is a sound basis for dividing further. A functional arrangement is shown in FC 9.5.

Flowchart

FC 9.5 — Functional Structure Managing Director → Production Manager, Marketing Manager, Finance Manager, Personnel Manager; Production Manager → Quality control, Processing of materials, Repairs and maintenance; Marketing Manager → Sales, Advertising

Two features follow. First, no department is complete in itself: the marketing department sells goods it does not make, and the production department makes goods it does not sell. Second, all departments serve the whole enterprise, so authority over each function is held at one point and applied uniformly across every product the firm sells.

Business Example

One Product, Four Departments A sugar mill buys cane, crushes it, and sells sugar in bulk. Its whole business is one product, so it is organised as departments for production, marketing, finance and personnel. A second product would not change this arrangement; it would simply pass through the same four departments.

9.7.2 Merits

Occupational specialisation — employees perform one kind of work within one field, and the department accumulates expertise that no individual could develop alone. Efficiency and quality of performance improve.
No duplication of effort — one department performs a function for the entire enterprise, so the same facility, machinery or specialist is not maintained twice. Costs are kept down.
Easier control and coordination within the department — the work of a department is of one kind, so its head understands every task in it and can supervise and synchronise it without difficulty.
Easier training and recruitment — a manager or worker has to be expert in a narrow range of skills only, which makes suitable people easier to find and quicker to train.
Due attention to every function — each basic function has a department and a head of its own, so none of them is neglected in favour of the rest.
Logical and proven — the structure follows the natural division of business work, which is why it is found at some level in almost every enterprise.

9.7.3 Demerits

Narrow perspective — a departmental head is judged on his own function and comes to treat it as the object of the exercise. The production department may insist on the finest quality without asking whether the market will pay for it.
Difficulty in fixing responsibility — no single department is answerable for a product as a whole. When sales fall, it cannot be settled whether the fault lay with marketing for poor selling or with production for a poor article.
Problems of coordination — departments depend on one another but are separately headed, and interdepartmental disputes have to travel up to a common superior before they can be settled.
Delay in decisions — as the enterprise grows, departments become large and matters requiring the agreement of two or more of them move slowly.
Poor preparation for top posts — a functional head spends his career inside one function and does not acquire the all-round experience that general management requires.
Functional empires — managers may build up the size and importance of their own departments, and rivalry between departments then displaces the objectives of the enterprise.

9.7.4 Suitability

A functional structure suits an enterprise that produces one product or a narrow range of related products, where a high degree of specialisation is needed and the scale of operations is large enough to keep separate departments busy. Where the product range is wide and varied, the same structure becomes difficult to work, and the divisional form examined in Section 9.8 is preferred. Even in such enterprises the functional basis rarely disappears altogether; it is commonly applied within each division at the lower levels.

9.8 Divisional Structure

When an enterprise sells several unrelated products, the functional arrangement begins to strain. One production department must handle technologies that have nothing in common, and one sales department must sell to buyers who have nothing in common. The remedy is to group activities by product instead of by function, which produces a divisional structure.

Definition

Divisional Structure Divisional structure is an arrangement in which the activities of an enterprise are grouped into divisions, each responsible for one product line and containing within itself the functions that product line requires.

9.8.1 Meaning and Features

Every major product, or group of related products, is organised as a separate division under a divisional head. The division looks after the purchase, production, sales and personnel work of its own product line, so it is largely self-contained and can operate without waiting on the other divisions. A divisional arrangement is shown in FC 9.6.

Flowchart

FC 9.6 — Divisional Structure Board of Directors → Managing Director; Managing Director → Plastics Division, Chemicals Division, Metals Division; each division → Purchase, Production, Sales, Personnel

Three features deserve notice. The functional basis is not abandoned but pushed down a level, since each division is internally departmentalised by function. Each division is semi-autonomous, its head being free to take decisions on his own product within the limits set from above. And top management retains overall policy, finance and control, so the enterprise remains one business and not several.

Business Example

Businesses Under One Roof ITC sells goods and services as unlike one another as cigarettes, packaged foods, paperboards and hotel accommodation. Products that are made, priced and sold in such different ways cannot sensibly be handled by a single production head or a single sales head, which is why enterprises of this kind organise each business as a unit of its own.

9.8.2 Merits

Product specialisation — all activities concerning one product are brought under one head, so decisions on that product are taken by people who know its technology and its market.
Individual attention to each product — a product is not left to compete for notice inside a large common department, which makes the expansion of a promising line easier.
Fixing of responsibility — a division has its own costs, revenues and results, so its performance can be measured and responsibility placed squarely on the divisional head.
Quick decisions and flexibility — the division contains every function it needs, so matters can be settled within it instead of being referred across departments.
Development of managers — a divisional head runs a complete business in miniature and gains the all-round experience that top management posts require.
Ease of growth — a new product line can be added as a new division without disturbing the working of the existing ones.

9.8.3 Demerits

Duplication of facilities — each division maintains its own purchase, production and sales set-up, so machinery, staff and premises are repeated and operating costs rise.
Loss of the advantages of centralisation — activities such as buying, accounting and advertising, which are cheaper when done for the whole enterprise at once, are now scattered.
Conflict between divisions — divisions compete for funds, materials and trained personnel, and each presses its own claim without regard to the enterprise as a whole.
Divisional interest over enterprise interest — a divisional head enjoys wide authority and may seek to enlarge his own division’s revenues at the cost of another.
Under-utilisation of capacity — plant and staff attached to one division stand idle when demand for that product falls, and cannot readily be transferred to a division that is busy.
Need for many capable managers — every division requires a head fit to run a business, and such people are not easily found or cheaply employed.

9.8.4 Suitability

A divisional structure suits a large enterprise with several product lines, especially where the products call for different manufacturing technologies and different methods of marketing. It also suits a firm that expects to diversify further, since growth can be absorbed by adding divisions. A small firm, or one with a single product, cannot support the duplication the form requires and is better served by a functional structure.

9.8.5 Functional and Divisional Structure Distinguished

The two forms answer the same question — on what basis shall activities be grouped — in opposite ways. Their main points of difference are set out in Table 9.4.

Table

Case Snippet

Case 9.3 — Two New Lines at Sundaram Appliances Sundaram Appliances has manufactured electric fans for thirty years through departments for production, marketing, finance and personnel. It has now added air purifiers and kitchen mixers, each made by a different process and sold to a different class of buyer. Delivery dates are being missed, and the marketing head says he cannot give three unlike products the attention each needs. Q. Name the structure Sundaram Appliances should now adopt and state one benefit and one cost it should expect from the change.

Figure

Fig. 9.8-1 — A Diversified Product Range Photograph of a display of several unrelated products of one manufacturer, such as packaged foods, household appliances and personal-care goods, arranged in separate groups.

9.9 Delegation of Authority

A manager is given more work than he can personally perform, and the enterprise gains nothing by his attempting all of it. He must therefore hand part of that work to his subordinates, and hand with it the right to take the decisions the work requires. This downward transfer is delegation of authority.

Definition

Delegation Of Authority Delegation of authority is the process by which a manager assigns a part of his work to a subordinate, grants him the authority needed to perform it, and holds him answerable for its performance.

9.9.1 Meaning

Delegation is a sharing of work and authority, not a surrender of either. A manager who passed on his entire work and all his authority would hold an empty post; he always retains the right to take the important decisions and to supervise and control what his subordinates do.

Certain consequences follow from this, and they are the points most often tested.

Delegation is always within defined limits — the manager states how far the subordinate’s authority runs, since authority granted without a boundary cannot be controlled.
A manager cannot delegate authority he does not himself possess. Delegation moves authority downward from a superior to a subordinate and never sideways or upward.
Delegation does not reduce the superior’s own authority. He may take back or reduce what he has granted at any time.
Delegation is never an abdication of responsibility. After delegating, the manager remains answerable to his own superior for the work he has passed on, which is why he continues to supervise it.
Delegation is systematic, not casual. Authority passed down in an orderly way from level to level is what creates the hierarchy of managerial positions.

Business Example

Authority With the Duty A production manager is told to keep output at a fixed level each month. He is accordingly authorised to purchase materials up to a stated value, to sanction overtime and to decide the sequence of jobs on the machines. Without those powers the target would be an instruction he had no means of meeting.

9.9.2 Elements of Delegation

Delegation begins when a duty is assigned, and is complete only when three elements are present together. They are shown in FC 9.7.

Flowchart

FC 9.7 — Elements Of Delegation Of Authority Assignment of duty → Grant of authority → Creation of responsibility → Enforcement of accountability

Authority

Authority is the right of an individual to take decisions, to command subordinates and to use the resources of the enterprise within the scope of his position. It arises from the position a person holds and not from the person himself, which is why it passes to whoever occupies the post next.

Definition

Authority Authority is the right to give orders and the power to exact obedience. — Henri Fayol

Authority flows downwards and grows narrower as it descends, since each level passes on only a part of what it holds. It is bounded not only by the limits the superior sets but also by law, by the policies of the enterprise and by what is physically possible.

Responsibility

Responsibility is the obligation of a subordinate to perform the assigned duty to the best of his ability. It arises only after a duty has been assigned by a superior, and it therefore flows upwards, from the subordinate to the person who assigned the work.

Responsibility is absolute: a subordinate who further delegates part of his task to another does not thereby reduce his own obligation for it. It should also be unitary — an employee should be responsible to one superior only for a given piece of work, since answering to two superiors at once invites conflicting demands. Above all, authority and responsibility must be commensurate. Responsibility without authority leaves a person obliged to achieve what he has no means of achieving; authority without responsibility invites its careless use.

Accountability

Accountability is answerability for the outcome of the work — the obligation to render an account of how the duty was performed and the authority used. It is imposed by the superior rather than accepted by the subordinate, and it too moves upwards.

Accountability cannot be delegated at all. A manager who has passed work to his subordinates remains accountable to his own superior both for his own work and for theirs, which is the reason he retains the right to supervise them. Thus authority is delegated, responsibility is assumed, and accountability is imposed. The three are compared in Table 9.5.

Table

9.9.3 Importance of Delegation

Relief to top management — routine matters are settled at lower levels, leaving senior executives time for policy, planning and new opportunities. Without delegation, a manager’s day is consumed by work others could do.
Quicker decisions — the decision is taken by the person nearest the point of action, who does not have to seek approval from above and who knows the local conditions best.
Basis of the management hierarchy — the passing of authority from one level to the next is what creates superior–subordinate relationships and fixes who reports to whom. Without delegation there could be no levels of management at all.
Specialisation and better use of talent — work can be assigned according to the abilities and experience of subordinates, so human and material resources are used where they yield most.
Motivation of subordinates — being trusted with authority carries status and recognition. Job satisfaction and self-confidence rise, and employees are encouraged to use their full capacity.
Development of future managers — subordinates who take decisions learn to take them well. Delegation is the training ground from which successors are drawn, and it answers the problem of succession that a firm otherwise faces when a senior manager leaves.
Growth and expansion — an enterprise can add products, markets and departments only if it has managers able to run them. By multiplying the number of people fit to take charge, delegation makes expansion possible.

9.10 Centralisation and Decentralisation

Delegation settles what one manager passes to his own subordinates. A second question remains for the enterprise as a whole: at which levels shall the power to decide finally rest? The answer describes the pattern of distribution of authority, and the two ends of that pattern are centralisation and decentralisation.

9.10.1 Centralisation

Centralisation is the systematic retention of decision-making authority at the top levels of management. Very little authority is delegated to managers at the middle and lower levels, who depend on instructions from above for their day-to-day work and are expected to carry out decisions rather than to take them. Supervision from the top is close and continuous.

A firm run in this way keeps its policies uniform, since all decisions issue from one point, and keeps its costs low, since capable managers are needed at the top alone. Action can also be swift in a crisis, because no consultation is required. What it sacrifices is speed in routine matters, the judgement of those closest to the work, and the growth of managerial ability lower down.

9.10.2 Decentralisation

Decentralisation is the systematic dispersal of decision-making authority to all departments and to all levels of management, so that decisions are taken at the level at which the relevant work is done. It is far more than a transfer of a few powers; it is a settled policy of the enterprise about where decisions belong.

Definition

Decentralisation Decentralisation is the systematic effort to delegate to the lowest levels all authority except that which can be exercised at central points. — Louis Allen

Top management does not empty itself of authority in the process. It retains the power to lay down objectives and policies, to allocate finance, and to coordinate and control the enterprise as a whole; what it disperses is the authority to decide operating matters within those policies.

Two cautions attach to the term. First, it has nothing to do with the physical location of work: a company with branches in a dozen cities may be wholly centralised if every branch awaits orders from the head office, and a company housed in a single building may be decentralised. Second, the two are relative terms and not alternatives. No enterprise can be completely centralised, for that would leave no hierarchy at all, and none can be completely decentralised, for that would leave top management with nothing to control. Every firm stands somewhere between, and Fayol expressed the test simply: whatever increases the role of the subordinate is decentralisation, and whatever decreases it is centralisation. The two patterns are compared in Table 9.6.

Table

Business Example

Stock Decided at the Store A footwear chain allows each store manager to decide the sizes and styles he will stock, within a budget fixed at the head office. The manager sees which lines move in his locality; a buyer sitting at the head office cannot. Policy, pricing and the budget itself remain with the head office.

9.10.3 Merits of Decentralisation

Relief to top management — operating decisions are settled below, so senior executives can give their time to policy, planning and the future of the enterprise instead of to daily approvals.
Quicker decisions — authority rests with the person nearest the problem, who need not wait for sanction from a distant superior. Delay and red tape are reduced.
Better decisions — the manager on the spot knows the realities of his own market, plant or branch, and decides on facts that would be stale by the time a report reached the top.
Development of managerial talent — lower-level managers who exercise real authority learn to judge, to decide and to bear the consequences. The enterprise thereby trains its own successors and is not left helpless when a senior post falls vacant.
Motivation and morale — authority carries status and recognition, and a manager trusted to decide takes greater interest in the results of his unit.
Effective control — each unit can be treated as a separate centre of performance and judged against its own targets, so the contribution of every division becomes visible.
Growth and diversification — new products and territories can be added because there are managers capable of running them, and each unit can be given the autonomy its own line of business needs.

9.10.4 Demerits of Decentralisation

Heavy expense — competent managers must be employed at many levels and in every unit, and facilities such as accounts and personnel offices have to be duplicated.
Lack of uniformity — units deciding for themselves may follow different policies and procedures, so the enterprise ceases to speak with one voice to its customers and its employees.
Problems of coordination — semi-autonomous units tend to take a narrow view and pursue their own targets, and sectional interest may be allowed to overshadow the objectives of the enterprise.
Unsuitable for small firms — a small enterprise has neither the range of activities to divide nor the managers to whom authority could be dispersed, and the cost would not be recovered.
Not possible for every activity — matters such as dealings with government authorities, negotiations with trade unions and the raising of capital must be handled centrally, whatever the general policy of the firm.
Risk of weakened control — where standards of performance are not laid down clearly, dispersed authority can produce decisions that no one at the top learns of until the damage is done.

9.10.5 Delegation and Decentralisation Distinguished

The two are related but not identical. Delegation is the act by which one manager passes authority to his own subordinate; decentralisation is the result achieved when such delegation is practised systematically, at every level and in every department, down to the lowest level at which a decision can sensibly be taken. Delegation is therefore the cause and decentralisation the effect. Delegation can exist without decentralisation, but decentralisation is impossible without delegation. The differences are set out in Table 9.7.

Table

Case Snippet

Case 9.4 — The Head Office Decides Everything Kalra Motors sells vehicles through eleven showrooms in four states. Every discount, however small, must be approved by the head office at Ludhiana, and showroom managers report that customers walk out while approval is awaited. The board is now considering allowing each showroom manager to grant discounts up to a fixed limit, the limit itself and all pricing policy remaining with the head office. Q. Name the pattern of authority Kalra Motors follows at present and the one it is considering, and state one benefit and one difficulty the change is likely to bring.

9.11 Summary

Organising is the process of identifying and grouping the work to be done, assembling the resources required for it, and establishing authority relationships among the positions so created. It follows planning and precedes staffing and directing.
The word ‘organisation’ is also used for what the process leaves behind — the organisation structure, which is the system of job positions, the duties attached to them and the authority relationships between them.
Organising matters because it brings specialisation, matches people to defined jobs, fixes responsibility, provides channels of communication, develops personnel, allows the enterprise to absorb change, and makes growth possible. A defective structure duplicates work and delays decisions.
The process of organising consists of five steps in a fixed order:

Division of the total work into jobs.
Grouping of related jobs into departments, which is called departmentation.
Assignment of each group of duties to a person suited to perform it.
Delegation of the authority the duty requires.
Coordination of the efforts of departments and individuals.

Formal organisation is the structure of well-defined jobs deliberately created by management. It gives clarity of duties, unity of command along the scalar chain, easy fixing of responsibility and stability, but is rigid, slow in communication and blind to human relationships.
Informal organisation is the network of personal and social relationships that arises spontaneously among employees. It carries information quickly along the grapevine, meets social needs and supports the formal structure, but breeds rumour, resists change and may set norms that conflict with the goals of the enterprise.
Informal organisation cannot be created or destroyed by order. Management’s task is to recognise the groups, work through their leaders and turn their norms towards efficient performance.
Line organisation is a direct, unbroken chain of command in which each subordinate is answerable to one superior only. It is simple, quick and economical, but overburdens key executives and offers no specialist advice.
Line and staff organisation attaches specialists to line managers to advise them. Staff advise and do not command, so unity of command survives; the form brings expert knowledge but is costly and breeds line–staff conflict.
Functional structure groups activities by function — production, marketing, finance, personnel. It gives specialisation and avoids duplication, but no department can be held answerable for a product as a whole, and coordination between departments is difficult.
Divisional structure groups activities by product line, each division being largely self-contained. It fixes responsibility on the divisional head and eases growth, but duplicates facilities and invites conflict between divisions. It suits large, diversified enterprises.
Delegation of authority is the downward transfer by which a manager assigns part of his work to a subordinate and grants him the authority to perform it. The manager remains answerable to his own superior, so delegation is never an abdication of responsibility.
Delegation has three elements:

Authority — the right to decide and command, which flows downward and can be delegated.
Responsibility — the obligation to perform the assigned duty, which flows upward and is absolute.
Accountability — answerability for the outcome, which flows upward and cannot be delegated at all.

Delegation relieves top management, speeds up decisions, creates the management hierarchy, motivates subordinates, trains future managers and makes expansion possible.
Centralisation is the retention of decision-making authority at the top; decentralisation is its systematic dispersal to all levels, top management retaining policy, coordination and control. The two are relative, and every enterprise stands somewhere between them.
Decentralisation speeds up decisions, develops managers and allows units to be judged on their own results, but makes coordination harder, threatens uniformity and raises administrative costs.
Delegation is the cause and decentralisation the result. Delegation is compulsory and confined to a manager and his subordinates; decentralisation is a matter of policy and extends to the whole enterprise.

Flowchart

FC 9.8 — The Organising Function At A Glance Organising → Division of work, Grouping of activities, Assignment of duties, Delegation of authority, Coordination of efforts; Outcome → Organisation structure; Structure by authority → Line, Line and staff; Structure by grouping → Functional, Divisional; Relationships within the structure → Formal, Informal; Pattern of authority → Centralisation, Decentralisation

9.12 Points to Ponder

Dividing work more finely makes each employee faster at a narrower task. At what point does further division begin to cost an enterprise more in coordination than it gains in speed?
Informal groups spread rumour and resist change, yet they also carry information faster than any official channel. Is a manager who deliberately works through informal leaders serving the enterprise or weakening its formal structure?
A manager who delegates widely does far less of the work himself than one who decides everything personally. Is such a manager less useful to his enterprise, or useful in a different way?
Responsibility is said to be absolute, and a manager remains answerable for work carried out by subordinates he cannot supervise at every moment. On what grounds can this be defended, and what would be lost if it were abandoned?
Decentralisation is described as a philosophy rather than a mere technique. Would an enterprise that decentralises only because rival firms have done so obtain the same benefits from it?
Should the structure of a business be settled first and its plans framed to fit that structure, or should the structure be redrawn each time the plans change?

9.13 Objective Questions

The grouping of related jobs into departments, each placed under a manager, is known as: [1]

Division of work
Departmentation
Coordination
Decentralisation

In which form of organisation do specialists advise line managers without holding any power to command their subordinates? [1]

Line organisation
Line and staff organisation
Divisional structure
Informal organisation

Assertion (A): A manager who has delegated a task to his subordinate continues to be answerable to his own superior for that task. Reason (R): Authority can be delegated, but accountability cannot. Choose the correct option: [1]

Both (A) and (R) are true and (R) is the correct explanation of (A)
Both (A) and (R) are true but (R) is not the correct explanation of (A)
1. is true but (R) is false
1. is false but (R) is true

Fill in the blank: The unbroken line of authority running from the top of an enterprise to its lowest level is called the __________. [1]
State whether the following statement is true or false: An enterprise with branches in several cities is, for that reason, a decentralised enterprise. [1]

9.14 Check Your Concepts

Why is a manager able to delegate his authority but not his accountability? [2]
State, in their correct order, the five steps in the process of organising. [3]
A firm manufacturing a single variety of biscuits proposes to adopt a divisional structure. Evaluate this proposal, giving reasons. [3]
Distinguish between formal organisation and informal organisation on any four bases. [4]
Explain the meaning of decentralisation of authority, and state any four of its merits and two of its limitations. [6]

9.15 Case-Based Questions

Kesari Hardware Ltd. has manufactured hand tools for many years through departments for production, marketing, finance and personnel. It has recently added a line of garden equipment, which is made by a different process and sold to a different class of buyer, and both lines are handled by the same departments. The marketing head has been asked to raise the sales of garden equipment by a fifth, but every advertisement he plans and every salesman he wishes to appoint must first be approved by the managing director. Two festival orders were lost last season while approvals were awaited.

Name the structure Kesari Hardware Ltd. follows at present and the structure better suited to its product range, giving one reason for the change. [3]
Identify the pattern of distribution of authority under which the marketing head is working, and state two consequences of it for the firm. [3]