Chapter 2: Organizational Management

1. INTRODUCTION

Organization is the backbone of management. Without efficient organization, no management

can perform its functions smoothly. Sound organization contributes greatly to the continuity
and success of the enterprise.

2. MEANING AND CHARACTERISTICS OF ORGANISATION

Some important definitions of organization are given below :

"It is grouping of activities necessary to attain enterprise objectives and the assignment of each
grouping to a manager with authority necessary to supervise it". Koontz and O'Donnel

"The process of identifying and grouping the work to be performed, defining and delegating
responsibility and authority and establishing relationship for the purpose of enabling people to
work more effectively together in accomplishing objects". Louis A. Allen

"The structure and process by which a cooperative group of human beings allocates its tasks
among its members, identifies relationship, and integrates its activities towards common
objectives". Joseph L. Massive

From the above definitions, it is clear that organizing is the process of determining the total
activities to achieve a given objective, grouping and assigning of activities to individuals,
delegating them authority necessary to perform the activities assigned and establishing
authority relationship among different positions in the organization.

An analysis of the above definitions reveals the following characteristics of an organization:

1. It is a group of individuals which may be large or small.
2. The group in the organization works under the executive leadership.
3. It is a machine or mechanism of management.
4. It has some directing authority or power which controls the concerted efforts of the group.
5. The division of labour, power and responsibilities are deliberately planned.
6. It implies a structure of duties and responsibilities.
7. It is established for accomplishment of common objectives
8. It is a functional concept.

Sound organization brings about the following advantages:

1. Facilitates attainment of the objectives of the enterprise.
2. Facilitates optimum use of resources and new technological development.
3. Facilitates growth and diversification.
4. Stimulates creativity and innovation.
5. Facilities effective communication.
6. Encourages better relations between the labour and the management.
7. Increase employee satisfaction and decreases employee turnover.

3. STEPS IN THE PROCESS OF ORGANISING

The following steps can be of great help in the designing a suitable structure, which will laid in
achieving enterprise objectives:

1. Clear definition of objectives: The first step in developing an organizational structure is to lay
down its objectives in very clear terms. This will help in determining the type, stability and basic
characteristics of the organization.

2. Determining activities: In order to achieve the objectives of the enterprise, certain activities
are necessary. The activities will depend upon the nature and size of the enterprise. For
example, a manufacturing concern will have production, marketing and other activities. Each
major activity is divided into smaller parts. For instance, production activity may be further
divided into purchasing of materials, plant layout, quality control, repairs and maintenance,
production research etc.

3. Assigning duties: The individual groups of activities are then allotted to different individuals
according to their ability and aptitude. The responsibility of every individual should be defined
clearly to avoid duplication and overlapping of efforts. Each person is given a specific job suited
to him and he is made responsible for its execution. Right man is put in the right job.

4. Delegating authority: Every individual is given the authority necessary to perform the
assigned activity effectively. By authority we mean power to take decisions, issue instructions,
guiding the subordinates, supervise and control them. Authority delegated to a person should
commensurate with his responsibility. An individual cannot perform his job without the
necessary authority or power. Authority flows from top to bottom and responsibility from
bottom to top.

5. Coordinating activities: The activities and efforts of different individuals are then
synchronized. Such coordination is necessary to ensure effective performance of specialized
functions. Interrelationship between different job and individuals are clearly defined so that
everybody knows from whom he has to take orders and to whom he is answerable.

6. Providing physical facilities and right environment: The success of an organization depends
upon the provision of proper physical facilities and right environment. Whereas it is important
to have right persons on right jobs, it is equally important to have right working environment.
This is necessary for the smooth running and the prosperity of the enterprise.

7. Establishment of structural relationship for overall control: It is very essential to establish

well defined clear-cut structural relationships among individuals and groups. This will ensure
overall control over the working of all departments and their coordinated direction towards the
achievements of predetermined goals of business.

4. FORMS OF ORGANISATION STRUCTURE

Organization requires the creation of structural relationship among different departments and
the individuals working there for the accomplishment of desired goals. The establishment of
formal relationships among the individuals working in the organization is very important to
make clear the lines of authority in the organization and to coordinate the efforts of different
individuals in an efficient manner. In order to organize the efforts of individuals, any of the
following types of organization structures may be set up: (i) Line organization, (ii) Line and staff
organization, (iii) Functional organization and (iv) project Organization.

4.1 Line Organization

The line organization represents the structure in a direct vertical relationship through which
authority flows. Under this, the line of authority flows vertically downward from top to bottom
throughout the organization. The quantum of authority is highest at the top and reduces at
each successive level down the hierarchy. Every person in the organization is in the direct chain
of command as shown in Fig.1

Fig. 1: Line Organization

Advantages of Line Organization

(i) It is very easy to establish line organization and it can be easily understood by the
employees.
(ii) There is clear-cut identification of authority and responsibility relationship. Employees are
fully aware of the boundaries of their jobs.
(iii) It ensures excellent discipline in the enterprise because every individual knows to whom he
is responsible.
(iv) It facilitates prompt decision-making because there is definite authority at every level. An
executive cannot shift his decision making to others, nor can the blame be shifted.
Disadvantages of Line Organization
(i) With growth, the line organization makes the superiors too overloaded with work.
(ii) There is concentration of authority at the top. If the top executives are not capable, the
enterprise will not be successful.
(iii) Line organization is not suitable to big organizations because it does not provide specialists
in the structure. Many jobs require specialized knowledge to perform them.
(iv)There is partially no communication from bottom upwards because of concentration of
authority at the higher levels. If superiors take a wrong decision, it would be carried out
without anybody having courage to point out its deficiencies.

In spite of these drawbacks, the line organization structure is very popular particularly in small
organizations where there are less number of levels of authority and a small number of people.

4.2 Line and Staff Organization

Line executives are generalists and do not possess specialized knowledge which is a must to
tackle complicated problems. With a view to give specialist aid to line executives, staff positions
are created throughout the structure. Staff elements bring expert and specialized knowledge to
provide advice to line managers so that they may discharge their responsibilities successfully.

In line and staff organization, the line authority remains the same as it does in the line
organization. Authority flows from top to bottom. The main difference is that specialists are
attached to line managers to advise them on important matters. These specialists stand ready
with their specialty to serve line men as and when their services are called for to collect
information and to give help which will enable the line officials to carry out their activities
better. The staff officers do not have any power of command in the organization as they are
employed to provide expert advice to the line officers. Staff means a supporting function
intended to help the line manager. In most organizations, the use of staff can be traced to the
need for help in handling details, gathering data for decision-making and offering advice on
specific managerial problems. Staff investigates and supplies information and
recommendations to managers who make decisions. Specialized staff positions are created to
give counsel and assistance in each specialized field of effort as shown in Fig.2

Fig. 2: Line and Staff Organization

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

For instance, personnel department is established as staff department to advise the line
executives on personnel matters. Similarly, finance, law and public relations departments may
be set up to advice on problems related to finance and accounting, law and public relations.
The staff officers do not have any power of command in the organization as they are employed
to provide advice to the line officers. In most organizations, the use of staff can be traced to the
need for help in handing details, gathering data and offering advice on specific managerial
problems.

Advantages of Line and Staff Organization

(i) Specialized knowledge. Line managers get the benefit of specialized knowledge of staff
specialists at various levels.
(ii) Reduction of burden. Staff specialists relieve the line managers of the botheration of
concentrating on specialized functions like accounting, selection and training, public relations,
etc.
(iii) Proper weightage. Many problems that are ignored or poorly handled in the line
organization can be properly covered in the line and staff organization by the use of staff
specialists.
(iv) Better decisions. Staff specialists help the line executives in taking better decisions by
providing them with adequate information of right type at the right moment and expert advice.
(v) Flexibility. Line and staff organization is more flexible as compared to the line organization.
General staff can be employed to help line managers at various levels.
(vi) Unity of command. Under this system, the experts provide special guidance without giving
orders. It is the line manager who only has got the right to give orders. The result is that the
enterprises takes advantage of functional organization while maintaining the unity of command
i.e., one subordinate receiving orders from one boss only.

Demerits of Line and Staff Organization

(i) There is generally a conflict between the line and staff executives. There is a danger that the
staff may encroach on the line authority. Line managers feel that staff specialists do not always
give right type of advice, and staff officials generally complain that their advice is not properly
attended to.
(ii) The allocation of duties between the line and staff executives is generally not very clear. This
may hamper coordination in the organization.
(iii) Since staff men are not accountable for the results, they may not be performing their duties
well.
(iv)There is a wide difference between the orientation of the line and staff men. Line executives
deal with problems in a more practical manner. But staff officials who are specialists in their
fields tend to be more theoretical.
4.3 Functional organisation

Functional organisation structure is the most widely used in the medium and large
organisations having limited number of products. This structure emerges from the idea that the
organisation must perform certain functions in order to carry on its operations. It seems natural
that the organisation begins its operations by emphasising the kind of work it must do to meet
its objectives. As it grows and division of labour leads to specialisation, the organisation has
more work to do; it adds new specialties and further divides its presently employed specialties.

Functional structure is created by grouping the activities on the basis of functions required for
the achievement of organisational objectives. For this purpose, all the functions required are
classified into basic, secondary and supporting functions according to their nature and
importance. The basic or major functions are those which are essential for the organisation.
Authority relationships in functional structure may be in the form of line, staff and functional. In
fact, the concept of functional authority is very appropriate for functional structure. Thus,
functional structure is charactersied by the following.
(i) Specialisation by functions.
(ii) Emphasis on sub-goals.
(iii) Pyramidal growth of the organisation,
(iv) Line and staff division,
(v) Functional authority relationships among various departments,
(vi) Limited span of management and tall structure.

4. 4. Project Organisation

They provide a horizontal grouping together of a number of functions which might otherwise
be labeled functional departments and exercising staff and functional authority. The basic idea
behind these structures is that since environment changes very rapidly, the organisation must
take up various activities on project basis, that is, adding the required ones and deleting the
unnecessary ones.
The establishment of project organisation calls for appointment of a project manager who is
responsible for the completion of the project. He coordinates the activities of the project. He
prescribes what is to be done, when it is to be done, and how much resources are required. The
functional personal are drawn from various functional departments and functional managers
decide who in their department will perform the task and how it will be done. Thus, project
manager is a unifying and focal point for the project activities.
5. THE CONCEPT OF AUTHORITY

Authority is a legal power which is possessed by a person from his superior officers and with
the help of which he succeeds in getting the things done by his sub-ordinates. Authority is the
key to managerial functions. If the managers do not possess required authority, they will not be
able to perform their duties properly. A manager is in a position to influence his subordinates
only by the use of his authority. It is the authority which enables him to discharge the important
functions of planning, coordination, motivation and controlling etc. in an enterprise. If proper
authority is not vested in him, he cannot perform these functions in the required manner and
he cannot be held responsible for all these functions in the absence of proper authorities. It is
only the authority by virtue of which he dominates his sub-ordinates and gets work done by
them.

Definitions

• "Authority is the right to give order and the power to exact obedience". – Henri Fayol
• "Authority is the power to command, to act or not to act in a manner deemed by the
possessor of the authority to further enterprise or departmental performance". – Koontz and
O'Donnell

While concluding the meaning of authority it can be said that authority is a legal right. It
empowers an individual to take decisions. It includes such rights or powers as that spending
money, of using certain kinds of quantities of materials, of hiring and firing people. He is given a
right to command and to exercise control over those who are responsible for the execution of
policies and programmes of the enterprise. For decisions taken the authorized person is held
responsible and is made answerable to his superiors and the organization as a whole.

6. RESOPNSIBILITY

Responsibility represents the work or duties assigned to a person by virtue of his position in the
organization. It refers to the mental and physical activities which must be performed to carry
out the task or duty. That means every person who performs some kind of mental or physical
activities as an assigned task has responsibility. In order to enable the subordinates perform his
responsibility well, the superior must clearly tell the former as to what is expected of him. In
other words, the delegator must determine clearly the task or duty that is assigned to the
delegatee. The duty must be expressed either in terms of function or in terms of objectives. If a
subordinate is asked to control the operations of a machine, the duty is in terms of function.
But if he is asked to produce a certain number of pieces of a product, the duty is in terms of
target or objective. Determination of duties in terms of objective will enable the subordinate to
know by what standards his performance will be evaluated.

Responsibility or duty implies the task assigned to a person to be completed in accordance with
the standards laid down. It is his superior who has entrusted this task to him. He should not find
any difficulty in expecting it because his superior knows his plus and minus points at work. He
would not assign a task which the subordinate is unable to complete. In fact he has divided and
subdivided the task pertaining to this division in such a manner that each one of his
subordinates gets the task of his choice. Hence there is no ground for the subordinate to object
the duty assigned to him by his superior unless the superior has acted deliberately in an
indicative manner. If he does so, there are other ways to remedy the situation.

7. RELATIONSHIP OF AUTHORITY AND RESPONSIBILITY

In every business unit, internal organization is necessary for its efficient and smooth running.
Under internal organization, duties are determined and distributed among the employees. All
activities are combined and coordinated. The lines of authority are to be determined, a well
recognized principle, to be followed for any organization and management.

In the internal organization of any concern, there must be a proper assignment of duties among
the various personnel. This means that some people assign and some others have to perform
those duties. The former people have an authority. The latter are subordinates to the former.
The relationship of authority and subordination among the various personnel and groups
should be properly determined. The position of each individual is to be fixed, i.e., whether he is
to be in the position of authority or in the subordinate position. This work is very important. In
this connection, the following principle is to be followed. The greater the responsibility
attached to a post, the higher will be the position of the person holding the post, in the
hierarchy. Thus, it is stated that authority should go with responsibility.

When the duties are assigned, there will be two types of employees. Some have authority and
others take up responsibility. The former occupy a superior position, while the latter are placed
in a subordinate position.

Authority refers to the right to make decision and to command subordinate to follow these
decisions. It is the supreme coordinating power and is very important for the managerial job.
Responsibility refers to the obligation of a subordinate. Every subordinate has to perform the
duty assigned to him.

Authority seems to flow from the superiors to the subordinates. Every manager can see that his
orders are executed by persuasion, coercion or economic social sanctions. Persuasion is the
best means. Otherwise, the task may not be successfully accomplished, responsibility cannot be
delegated. But authority can be delegated.

8. DECENTRALISATION

According to Allen, decentralization refers to the systematic effort to delegate to the lowest
levels all authority except that which can only be exercised at central points. Thus,
decentralization means reservation of some authority (to plan, organize, direct and control) at
the top level and delegation of authority to make routine decisions at points as near as possible
to where action takes place.
Advantages of Decentralization

(i) It leads to a competitive climate in the organization.

(ii) It relieves the management of much workload;
(iii) It makes jobs at the lower levels of the organization more attractive and interesting. As a
result, the level of motivation of the employee increases;
(iv) It encourages initiative at lower levels where the employees are allowed to participate in
the decision-making process;
(v) Decision made closer to the actual situations is likely to be more realistic. Effective decisions
are possible because of the speed and first-hand knowledge that decentralization provides.

9. CENTRALISATION VS. DECENTRALISATION

Centralization and decentralization are the opposite ends of an organization. On the one hand,
centralization brings uniformity of policy and action, utilizes the skills of centralized and
specialized staff, and enables closer control over operating units. And on the other hand,
decentralization tends to effect faster decision-making and action on the spot without
consulting higher levels. Decentralization has the effect of motivating the subordinates since
they have a greater share in management decision making.

The question of centralization or decentralization is a matter of degree. It is not possible to

conceive of an organization which is exclusively centralized as some decentralization of
authority is bound to exist. Likewise, there can be no absolute decentralized structure as the
top executive cannot delegate all his authority. The issue of centralization and decentralization
has to be decided objectively taking into consideration the size and nature of enterprise,
diversity of the company's product, economies of division of labour, location of markets, nature
of services to be performed, availability of trained and efficient managers, philosophy of
management, etc.

10. SPAN OF CONTROL

Span of Control means the number of subordinates that can be managed efficiently and
effectively by a superior in an organization. It suggests how the relations are designed between
a superior and a subordinate in an organization. Span of control is of two types:

1. Narrow span of control: Narrow Span of control means a single manager or supervisor
oversees few subordinates. This gives rise to a tall organizational structure.
2. Wide span of control: Wide span of control means a single manager or supervisor
oversees a large number of subordinates. This gives rise to a flat organizational
structure.

Narrow span of control is more expensive as compared to wide span of control as there are
more number of superiors and therefore there are greater communication problems between
various levels of management. Wide span of control is best suited when the employees are not
widely scattered geographically, as it is easy for managers to be in touch with the subordinates
and to supervise them.

An ideal span of control according to modern authors is around 15 to 20 subordinates per

manager, while according to the traditional authors the ideal number is around 6 subordinates
per manager. In reality, the ideal span of control depends upon various factors, such as:

1. Nature of an organization
2. Nature of job
3. Skills and competencies of manager
4. Employees skills and abilities
5. The kind of interaction that takes happens between superiors and subordinates, etc

11. FORMS OF BUSINESS OWNERSHIP

There are basically five forms of business ownership structures for new small businesses:

1. Sole proprietorship:

A sole proprietorship, also known as a sole trader, is owned by one person and operates for
their benefit. The owner may operate the business alone or with other people. A sole
proprietor has unlimited liability for all obligations incurred by the business, whether from
operating costs or judgements against the business. All assets of the business belong to a sole
proprietor. For example, computer infrastructure, any inventory, manufacturing equipment
and/or retail fixtures, as well as any real property owned by the business.

The advantages with a sole proprietorship include

i. ease and cost of formation
ii. simply announcing you are in business and requesting any licenses and permits you
may need;
iii. all profits from the business belong exclusively to you, the owner; flexibility and
control
iv. you make all the decisions and direct the entire business operations;
v. very little government regulations; secrecy; and ease of ending the business.

There are disadvantages includes

i. unlimited liability — all business debts are personal debts, meaning you could lose
everything you own if the business fails or loses a major lawsuit;
ii. limited sources of financing — based on your creditworthiness;
iii. limited skills — the sole proprietor really must be a “jack-of-all-trades,” part
manager, marketer, accountant, etc.; and
iv. limited lifespan — the business ends when the owner dies.
2. Partnership:

A partnership is a business owned by two or more people. In most forms of partnerships, each
partner has unlimited liability for the debts incurred by the business. There are two basics
forms of partnerships, general and limited. In a general partnership, all partners have unlimited
liability, while in a limited partnership, at least one partner has liability limited only to his or her
investment while at least one other partner has full liability.

Advantages of a partnership include

i. ease of organization
ii. combined knowledge and skills
iii. using the strengths of each partner for better business decision-making;
iv. greater availability of financing; and
v. very little government regulations.

Disadvantages including
i. unlimited liability
ii. all business debts are personal debts;
iii. reconciling partner disagreements and action
iv. each partner is responsible for the actions of all the others;
v. sharing of profits and limited lifespan
vi. the partnership ends when a partner dies or withdraws.

3. Corporation:

The owners of a corporation have limited liability and the business has a separate legal
personality from its owners. Corporations can be either government-owned or privately
owned. They can organize either for profit or as not-for-profit organizations. A privately
owned, for-profit corporation is owned by its shareholders, who elect a board of directors
to direct the corporation and hire its managerial staff. A privately owned, for-profit
corporation can be either privately held by a small group of individuals, or publicly held,
with publicly traded shares listed on a stock exchange.

Advantages
i. Limited liability of stockholders
ii. Ability to attract capital
iii. Ability to continue indefinitely
iv. Transferable ownership

Disadvantages
i. Cost and time in incorporating
ii. Double taxation
 iii. Potential for diminished incentives
iv. Legal requirements and red tape
v. Potential loss of control

4. Cooperative society

Cooperative as “a society which has its objective of promotion of economic interests of its
members in accordance with cooperative principles”. Often referred to as a "co-op", a
cooperative is a limited liability business that can organize for-profit or not-for-profit. A
cooperative differs from a corporation in that it has members, not shareholders, and they share
decision-making authority. Cooperatives are typically classified as either consumer cooperatives
or worker cooperatives.

Thus, we can now define cooperative as a voluntary organisation of those who are
economically weak to stand on their own legs. They come together, not to earn profits but
improve their common economic interests through business propositions. The basic objectives
of such organisations are self-help and mutual help.

A cooperative organisation needs to be registered with the Registrar of Co-operative Societies

of the State in which the society’s registered office is located. It should have a minimum of 10
members and no limit for maximum number of members. The members are the owners. They
contribute capital to the organisation and get dividends. The liability of the members is limited.
The managing committee elected by the members in the annual general meeting manages the
affairs of the co-operative organisation.

5. Government Sector

Business and organisations controlled by the government. Main aim of organisations in the
Government Sector is to provide a service for members of the general public

• Examples include:
– DD - Doordarshan
– IIT – India Institute of Technology
– ONGC – Oil and Natural Gas Corporation
– Defence – Army, Navy, Air force
– Local Municipal Councils
QUESTION BANK

1. Define organization and discuss its characteristics.

2. "Organization is an important tool to achieve organizational objectives," Comment.
3. Explain the various steps in the process of organizing.
4. Explain “line organization” with diagram. Discuss their merits and demerits.
5. Explain “line and staff organization” with diagram. Discuss their merits and demerits.
6. Explain “functional organization” with diagram. Discuss their merits and demerits.
7. Explain “project organization” with diagram. Discuss their merits and demerits.
8. Distinguish between Authority and responsibility
9. Explain the term 'Decentralization' and give its principal advantages.
10. Distinguish between centralization and decentralization.
11. What is span of control?
12. Explain two types of span of control in detail.
13. Explain the following with advantages and disadvantages.
i. Sole proprietorship
ii. Partnership
iii. Corporation
14. Write short notes on
i. Cooperative society
ii. Government Sector