Organizational structure is a framework within which the tasks are separated and the managerial and operating tasks are performed by clearly mentioning the flow of authority and responsibility. It is a framework which helps in setting up clear distinction of heads and subordinated. For example: If Radha sets up her own business of electronic goods. She specifies that Rahul will be in close connection with the supplier and order the goods whenever necessary. Kiran will be responsible for dealing with the customers. Arjun will look after the after sales services. Manish will look after the cash and online payments and other accounts work. Everyone will report back to Radha. When she specifies the roles, duties and responsibilities of each person, it becomes a organizational structure.
While this example is taken for a small scale business and there are lot many other activities which need to be performed in a business. That is the reason, a good organizational structure is important. As the size and complexity of a business increases the organizational structure becomes more important. For any organization that has a growth prospective cannot leave organizational structure because without it the business will become stagnant and may sometime cease to exist. It is structure which brings together the resources i.e. physical, human and financial resources.
Organizational structure is important because it helps in improving the profitability of the firm. The environment in which the business runs is ever changing and to react to this environment it is important to change accordingly. It not only helps in coordination of different activities of the business but also helps in correlation of people, resources and work. A good organizational structure will improve the communication line between the people in an organization and helps in better control of the work. This benefit of smooth working comes from the proper line of authority and responsibility and clear distinctions made for the job roles of the employees.
Span of management is an important factor which needs to be considered while choosing a structure for the organization. Span of management is a simple tool which helps in determining the number of subordinates which a superior can manage effectively and efficiently.
Types of organizational structure
There are different kinds of structure adopted by different kinds of business organizations based on the kind of work, area and products they offer. They are-
- Functional structure
- Divisional structure
A Functional Structure is a structure of an organization under which the similar kinds of activities or functions are grouped together to form a department. These activities are divided and can be further divided into sub categories. For example: consider a mobile manufacturing company, the company if takes up a functional structure as an organizational structure will have manufacturing department, marketing and sales department, finance department and personnel department.
Advantages of functional structure
- Improves specialisation: when an organization is divided based on the functions then a department will perform single type of function and thus their efficiency and quality will increase because of the improved experience which they will get because of repetitive work. Thus, it improves specialisation in particular activity.
- Better control and coordination: as the departments are divided based on the functions and the similar kinds of tasks are performed thus it will give better control of the activities at a single place and thus help in coordinating the similar kinds of activities because people in a particular department will be aware of each other’s job roles and how to perform them.
- Improved profits: the profits are bound to increase when there is improved workings in an organization because of departmentalisation and increased operational and managerial efficiency.
- Reduces duplication: when there are separate departments for different kinds of activities and there are sub sections under a particular department then it leads to economies of scale because the duplication of activities is reduces as there is no overlapping of similar kinds of activities.
- Better training: when there are people in a department performing similar kinds of activities then the training can be easily provided to them based on the work they do. They will get more attention. Attention will be given to mainly the activity they perform and thus leading to development of personnel.
Disadvantages of functional structure
- Conflict of interests: conflict of interest will be there within different departments if they do not have clear distinction of responsibilities. They may want different things and want to achieve different objectives and thus can hinder each other’s growth.
- Inflexibility: as the people working in a department will be given training for that particular area and this will limit the learning of the heads of departments and other employees as they will not get trained in diverse areas.
- Reduced unity of efforts towards organizational goal: different departments will have their own goals and they will focus on achieving them and this may become hindrance for the organizational goal. As, each and every person should have their personal goals aligned with the organizational goals so that it does not creates conflicts and chaos.
Suitability of functional structure
Functional structure is suitable when the size of the organization is large with diverse activities to be performed and these activities need specialisation.
Divisional structure is different from functional structure altogether. As, in the divisional structure, the divisions are made based on the different kinds of products which the company is offering. These divisions have its separate functions therein. Thus, it can be called multifunctional divisions. However, functions in each division may be different based on the suitability and need. For example: a company may be manufacturing pens, pencils, notebooks and erasers. These will be considered divisions and these divisions will further have marketing department, production department, finance department etc.
Advantages of divisional structure
- Development of skills: the divisional department head will have knowledge of each function i.e. the knowledge of how to handle sales, marketing, finance, human resource etc. The head will thus be prepared for higher positions.
- Proper performance measurement: each department based on the divisions will have clear distinction between the revenue earned, cost incurred and profit earned by them. This will act as a good performance measurer and thus corrective measures can be taken for the divisional department which does not performs well.
- This structure is flexible because it initiates better and quicker decision making as there is no need to consult other departments for any decision to be taken.
- If in future there is any new product which the company decides to add up in the product lines of the company then it will be easier as it will only have to add a separate department for the new product instead of hindering existing structure.
Disadvantages of divisional structure
- There may be conflict between the departments because some may perform better and others may not and this will lead to chaos. Also, the conflict can arise due to difference in allocation of funds for different departments.
- There may be duplication of activities which may raise the cost of the industry. The duplication of efforts will lead to wastage of efforts and wastage of time and money too.
- There may be more power in hands of the head of divisions because they may get knowledge of every function in their divisional department and they may consider themselves to be of high authority and ignore the responsibilities and ultimately ignore the organizational interest.
Suitability of divisional structure
Divisional structure is thus suitable for product specialisation. Thus where the company keeps on adding the new products to the product line of the company then this structure is best suitable.