Ch 5 Organization

Chap 5 Organization
Meaning:
An entrepreneur organizes various factors of production like land, labour, capital,
machinery, etc. for channelizing them into productive activities. The product finally
reaches consumers through various agencies. Business activities are divided into
various functions, these functions are assigned to different individuals.

Various individual efforts must lead to the achievement of common business goals.
Organization is the structural framework of duties and responsibilities required of
personnel in performing various functions with a view to achieve business goals
through organization. Management tries to combine various business activities to
accomplish predetermined goals.

Present business system is very complex. The unit must be run efficiently to stay in
the competitive world of business. Various jobs are to be performed by persons
most suitable for them. First of all various activities should be grouped into different
functions. The authority and responsibility is fixed at various levels. All efforts
should be made to co-ordinate different activities for running the units efficiently so
that cost of production may be reduced and profitability of the unit may be
increased.

Definitions:

Louis Allen, “Organization is the process of identifying and grouping work to be

performed, defining and delegating responsibility and authority and establishing
relationships for the purpose of enabling people to work most effectively together in
accomplishing objectives.” In the words of Allen, organization is an instrument for
achieving organizational goals. The work of each and every person is defined and
authority and responsibility is fixed for accomplishing the same.

Wheeler, “Internal organization is the structural framework of duties and

responsibilities required of personnel in performing various functions within the
company………… It is essentially a blue print for action resulting in a mechanism for
carrying out function to achieve the goals set up by company management”. In
Wheeler’s view, organization is a process of fixing duties and responsibilities of
persons in an enterprise so that business goals are achieved.

Koontz and O’Donnell, ‘The establishment of authority relationships with provision

for co-ordination between them, both vertically and horizontally in the enterprise
structure.” These authors view organization as a coordinating point among various
persons in the business.

Compiled By Prof. A.N. Arsiwala Page 1

 Ch 5 Organization

Oliver Sheldon, “Organization is the process so combining the work which

individuals or groups have to perform with the facilities necessary for its execution,
that the duties so performed provide the best channels for the efficient, systematic,
positive and coordinated application of the available effort”. Organization helps in
efficient utilization of resources by dividing the duties of various persons.

Spriegel, “In its broadest sense organisation refers to the relationship between the
various factors present in a given endeavor. Factory organisation concerns itself
primarily with the internal relationships within the factory such as responsibilities of
personnel, arrangement and grouping of machines and material control. From the
standpoint of the enterprise as a whole, organisation is the structural relationship
between the various factors in the enterprise”.

Spriegel has given a wide definition of the organization. He has described it as the
relationship among persons, factors in the enterprise. All factors of production are
coordinated in order to achieve organisational objectives.

George Terry, “Organising is the establishing of effective authority relationships

among selected work, persons, and work places in order for the group to work
together efficiently”. According to Terry organisation is the creation of relationship
among persons and work so that it may be carried on in a better and efficient way.

C.H. Northcott, ‘The arrangement by which tasks are assigned to men and women
so that their individual efforts contribute effectively to some more or less clearly
defined purpose for which they have been brought together”. According to
Northcott the purpose of organization is to co-ordinate the activities of various
individuals working in the organization for the attainment of enterprise goals.

L.H. Haney, “Organization is a harmonious adjustment of specialized parts for

accomplishment of some common purpose or purposes”. Organization is the
adjustment of various activities for the attainment of common goals.

Some of the Principles of organization are studied as follows:

Principles of organization, for sake of clarity of discussion and a better

comprehension of these, have been classified in the following manner:

(I) Overall Principles:

(i) Principle of unity of objective

(ii)Principle of simplicity

(iii)Principle of flexibility

(II) Structural Principles:

Compiled By Prof. A.N. Arsiwala Page 2

 Ch 5 Organization

(iv)Principle of division of work

(v)Principle of functional definition

(vi)Principle of optimum departmentation

(vii) Principle of unity of direction

(viii) Span of management principle

(III) Operational Principles:

(ix) Principle of adequate delegation

(x) Scalar chain principle

(xi) Principle of unity of comment

(xii) Authority-level principle

(I) Overall Principles:

Under this classification, some of the very fundamental principles of organization

are included i.e. principles which are absolutely essential for an effective and logical
functioning of the organization.

A brief explanation of the principles under this category is as follows:

(i) Principle of unity of objective: Very simply stated, this principle requires that
individual and departmental objectives throughout the enterprise must be perfectly
harmonized; and that all objectives must be mutually supportive and collectively
contributing to overall common objectives.

(ii) Principle of simplicity: The observance of this principle requires that the
management must, as far as possible, design a simple organizational structure. A
simple structure facilitates a better understanding of superior- subordinate
relationships; and provides background for better co-operation among people.

(iii) Principle of flexibility: While designing the organizational structure, the

management must provide for in-built devices within the structure itself; which
would facilitate changes in the organizational structure to be effected as and when
environmental factors-internal and/or external- so demand.

(II) Structural Principles:

Structural principles of organization relate to those aspects of the organization,

which have a bearing on the structuring (or the development) of the organization;
its fundamental design and shape.

Compiled By Prof. A.N. Arsiwala Page 3

 Ch 5 Organization

Some of the important principles, in this context, might be the following

ones:

(iv) Principle of division of work: Since the total work of the enterprise cannot
be performed by only one person; it is imperative that such work must be suitably
divided among a number of persons. In fact, the total managerial work ought to be
divided among a number of managers; and the total operational work being divided
among a number of operating personnel.

(v) Principles of functional definition: The above stated principle implies that
the role (or job) of each individual and of each department of the enterprise must
be suitably defined, in terms of the-work content, the authority and facilities
required for job performance and the relationship of the job with those of others, in
the enterprise.

(vi) Principle of optimum departmentation: There are many ways and bases
for creating departments within an organization. According to the principle of
optimum departmentation, departments in an organization must be so created and
maintained-as to facilitate the best attainment of the common objectives of the
enterprise.

(vii) Principle of unity of direction: The principle implies that each group of
activities having the same objective must have only one overall head and only one
overall or master plan. As a principle of organization, this concept of unity of
direction must be so embedded in designing the organizational structure that for
each group of similar activities, there is a provision for only one overall head-having
authority over all personnel performing the same function, anywhere, in the
organization.

(viii) Span of management principle: The span of management principle is

variously called as- the span of control or the span of supervision. However, the
phrase ‘span of management’ is the widest; including also the notions of span of
control and span of supervision. The span of management principle implies that
there is a limit to the number of subordinates; whose work could be effectively
managed (controlled or supervised) by a superior.

Suppose in an enterprise there are 10 subordinates to managed by the

management. Further suppose the span of management is also 10. In this
situation, only manager would be required to handle and manage the work of all
the ten subordinates.

Compiled By Prof. A.N. Arsiwala Page 4

 Ch 5 Organization

The organizational structure would appear as follows:

Now, suppose the span of management is only 5. In this case, the manager would
be aided by two assistant managers; and controlling 10 subordinates via two
assistants-each assistant manager managing the work of 5 subordinates.

The organizational structure in this case would look like somewhat taller than its
counterpart under wide span; and will have more layers of the organization. The
following chart illustrates this concept.

Without going into the details of the discussion, it would suffice to say that the
shape of the organizational structure- tall or flat-has implications for organizational
efficiency on grounds of costs of administration, effectiveness of communication
and facilities in co-ordination.

(III) Operational Principles:

Operational principles of organization could be suggested to be those which have a

bearing on the running or functioning of the organization.

Some important principles, under this category, are as follows:

(ix) Principle of adequate delegation: By the principle of adequate delegation,

we mean that each managerial position be provided with adequate (or necessary or
requisite) authority-to enable the holder of the position i.e. the manager to cope
successfully with the requirements of his job.

Compiled By Prof. A.N. Arsiwala Page 5

 Ch 5 Organization

(x) Scalar chain principle: Scalar chain implies a chain of superiors-ranging from
the highest rank to the lowest rank-in an organization. The scalar chain forms the
base of authority-responsibility relationships among managers and subordinates, in
the organisation; thus promoting mutual understanding among superiors and
subordinates at different levels of the organization.

As a principle of organization, scalar chain principle requires its incorporation into

the design of the organisation, for ensuring smooth running of the enterprise life.

(xi) Principle of unity of command: The above-sated principle implies that an

employee must receive orders and instructions, only from one superior, at a time.
The observance of this principle is desirable for reasons of removing doubts and
confusions from the mind of the employees; and for facilitating exact fixation of
responsibility on individuals for the results expected of them.

(xii) Authority-level principle: The authority-level principle implies that

managers at particular levels in the management hierarchy must decide only those
matters which fall within the purview of the authority vested in their managerial
positions.

A natural extension of this principle is that if a manager at any level of the

management hierarchy comes across a matter not covered by his authority; the
matter must either be referred upwards in the hierarchy or pushed down the
hierarchy at the appropriate level for decision.

Classification Organization Theories:

The evolution of organisation and management can be divided into three broad
classifications as follows:

1. Classical Organization Theory:

The classical theory represents the traditionally accepted views about organisations
i.e. organization was viewed as machine and human beings as components of that
machine. The classical theory is the beginning of the systematic study of the
organizations.

The classical theorists concentrated on organisation structure for the achievement

of organisational goals, thus, focusing on input-output mediators and giving less or
no attention to facilitating and constraining factors in the external environment.
Many of the classical concepts and principles hold good even today. The writers in
this thought have dwelt on human behaviour only in rudimentary manner. The
classical theory can be identified into three streams of thoughts.

These are:

Compiled By Prof. A.N. Arsiwala Page 6

 Ch 5 Organization

(i) Scientific Management introduced by F.W. Taylor

(ii) Administrative or Process management introduced by Henry Fayol and

(iii) Bureaucratic model introduced by Max Weber.

The scientific management group was mainly concerned with the tasks to be
performed at the operative levels. Henry Fayol studied for the first time the
principles and functions of management. Max Weber introduced bureaucracy as a
form of rational organisation.

2. Neo-Classical Organisation Theory:

The classical theory of organisation focused its main attention on physiological and
mechanical variables of organisational functioning. The testing of these variables
does not show positive results. The Neo-classical writers tried to remove the
deficiencies of the classical school.

This theory consists of two schools of thought viz:

(i) Human Relations propounded by Elton Mayo and Roethlisberges

(ii) Behavioural Science Approach introduced by A. Maslow, D. McGregor, F.

Herzberg and V. Vroom.

The Hawthorne studies conducted by Elton Mayo and associates discovered that
real cause of human behaviour was somewhat more than mere physiological
variables. These studies revealed the importance of social and psychological factors
in determining workers’ productivity and satisfaction. The pioneers of Behavioural
Approach reasoned that in as much as managing involves getting things done with
and through people the study of management must be centered around people and
their inter-personal relations. The advocates of this theory concentrated on
motivation, individual drives, group relations, leadership, group dynamics and so
forth.

3. Modern Organisation Theory:

Modern organisation theory is of recent origin, having developed in early 1960s.

This theory has tried to overcome the drawbacks of earlier theories.

They theory may be understood in two approaches:

(i) Systems Approach and

(ii) Contingency Approach.

Compiled By Prof. A.N. Arsiwala Page 7

 Ch 5 Organization

The systems approach studies the organisation in its totality. The mutually
dependent variables are properly analyzed. Both internal and external variables are
studied in analyzing the nature of organisation. The contingency approach suggests
that there is no best way to handle all of the management problems and there is no
organisational structure to suit all the situations. A structure will be suitable only if
it is trailer made for an enterprise. This approach suggests that needs,
requirements, situations of a particular concern should be considered while
designing an organisational structure. The influence of both internal and external
factors should be considered in this context.

Formal and Informal Organization: Features, Advantages and

Disadvantages

Formal Organisation: When the managers are carrying on organising process

then as a result of organising process an organisational structure is created to
achieve systematic working and efficient utilization of resources. This type of
structure is known as formal organisational structure.

Formal organisational structure clearly spells out the job to be performed by each
individual, the authority, responsibility assigned to every individual, the superior-
subordinate relationship and the designation of every individual in the organisation.
This structure is created intentionally by the managers for achievement of
organisational goal.

Features of Formal organisation:

(1) The formal organisational structure is created intentionally by the process of

organising.

Compiled By Prof. A.N. Arsiwala Page 8

 Ch 5 Organization

(2) The purpose of formal organisation structure is achievement of organisational

goal.

(3) In formal organisational structure each individual is assigned a specific job.

(4) In formal organisation every individual is assigned a fixed authority or decision-

making power.

(5) Formal organisational structure results in creation of superior-subordinate

relations.

(6) Formal organisational structure creates a scalar chain of communication in the

organisation.

Advantages of Formal Organisation:

1. Systematic Working: Formal organisation structure results in systematic and

smooth functioning of an organisation.

2. Achievement of Organisational Objectives: Formal organisational structure

is established to achieve organisational objectives.

3. No Overlapping of Work: In formal organisation structure work is

systematically divided among various departments and employees. So there is no
chance of duplication or overlapping of work.

4. Co-ordination: Formal organisational structure results in coordinating the

activities of various departments.

5. Creation of Chain of Command: Formal organisational structure clearly

defines superior subordinate relationship, i.e., who reports to whom.

6. More Emphasis on Work: Formal organisational structure lays more emphasis

on work than interpersonal relations.

Disadvantages of Formal Organisation:

1. Delay in Action: While following scalar chain and chain of command actions get
delayed in formal structure.

2. Ignores Social Needs of Employees: Formal organisational structure does not

give importance to psychological and social need of employees which may lead to
demotivation of employees.

3. Emphasis on Work Only: Formal organisational structure gives importance to

work only; it ignores human relations, creativity, talents, etc.

Compiled By Prof. A.N. Arsiwala Page 9

 Ch 5 Organization

Informal Organisation: In the formal organisational structure individuals are

assigned various job positions. While working at those job positions, the individuals
interact with each other and develop some social and friendly groups in the
organisation. This network of social and friendly groups forms another structure in
the organisation which is called informal organisational structure.

The informal organisational structure gets created automatically and the main
purpose of such structure is getting psychological satisfaction. The existence of
informal structure depends upon the formal structure because people working at
different job positions interact with each other to form informal structure and the
job positions are created in formal structure. So, if there is no formal structure,
there will be no job position, there will be no people working at job positions and
there will be no informal structure.

Features of informal organisation:

(1) Informal organisational structure gets created automatically without any

intended efforts of managers.

(2) Informal organisational structure is formed by the employees to get

psychological satisfaction.

(3) Informal organisational structure does not follow any fixed path of flow of
authority or communication.

(4) Source of information cannot be known under informal structure as any person
can communicate with anyone in the organisation.

(5) The existence of informal organisational structure depends on the formal

organisation structure.

Advantages of Informal Organisation:

1. Fast Communication: Informal structure does not follow scalar chain so there
can be faster spread of communication.

2. Fulfills Social Needs: Informal communication gives due importance to

psychological and social need of employees which motivate the employees.

3. Correct Feedback: Through informal structure the top level managers can know
the real feedback of employees on various policies and plans.

Strategic Use of Informal Organization: Informal organisation can be used to

get benefits in the formal organisation in the following way:

Compiled By Prof. A.N. Arsiwala Page 10

 Ch 5 Organization

1. The knowledge of informal group can be used to gather support of employees

and improve their performance.

2. Through grapevine important information can be transmitted quickly.

3. By cooperating with the informal groups the managers can skillfully take the
advantage of both formal and informal organisations.

Disadvantages of Informal organisation:

1. Spread Rumours: According to a survey 70% of information spread through

informal organizational structure are rumors which may mislead the employees.

2. No Systematic Working: Informal structure does not form a structure for

smooth working of an organisation.

3. May Bring Negative Results: If informal organisation opposes the policies and
changes of management, then it becomes very difficult to implement them in
organisation.

4. More Emphasis to Individual Interest: Informal structure gives more

importance to satisfaction of individual interest as compared to organisational
interest.

Difference Between Formal & Informal Organisations

BASIS FOR FORMAL INFORMAL

COMPARISON ORGANIZATION ORGANIZATION

Meaning An organization type in An organization formed

which the job of each within the formal
member is clearly organization as a
defined, whose network of interpersonal
authority, responsibility relationship, when people
and accountability are interact with each other,
fixed is formal is known as informal
organization. communication.

Creation Deliberately by top Spontaneously by

Compiled By Prof. A.N. Arsiwala Page 11

 Ch 5 Organization

BASIS FOR FORMAL INFORMAL

COMPARISON ORGANIZATION ORGANIZATION

management. members.

Purpose To fulfill, the ultimate To satisfy their social and

objective of the psychological needs.
organization.

Nature Stable, it continues for a Not stable

long time.

Communication Official communication Grapevine

Control Rules and Regulations Norms, values and beliefs

mechanism

Focus on Work performance Interpersonal relationship

Authority Members are bound by All members are equal.

hierarchical structure.

Size Large Small

Compiled By Prof. A.N. Arsiwala Page 12