Lecture 2. Organization Structure

Lecture 2.
Organization
Structures
Chapter Outline
There are six elements of structure:
Definition
Factors consideration to form an
organization
Key elements of organization structure
Contingency factors that impact
organization design
Legal forms of business organizations
Comparison
Organization
Factors to be considered
formation of an organization
during
Liability
Taxation
Sharing Profits and Losses
Control and Decision Making
Blending and division of Assets
Workloads
Legal actions
Agency
Expenses
Starting and Stopping
Continuity and Growing
Paper works
Regulatory affairs
Key
Elements
Structure
A.
B.
C.
D.
E.
F.
Work specialization
Chain of command
Span of control
Authority and responsibility
Centralization vs. decentralization
Departmentalization
A. Work specialization
A consciously coordinated social unit

composed of two or more people that
functions on a relatively continuous basis
to achieve a common goal or set of
goals.
Whenever managers develop or change

the structure, it is called organization
design.
of
Organization
The structure of the organization is the

framework or skeleton for dividing,
assigning and coordinating work.
The first component is the division of

labor, or work specialization. It describes
the degree to which tasks are subdivided
into separate jobs. An entire job is not
done
by
one
person.
Individuals
specialize in doing part of an activity
rather than the entire activity. Work
specialization makes efficient use of the
broad skills that workers have.
B. Chain of command
The next component is the chain of
command--the principle that no person
should report to more than one boss. As
you can see in this example, one
individual only reports to another
individual.
Chief Executive
Officer
Executive
Executive
President
Vice President
Vice President
Vice Vice Vice Vice Vice
President
President
President
President
President
RegionRegionRegionRegionRegion
1
2
3
4
5
District
District
District
District
District
District
District
A
B
C
D
E
F
G
C. Span of control
The span of control refers to the number
of employees a manager can effectively
and efficiently manage. The span of
control now is greatly influence by
contingency variables such as the
training and experience employees have,
complexity of tasks, physical proximity of
manager and employees, the culture of
the organization, and the preferred
managing style of the manager.
D. Authority Vs responsibility
Authority is the right to perform or
command. It is important to note that the
concept of authority is related to the
position and not the person.
When a person has been delegated
authority, the person also has the
responsibility--or obligation to perform
the tasks or assignments.
Empowerment is the delegation of
decision-making (authority) over some
work process. However, for this to work
effectively, employees need to be
responsible for the success of the
process. And empowerment truly works,
when a person has both responsibility
and authority--it isnt appropriate to hold
someone accountable for something that
they have no authority over.
There are mainly 2 types of authorities
Line Authority: It is the authority that a
manager has over other employees. It
extends from the top of the organization
to the bottom.
Staff Authority: Staff authority is the right

to advise or assist others who possess
line authority as well as other staff
personnel.
Line and Staff personnel must work
together
closely
to
maintain
the
efficiency and effectiveness of the
organization.
E. Centralization
decentralization
vs.
Centralization refers to how much

decision-making authority is pushed
down to lower levels in the organization.
Traditional organizations are structured in
a pyramid, with power and authority
centralized at the top. For dynamic
decision making decisions need to be
made closed to the problems.
As a
consequence,
managers
will
make
decisions about the best amount of
decentralization
to
achieve
organizational goals.
*Recall our discussion earlier about
empowerment.
For this to work,
decision-making must be decentralized.
F. Departmentalization
Traditionally, work activities have been
specialized
and
grouped
into
departments.
Those specialists are
under the direction of a manager. There
are mainly 5 ways in which departments
are designed.
Functional: by placing employees
with shared skills and knowledge into
work-groups. These are referred to as
functional departments.
Examples
would be engineering, accounting,
human resources, and marketing.
Product: Tasks can also be grouped

according to a specific product, thus
placing all activities related to the
product under one manager. This is
called product departmentalization.
Customer: Jobs may be grouped
according to the type of customer
served by the organization. For
example, in an organization like
Staples or Grand and Toy, it could
break the departments into those that
serve retail customers, home-based
business customers, or government
customers.
Geographic: If an organizations
customers
are
geographically
dispersed, it can group jobs based on
geography. For example, Coca-Cola
has two broad geographic areas--the
North American sector and the
international sector.
Process:
an
organization
can
departmentalize based on the basis of
work flow or customer flow. This is
referred
to
as
process
departmentalization.
It is important to remember is that there
is no single structure that will fit all
situations.
Contingency factors & Organization

design
There are 4 factors that impact on the
design of an organization.
1) Strategy: Since the structure is

designed to achieve objectives, and
because these objectives flow from
the overall strategy, it makes sense
that structure and strategy are closely
linked. If a company has developed a
strategy
to
compete
more
aggressively on a world market, then
it will need to be more flexible to
respond to various external factors.
2)
Size: The larger an organization is,

the more bureaucratic it tends to
become. There is more division of
labor, rules and regulations.
3) Technology: Generally speaking, the

more routine the technology is within
the productive capacity of the firm,
the more standard and simple is the
structure.
4)
Environmental uncertainty: The

last element to consider is the degree
of environmental uncertainty facing
the organization.
Simply put, the
more uncertain the environment, the
more flexible and adaptable the
structure needs to be to respond
effectively.
Legal
forms
organizations
of
Business
The type of business may not be the first

question a new or potential business
owner. It is, however, a question that
must be carefully addressed because of
the tax, managerial, legal and liability
impacts that the business formation has.
There are a number of legal forms that a
business can take.
Sole
Proprietorship:
A
sole
proprietorship is one person alone. He or
she will have unlimited liability for all
debts of the business, and the income or
loss from the business will be reported on

his or her personal income tax return
along with all other income and expense
he or she normally reports. Although
proprietorship avoids the expense of
forming a partnership or corporation,
many start businesses this way because
they are unfamiliar with the other forms
of organizations.
General Partnership: In a general
partnership, each of the two or more
partners will have unlimited liability for
the debts of the business. The income
and expense is reported on a separate
return for tax purposes, but each partner
then reports his or her pro-rata share of
the profit or loss from the business as
one line on his personal tax return.
Shielded from personal liability as

"owner" (stockholders)
Ownerships (shares of stock) freely

transferable
4.
Government
companies:
Companies which are incorporated solely
or jointly with state and central
government or 51% & 49% with other
joint ventures or with other public limited
companies. Here also liabilities are
limited by shares.
Formulations of companies are in many

manners.
1. Private limited company: A
Company incorporates with more than
two persons and it is limited to fifty
members. In this case it is only a huge
partnership and the liability is unlimited.
2. Public Limited companies: A
company which is constituted with a
minimum of seven members and
maximum is unlimited, and members
called share holders. Here the liability is
limited up to level of what he is invested.
3. Corporation: A corporation is a legal
entity, separate from its owners, with
many of the rights of an individual: a
name, enter contracts, own property, sue
& be sued and so on. (It can't get a
Driver's License or Register to vote).
General characteristics of corporations
include:
Dividends
Double taxation
Differences between public and private

limited companies
A
private
limited
company's
requirements are lighter, but for this
reason its shares may not be offered to
the general public (and therefore cannot
be traded on a public stock exchange.)
This is the major distinguishing feature
between a private limited company and a
public limited company. Most companies,
particularly small companies, are private.
How private limited companies convert
to a public limited company?
A private ltd company might change into
a public limited company if it desires to
raise more capital for its business.
Whenever
a
limited
company
is
converted into a public limited company
it is allowed to put its share in public and
on stock exchange i.e. It can now sell the
shares not just to its friends and family
but anywhere around the world. Though
the effect on control and ownership

might get less strengthen.
How are Corporations
Liability Companies alike?
and
Limited
Comparison Table: Legal Forms of Business Organization
Both corporations and limited companies

limit
the
liability
of
the
owners/shareholdersOwnership
from the debtsTaxof
Structure
Requirements
the business
and against
lawsuits Treatment
against
Limited
Company:
This
is
a business owned
the business.
Sole of peopleOne
owner
Income
and
by a group
who
do not want
to have
losses
unlimited
personal
liability
for thecompanies
debts
of pass
the
Difference
between
Limited
through
to
proprietors
business.
This
is
because
the
company
has
its
and corporations
owner
and
hip
own legal
identity, separate and distinct from
are taxed at
the
owners.
Liabilityis isformed
definedbyasone
limited
Limited
company
or
personal rate
because
the maximum
that
ownersThe
can
more business
people,
asthe
owners.
owners,
"Members,"
file Articles
lose
is thecalled
money
that they have
investedofin
Organization
and
set
out
an
Operating
the business. The owners are not personally
Agreement.for
In the
other
words,
thebusiness
business
responsible
debts
of the
so
income
is
considered
as
the
owner's
or
personal assets such as homes and personal
shareholder's
income,
and
the
bank
accounts are safe.
It must have:
Liability
Unlimited
personal
liability
the
companys
name,
location,
Owner has
direct control
share
Unlimited
personal
liability
are taxed at
personal
rate;
Companies are managed by directors
and
flexibility in
owned by shareholders. The share owned by
profit-loss
each person will often reflect the size of their
allocations to
Unlimited
personal
liability
Personal
finances at
risk
All profits go
to owner
Miss out on
many
business tax
deductions
Easy to exit
business
Total
responsibility
Ease of
formation
Unlimited
personal
liability
Pooled talent
Pooled
resources
flexibility in
profit-loss
allocations to
partners
Certificate
of
Incorporation: The
Certificate of Incorporation often referred
to as the birth certificate of a company
and is issued (in the form of a single sheet
ofLimited
paper) by the
Companies
House.
Two
or more
IncomeThe
and
companies
owners
losses
pass
Certificate
of Incorporation
details
when
to
the company was formed, the through
company
name and the company number. partner and
Drawbacks
May be more
difficult to
raise
financing
rate
administrative matters and the personal
calling of
meetings.
III.
Low start-up
costs
Freedom from
most
regulations
owner/shareholder pays the tax on his or

personal tax return.
I.her Memorandum:
The Memorandum states
A Corporation
a separate
legal entity.
It
capital and iswhat
the company
can and
is formed by filing corporate organization
cant do.
forms in the state where the corporation
is
located,
and
by
designating
shareholders, each with a specific
number of shares. The corporation also
II.
Articles
of Association:
of
General
TwoDirectors
or more toArticles
Income
and
creates
a Board of
oversee
can owners
loosely be described
as
partnership
lossesand
pass
the Association
corporate
business.
The profits
the
rulebook
of
the
company
because
through
losses of the corporation are taxable
toto
partners
they
will
describe
the
conduct
expected
the
corporation,
not
the
ownersand
are
taxed at
of/from
the
directors
and
govern
(shareholders).
Advantages
Somewhat
easier access
to financing
Some tax
benefits
Limited,
although one
partners
must retain
unlimited
liability
Good way to
acquire
capital from
limited
partners
Divided
authority and
decisions
Potential for
conflict
Continuity of
transfer of
ownership
Cost and
complexity of
forming can
be high
Limited
partners
cannot
participate in

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Lecture 2.

There are six elements of structure:

A consciously coordinated social unit

Whenever managers develop or change

The structure of the organization is the

The first component is the division of

Staff Authority: Staff authority is the right

Centralization refers to how much

Product: Tasks can also be grouped

Contingency factors & Organization

1) Strategy: Since the structure is

Size: The larger an organization is,

3) Technology: Generally speaking, the

Environmental uncertainty: The

The type of business may not be the first

loss from the business will be reported on

Shielded from personal liability as

Ownerships (shares of stock) freely

Formulations of companies are in many

Differences between public and private

the effect on control and ownership

Comparison Table: Legal Forms of Business Organization

Both corporations and limited companies

owner/shareholder pays the tax on his or

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