Need Importance Of Organization Commerce Essay


Organization is the foundation upon which the whole structure of management is erected.Organization is associated with developing an outline where the overall work is divided into manageable components in order to facilitate the achievement of objectives or goals. Thus, organization is the structure or mechanism that enables living things to work together. In a static sense, an organization is a structure or machinery manned by group of individuals who are working together towards a common goal.

Examples of organization: Corporations, governments, non-government organizations, armed forces, non-profit organizations etc.

The term organization has been used in four different senses;

Organization as Framework of Relationships:Organization refers to the structure and interactions among various job positions which are created to realize certain objectives.

Organization as a process: Organization is viewed as a dynamic process and a managerial activity which is vital for planning the utilization of company's resources.

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Organization as a System:Organization is also viewed as a system. System concepts recognize that organizations are made up of components, each of which has exclusive properties, abilities and reciprocated associations. The constituent elements of a system are linked together in such complex ways that actions taken by one individual have far reaching effects on others.

Organization as a Group of Persons:Organization is very often viewed as a group of persons contributing their efforts towards certain goals.


"Organizations may be defined as a group of individuals large or small thatare cooperating under the direction of executive leadership in accomplishment of certain common object." -Keith Davis

"Organization is a system of cooperative activities of two or more persons." -Chester Barnard

"Organization is the form of every human association for the attainment of a common purpose." -Mooney and Reily

"Organization is a harmonious adjustment of specialized parts for the accomplishment of some common purpose or purposes." - Haney

"In its broadest sense, organization refers to the relationship between the various factors present in the given endeavor. Factory organization 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 enterprise as a whole, organization is the structural relationship between various factors in an enterprise."- Spriegel

1.1 Need / Importance of Organization

A renowned industrialist of U.S.A Andrew Carnegie when sold his company 'United States Steel Corporation' , showed his confidence in organization by saying "Take away our factories, take away our plants, our avenues of transportation, our money, leave nothing but our organization and we shall establish better factories."Since ages and all walks of life, organization has been playing a significant role. The importance of organization is as stated below.

A tool for achieving objectives:Organization is an important tool in the hands of management for accomplishing the objectives of an enterprise.

It facilitates administration and management: A sound organization increases efficiency, avoids duplication of work, avoids delay in work, improves managerial skills and motivates employees to perform their duties.

It ensures optimum use of human resource: Good organization establishes individuals with interests, knowledge, skills, abilities and viewpoints.

It enhances creativity: A well-conceived and comprehensive organization is the source of creative thinking and initiation of new ideas.

Prevents Corruption: Enterprises which lack sound organization most of the times have problem of corruption. Sound organization helps to prevent corruption by raising morale of the employees. As a result of which employees are encouraged to work with higher efficiency, commitment and honesty.

Fosters growth of enterprise: Good organization plays a key role not only in growth but also in the expansion and diversification of an enterprise.

Eliminates overlapping and duplication of efforts: In a situation, where the distribution of work is not clearly identified and the work is performed in a haphazard manner there will be duplication and overlapping of efforts. As a good organization requires that the work be clearly assigned amongst employees, such overlapping and duplication is to be eliminated.

Coordination: Various jobs and positions are linked together by structural relationship of the organization. The organizational process exercises its due and balanced emphasis on the coordination of different activities.

1.2 Principles of Organizing

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For timely and systematic completion of work it is must for every organization to adopt some techniques or principles. Thus these principles would be the deciding factor for the success or failure of an organization.

Principle of Objective:All the enterprises whether large or small, set certain central objectives. Every element of the organization and organization as whole should be geared to the central objectives identified by the enterprise.

Principle of Specialization: Precise division of work facilitates specialization. According to this principle, division of work among the employees should be based on their knowledge, skills, abilities, capabilities and interests. This would lead to specialization which would in turn lead to efficiency, quality and elimination of wastage of resources.

The Scalar Principle: This principle is sometimes referred to as the chain command. There must be clear lines of authority running from the top to bottom of the organization and linking all the individuals in the organization.

The Principle of Authority: Authority is an important ingredient of the organization structure. It is the tool by which the manager can create an environment where an individual can perform with greater efficiency.

The Principle of Span of Control: This principle states that there is a limit to the number of subordinates that report to one superior. Supervision of too many people can lead to trouble and confusion. Also the superior will not be able to spare time to supervise each of his subordinate. It will also lead to increased complexity of the organization structure.

The span of control depends upon a number of considerations. It is easy to supervise a large number of subordinates involved in routine jobs and working in the same room, whereas it is difficult to supervise highly diverse and specialized personnel scattered widely. The ability of the employee, their willingness to assume responsibility and the attitude of management towards delegating and decentralization should also be analyzed in detail while making a decision on span of control.

The Principle of Unity of Command: This principle is basically about avoiding dual reporting. It states that every individual employee working in the organization should be kept in the supervision of one boss only. This principle eliminates the possibility of conflicts in instructions and fosters a feeling of personal responsibility for work.

The Principle of Definition: Each individual in the organization should be made aware about his / her responsibilities, duties, authorities and relations with the other job positions in the organization structure.

Principle of Unity of Direction: The basic motive for the existence of organization is the attainment of certain objectives. Major objectives should be split into functional activities and there should be one objective and one plan for each group of people.

The Principle of parity of Authority and Responsibility: The responsibility for execution of work must be accompanied by the authority to control and direct the means of doing the work.

The Principle of Supremacy of Organizational Objectives: The organizational goals and objectives should be given wide publicity within the organization. The people contributing to it should be made to understand that enterprise objectives are more valuable and significant and one should give higher priority to organization's objectives in comparison to personal motives.

1.3 The Process of Organizing








Fig. 4.1 Steps in Organizing

From the Fig. 1.1 it is clear that organizing is a process involving multiple activities. The details of all these activities are as follows:

Fixing the objectives of the organization: The top level management holds the responsibility of fixing the overall objectives of the organization whereas the middle level management fixes the departmental objectives and lower level management fixes the day-to-day objectives. The objectives decided by each of the level of management should be both specific as well as realistic.

Finding activities must for achieving objectives: Once the objectives are fixed, the strategic level of management determines different activities that are required to be performed in order to accomplish the set objectives. This is a crucial stage as it helps to eliminate duplication, overlapping and wastage of efforts.

Grouping the similar activities: All the activities which are similar in nature are grouped together to form departments. This is also termed as departmentalization. This leads to specialization. Ex: All the activities that are directly or indirectly related to management or development of the human resource like training, performance appraisal, recruitment are grouped together to form the Human Resource Department.

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Defining responsibilities of each employee: At this step the responsibilities of all the individuals working in the organization are clearly defined. This would ultimately lead to selection of right candidate for the right job. This brings about efficiency since each individual is aware about what he/ she has to do.

Delegating authority to employees: In a situation where two or more individuals are working together for a common purpose it becomes necessary to clearly define the authority relationship among them. Each subordinate should know whom he has to report. Also each superior should be aware of the authority he has over his subordinates.

Providing employees with required resources: After defining authority relationships, the employees must be provided with all the resources that are required for achieving the objectives of the organization.

Coordinating efforts of all to achieve goals: This is the last and most important step in the process of organizing. Here the efforts of all individual employees, groups and departments are fetched together and coordinated towards the mutual objective of the organization.

Ex: Let us consider a simple example where a company has decided to have one day picnic for its employees. Here it is clear that the objective is arranging picnic. The HR department would then list all the activities to be carried out for the successful execution of picnic. These activities would then be grouped based on the similarity, for instance arranging for breakfast, lunch and dinner on the day of picnic. Each of the members of this committee would in turn be assigned a particular responsibility like selecting the menu and so on. Each of the members will also be given authority with the assigned responsibility for efficient execution. Each of the committee formed, like the refreshment committee will then be allocated a budget to enable them to carry out the assigned duties. And most importantly efforts of all the committees or individuals must be coordinated to meet the central objective that is successful arrangement of picnic.

1.4 Organization Structure

An organization structure specifies the various job positions and depicts how the same are formally divided, grouped and coordinated. It provides an appropriate framework for authority relationships. It is a means to help the management to achieve the organizational objectives. It can also be considered as the viewing glass or perspective through which individuals see their organization and its environment. An organization can be structured in many different ways, depending on their objectives. The structure of an organization will define the ways in which it functions and executes. Organization structure allows the expressed allocation of duties for different functions and processes to different entities such as branch, department, workgroup and individual.

Organization structure affects organizational action in two major ways. Firstly, it provides a basis on which the standard operating procedures and routines rest. Secondly, it determines which individuals get to participate in which decision making process and thus to what degree their views shape the organization's actions.

There are several reasons why designing an organizational structure is such an important aspect. Organization structure has a crucial impact on the organizations ability to

Deal with contingencies

Achieve a competitive advantage

Effectively manage diversity

Increase its efficiency and ability to innovate new goods and services

1.4.1 FormalOrganization

The formal organization refers to the structure that is designed and prescribed by the management of the enterprise. It is defined as a "hierarchical concept of subordination of entities that collaborate and contribute to serve a common goal."A formal organization has its own set of rules and regulations that are to be followed by each individual in the organization. It depicts clear lines of authority and the superior-subordinate relationship also each of the individual is assigned specific duties and responsibilities. In a formal structure there are predefined objectives and the individual efforts are diverted towards achieving these objectives.

According to Barnard, "Any organization shall be considered formal at the stage when the activities of two or more persons are coordinated consciously to achieve the definite objective."

Ex: College, Hospital, Company etc.

Features of Formal Organization

Authorities and responsibilities are clearly defined.

It does not consider the emotional aspect.

It is predetermined and purposefully created.

Based on delegation of Authority.

It provides for division of labor.

Organizational charts are followed.


It promotes discipline in the organization.

It provides a basic structure of division of work and responsibility. Without such a structure it becomes very difficult for employees to agree between themselves on the duties and responsibilities of every individual.

It gives a clear cut idea about the authority and responsibility of the individuals. Thus formal structure reduces confusions and brings clarity in working.

The dependency is not on a single person.

Decreases the possibilities and occasions of conflict.

The formal organization helps to keep the firm operating despite of the changes in the work force.

Eliminates duplication of work which in turn leads to effective utilization of resources.


At times the formal organization causes reduction in initiatives of the person working in the organization.

It does not consider the emotions aspect.

It may cause delay in work.

1.4.2 Informal Structures

This is a shadow organization made up of the informal, but often critical, relationships between members of the organization. The informal structure has its presence in all the formal structures. Informal structure depicts the way in which individuals communicate and relate themselves with others beyond the formal structure. The informal structure develops through various frequent instances like having regular interaction, lunch, coffee with colleagues.

According to J.L Massie, "Informal organization is any human group interactions that occur spontaneously and naturally over long period of time."

Features of Informal Organization

The informal organizations are not depicted in the organizational chart.

The informal organizations do not have any particular structure.

It denotes human relationships beyond the formal organizational structure.

Informal organizations are outcome of voluntary associations.

The informal organizations develop out of personal preferences, beliefs, habits and understanding.


It is effective channel of communication in certain cases.

It develops a sense of belongingness among the individuals.

The gaps and deficiencies that exist in the formal organizations can be filled up by the informal organization.

The members of informal organizations help each other in case of unforeseen events or emergencies.

Informal group forces the manager to plan and act more carefully than he would otherwise. Informal organization is a check and balance on unlimited use of authority by a manager.


It operates based on the group psychology.

The interests of the formal and informal groups may clash, leading to conflict making the job of managers difficult.

The informal organizations may fall prey to rumors.

It may cause problems by resisting changing at certain occasions.

Fig. 4.2 Formal and Informal Organization

Difference between formal and Informal Organization:

Sr. No.


Formal Organization

Informal Organization







Formal Relations

Personal Relations



To achieve organizational objective

For social satisfaction








Voluntarily chosen











Departments in the organization

Group of trekkers

1.5 Types of Organization Structures

Functional Structure

The concept of functional organization was proposed by F.W. Taylor. In functional structures, individuals having identical skills and performing similar tasks are grouped together into formal work units, generally called departments. Members of functional departments share technical know-how, interests and responsibilities. Employees within the functional division of an organization tend to perform in areas of their expertise. The functional structure may differ according to the major functions of a business.

Fig. 4.3.1 Functional Structure for Business Entity

Fig. 4.3.2 Functional Structure for a Hotel

Fig. 4.3.3 Functional Structure for a College


Specialization: The organizational efficiency increases as each of the employee performs the task as per his specialization.

Reduced Workload: As each of the functional head is responsible for only one function work load is reduced.

Flexibility: It is easier to accommodate a change with little or no difficulty.

Improved Control: As each employee is in charge of one function only, it is easier to spare time to supervise all his / her subordinates.

Mass Production: Due to specialization and standardization it becomes feasible to go for large scale production.


Complex Relationships: An individual has several superiors due to which accountability for results cannot be easily fixed. Also cross functional relationships create confusion.

Inefficient Administration: As same groups are controlled by various specialists, there is inefficient administration.

Expensive: As large number of specialist need to be hired it adds to increase in cost.

Ineffective Coordination: Each of the functional managers is bound to think only from the perspective of his / her department rather than the whole organization.

Delay in decision making: Several functional specialists are involved in the process of decision making as a result of which decisions may be delayed.

Divisional Structure

In the divisional structure the organization is organized into various divisions based on four criteria product, market, process and location. Thus divisional structure is most suited for the organizations having a wide range of products, area of operation, work processes or customers. Each of the division has its own set of functional units like marketing, manufacturing, finance, HR etc. and is self-contained.





Goods Provided / Services Catered


Target Customers / Clients


Location at which activities are carried out


Activities of same process

Fig. 4.4 Divisional Structure based on product, market, location and process


Highly Flexible: Divisional structure can respond more quickly to the changing environment.

Specific: Expertise focused on specific product, market, process or location.

Coordination: The divisional structure leads to better coordination across functional departments.

Clear Accountability: Divisional structuring provides clear correlation between the expense and profit of the individual divisions. The business objectives of the divisions can be formulated more objectively and the expectations can be better agreed.

Ease of operation: Greater ease to modify the size by adding or deleting divisions.


Reduced economies of scale: Duplication of efforts across divisions leads to increase in the operating and administrative cost.

Rivalry: Divisional structures may also result into rivalry as the divisions compete for resources.

Divisional Affiliations: The employees feel more affiliated towards their own divisions and would still lack affiliation to the organization as whole.

Supremacy of divisional goals: The divisional goals may have priority over the organizational goals.

Matrix Structure:

The matrix structure comes into existence when one organization structure is superimposed by the other. In this structure an employee is answerable to two immediate supervisors: a functional supervisor and a divisional supervisor. The functional supervisor is charged with overseeing employees in a functional area such as marketing or engineering. Divisional supervisors manage specific projects. They absorb employees from various functional areas to complete their project teams. The diagram below depicts the absorption of employees from Operations, Finance, and Marketing for project A and B. These employees report to both Managers at that point of time.


Manager -Finance

Manager - Marketing

Manager - Operations

Manager - Projects

Project - A

Project - B

Fig. 4.5 Matrix Organization Structure


Flexibility: Increased flexibility in adding, removing or changing the activities to meet the changing needs.

Motivation: If it is identified that a particular project is lacking proper motivation then it is provided to the concerned department.

Development of skills: Since cross functional teams are formed, it leads to development of skills of the employees.

Better Service: There is always a product or project manager answerable to the queries.

Improved Strategic Management: Top level managers are freed from routine tasks to focus on strategic issues.


Power Struggle: Conflicts occur as there is overlapping of responsibility and authority.

Slow decisions: The speed of decision making retards as there is shared decision making in the matrix structure.

Increased Confusion: As there is dual reporting in matrix structure, it causes confusion.

Increased Administrative and Managerial Overhead: Due to the duplication of routine activities the administrative cost increases and as specialized managers are hired for each of the projects and functions the managerial cost also increases.

Professional Developed sidelined: Professional development is not given a priority due to time constraints of the project, so team members forgo opportunities to develop and improve.

Network Structure:

A network structure is a cluster of various organizations that coordinates its actions through agreements and contracts instead of hierarchy of authority. Rather than hiring individuals to perform all of its business activities, a company using the network structure depends on outside companies. The organizations using a network structure own only the core or essential components of the business and outsource the rest. It may, for instance, hire an outside advertiser to advertise its products. The network structure reduces costs and brings in flexibility because it utilizes external help as and when required. Creating a network-based company, however, means losing control over whatever processes the company has outsourced.


Financial Consultancy

Information Technology

Core Group

Advertising Agency

Training Consultancy

Fig. 1.6 Network Organizational Structure


Flexible: The most important advantage of network structure is that, it can quickly respond to the changing environment. As the business grows, organizations can enter into new partnerships and vice-a-versa.

Cost Effective: As only the essential part of business is owned by the company and the other operations are outsourced, less number of individuals need to be hired leading to reduction in overheads.

Efficiency: The overall efficiency of the organization increases as the tasks are outsourced to expert organization.


Coordination Problems: As the business functions are outsourced to different companies sometimes it would become difficult to coordinate all of these activities.

Loss of control: There is always a fear of losing control over the core activities which would lead to uncertainties in the relationship.

Political Pressure: The change in political scenario affects the organizations bearing network structure to a large extent.

Increased Pressure: If there are problems of unemployment in the parent company due to outsourcing there are likely to be pressures on government to effect policy changes in this respect.

Line and Staff Organization:

The oldest and simplest form of organization is line organization. Line functions are those which have direct responsibility of achieving the objective of the venture. In this form of organization, a supervisor exercises direct control over a subordinate, authority flows from top to bottom of the organization. Here the chief executive heads the organization. This type of organization is also called as scalar organization.

The concept of staff organization was developed by F.W Taylor. The objective of functional organization is to offer specialist services in the organization. Under this plan, specific functions common to all the departments are placed in the hands of an expert of that function.

The line-and-staff organization combines the line organization with staff departments that support and direct line departments. Most medium and large-sized firms exhibit line-and-staff organizational structures. The distinguishing characteristic between simple line organizations and line-and-staff organizations is the multiple layers of management within line-and-staff organizations. 

Company Secretary


Manager - Marketing

Manager -Finance

Manager - Operations

Line Authority

Staff Authority

Fig. 1.7 Line and Staff Organization


Top managers relieved from routine work: In this organization line authorities focus on execution of work and are relieved from thinking function.

Expert Advice: Line authorities are not autocrats as they are to take the advice from the experts or staff position.

Efficiency: This results greater efficiency as the line managers spend much of their time on line functions. The line managers function more efficiently as they get support from staff positions.

Easy Coordination: Thisorganization ensures co-ordination automatically as the line manager's work along with staff officers.


Confusion: Line and staff organization are ambiguous in terms of organizational relationships, responsibility and authority.

Conflict: Conflicts are common in line and staff organizations owing to unclear definition of authority the structure entails.

Ineffective and erroneous Decision Making: It is not uncommon for line managers to feel threatened by the advice of staff members. In this case, line managers are liable to make decisions without staff member consultation. Such decisions are not always successful.

Slower decision making: Decision making is slower in a line and staff organization due to its complexity and layers. 

Costly: Most of the line and staff executives are experts in their fields and their appointment leads to heavy expenditure.

Virtual Organizations

The virtual organization is a network of independent enterprises, suppliers, customers linked by Information Technology. The virtual organization networks are usually temporary in nature. The significant attributes of virtual organizations are as mentioned below:

Technology: The geographically dispersed partners connect to each other via electronic networks.

Flexibility: It offers flexibility as the partners can link up as and when required. The structure evaporates as soon as the requirement is over.

Efficiency: As each partner brings in his core proficiency the overall efficiency of the organization is bound to increase.

Borderless: The boundaries that traditionally separate a firm from its customers, competitors and suppliers are eliminated.


Boundary less: They are appropriate for affinity groups that are geographically dispersed.

Suitable for short term initiatives: They are suitable and tailored for short-term initiatives with clearly defined objectives.

Flexible: Virtual organizations are highly responsive to changing environment.

Cost effective: As there is no physical existence there is little or no organizational overhead.


Dependency on Technology: As the virtual organizations depend on Information Technology for coordination and interaction their efficiency may be affected by the limitations and problems inherent to these technologies.

Difficult to manage: Since there is no physical existence, it becomes difficult to manage virtual organizations in some situations.

Tall Organizational Structure:

The organizations that require close monitoring of all its business activities opt for tall organizational structure. In this type the decision making authority is the top level management. This results in one long chain of command similar to military organizations. As the organization expands the operations, the levels of management also go on increasing which ultimately results in tall organizational structure. In tall organization structure the span of control is narrow.

Fig. 1.8 Tall Organizational Structure


Improved Performance and Discipline: The quality of performance increases as the tall structure facilitates close supervision of activities being carried out. Similarly the discipline in the organizationis also maintained.

Cordial Relations: As there is narrow span of control, the superiors get time to interact with their subordinates and solve their problems as a result of which the superior-subordinate relations improve.

Narrow span of control: The narrow span of control facilitates easy supervision and control.

Easy Coordination: The efforts of subordinates can be easily coordinated.

Development of Staff: Tall organizations encourage development of the staff. As there is narrow span of control the superior can easily identify the areas in which the subordinate lacks and arranges for training for his / her development.


Delay in decision: As there are several levels of management it causes delay in the decision making process as well as distortion in communication.

Cost inefficiency: As there are increased level of management the tall structure adds to the cost of administration.

Coordination Problems: As the structure grows taller it leads to coordination problems.

No freedom: There is strict supervision. Thus the subordinates have no freedom at all.

Dominance: The mangers may become more dominating as a result of which subordinates may become disloyal.

Flat Organizational Structure

The organizations that require more autonomy and self - control have flat organizational structure. In this structure there are fewer levels of management. The flat organizational structure is usually adopted by small business firms. Here the management shows confidence in the decision making capability of the employees. It focuses on empowering the employees rather than following the chain of command. In the flat organizational structure the span of control is wide.

Fig. 1.9 Flat Organizational Structure


Cost effective: This structure proves to be cost effective as compared to tall structure since there is less number of managers.

Decision making: Quick decision making is possible as there are fewer levels of management.

Communication: The flat structure facilitates easy and fast communication as there are fewer levels.

Suitability: It would be suitable where routine and standardized jobs are performed.

Freedom: The subordinates enjoy some amount of freedom as there is no strict supervision as in case of tall structure.


Loose control: As there are large number of subordinates reporting to a superior there is loose control. Maintaining the discipline also becomes difficult at times.

Coordination Problems: It becomes difficult to coordinate the activities of large number of subordinates.

Suitability: It may not be suitable for complex organizations.

Decreased quality of performance: As there is no close monitoring it can lead to decreased performance.

1.6 Span of Control


According to Louis Allen, "Span of control refers to the number of people that a manager can supervise."

According to Prof. Dimock,"The span of control is the number and range of direct, habitual communication contacts between the Chief Executive of an enterprise and his principal fellow officers."

Span of control refers to the number of subordinates a superior has. The more is the number of people reporting to a manager, broader is the span of control and vice-a-versa. This concept emphasizes that there should be appropriate number of individuals reporting to one manger since a large number would lead to confusion and difficulties.

According to the management experts the span of control should not exceed 1:6 at the top level and at the lower level 1:20. However these are only theoretical figures. The span of control depends on various factors as mentioned below:

Capability of the Superior

Capability of Workers

Nature of the task to be performed

Geographical Dispersion

Other tasks to be handled

The span of control can be either narrow or broad, each of which has its own pros and cons as mentioned below:

Advantages of narrow span of control

Narrow span of control facilitates better communication among the boss and the subordinates.

Supervising fewer numbers of people requires less managerial skills.

Subordinates get an opportunity to discuss their problems and provide feedback to their superiors.

Managers can exercise better control over subordinates.

Disadvantages of narrow span of control

It tends to increase the levels of management because of which it becomes difficult for top level managers to be in touch with the ground level realities.

It creates problem of coordination.

It may reduce morale of the employees as they operate under a very tight control.

It leads to distortion of communication when the communication is across various levels of management.

Advantages of wide span of control

It is cost effective since fewer managers are appointed.

Less confusion

Less control and supervision can create more positive attitude among employees.

Creates a more entrepreneurial culture as workers can take responsibility for


Disadvantages of wide span of control

Fewer promotional opportunities so can be de-motivating.

Managers with wide span of control may get overloaded with work.

Lose control over subordinates.

1.7 Centralization and Decentralization of Authority


"Centralization is systematic and consistent reservation of authority at central points within an organization. Decentralization applies to systematic delegation of authority in an organizational context."-Allen

"Everything which goes to increase the importance of subordinate's role is decentralization and everything which goes to reduce is decentralization."-Fayol


It is the process where the concentration of decision making is in a few hands. All the decisions and actions at the lower levels are dependent on approval by the top management. Under centralization, the vital and significant decisions are taken by the top management and the other levels are into implementation as per instructions of top level.

Ex: Suppose 1,2,3,4 and 5 are subordinates of A and X, Y and Z are subordinates of 4. Here X, Y and Z depend on 4 for the decisions to be made and 4 in turn depend on A. Neither of X, Y and Z nor 1,2,3,4 and 5 can make decisions without consulting A. This called centralization of authority.










Fig. 1.10Centralization of Authority

Advantages of Centralization:

Reduced costs: The standardized processes and techniques help in considerable reduction of costs incurred. The significant reason for the reduction in cost is specialization of activities to be performed.

Flexibility: In a situation of emergency or crisis, standardization of activities requires minimal efforts to revise all the activities at once. This guarantees a greater degree of flexibility in an organization.

Avoids replication of work:Centralized training and standardization of work leaves no possibility for replication of tasks or actions. This eliminates additional expenditure on excessive labor for duplication of work.

Better Coordination:Centralization accelerates better coordination among different operations. Direct control and supervision are facilitated which results in less possibility of conflict of authority and duplication of work.

Disadvantages of centralization

Delay in work:Centralization results in loss of man-hours and delay in execution of work because of transmission of records from and to the central room. Quick decision is not possible which also causes delay of work.

Dictatorship: An employee is always expected to work in accordance to what has been dictated to him. No employee at the subordinate level is given the authority to take a decision on any issue in the absence of the lead. This causes psychological reluctance and employee sees no growth or motivation within the organization which would sometimes result in disloyalty.

High Level of Dependency: The success of organization depends totally on the proficiency and decision making ability of the top management which might prove to be risky at times.


Decentralization is systematic delegation of authority at all levels of management. In decentralization, authority is retained by top management for taking major decisions. Ex: framing policies and procedures considering organization as whole. Rest of the authority may be delegated to middle and lower level management.

Ex: Suppose 1,2,3,4 and 5 are subordinates of A and X, Y and Z are subordinates of 4. Though X, Y and Z are supervised by 4, they can take decisions on routine matters and depend on decisions to be taken by 4 only in case of important issues. Similar is the relationship between 1,2,3,4 and 5 and A. Here 1, 2,3,4,5 and X, Y, Z also enjoy some part of authority apart from A. This denotes distributed authority. This is called as decentralization of authority.










Fig. 1.11Decentralization of Authority

Advantages of Decentralization:

Reduces burden on top executives:Decentralization of authority frees top executives from routine work and minor details so that they can concentrate on more important functions like preparing the policies and procedures, strategic decision making, coordination and control etc. As the company expands to the level that it goes beyond the reach of the few top level executives, decentralization becomes indispensible. By delegating authority, top management can extend its leadership over a giant enterprise.

Quick and better decisions:Decentralization fosters prompt and more accurate decisions because decisions are made by those who are aware of all the realities of the situation. Decisions can be made near the point of action without consulting higher levels and without waiting for approval of top executives over minor matters.

Growth and Diversification:Decentralization enables growth and diversification of products and markets. Under decentralization each area of operation is treated as different division so that it can respond quickly to changing demands of its market.

Better Communication:Decentralization improves the level of efficiency and communication within the organization as there are fewer levels of authority.

Development of executives:Decentralization provides an opportunity to subordinate managers to take initiative and acquire leadership qualities.Lower levels of executives learn to manage by exercising delegated authority. A pool of promotable managers becomes available which simplifies management successions and support to warrant continuity of management.

Motivation and improved morale: Decentralizationincreases the job satisfaction and morale of subordinates. Occasion to make decisions offers sense of belonging and satisfies the need of power, prestige, status and independence. Competition environment is generated. High motivation and morale help in improving output and working relationships. Improvedutilization of talents at lower level can be made.

Effective supervision and control:Decentralization results in effective supervision because managers at lower levels have authority to make changes and recommendations. It also promotes effective control through comparative evaluation of performance and clear cut accountability for results.

Democratic Management:Decentralization makes leads to democratic management and flexibility of operations. Necessary changes can be accommodated without dislocating the entire structure.

Disadvantages of decentralisation

Suitability issues: In cases where the training, experience, education etc. of the employees are inadequate, decentralization of authority would be harmful for the enterprise.

Not desirable for small enterprises:Decentralization is not suitable for small enterprises because it would be easier and more economical to administer the enterprise on a centralized basis.

Problematic in case of emergency: In a situation of emergency, decentralized administration is ineffective. It is costly and time consuming to control an emergency situation which affects a vital business area under a decentralized plan.

Lack of uniformity: There might be lack of uniformity and inconsistent procedures as each department might have the authority to formulate its own policies and procedures.

Coordination Problems: As each department / division enjoys substantial autonomy it might lead to coordination problems.

Organization at a Glance:

Organization is a social unit of people, systematically structured and managed to accomplish a task or to achieve collective goals on continuous basis.

Organization viewed in four different senses:

As a framework of relationships

As a process

As a system

As a group of persons

Importance of Organization:

A tool for achieving objectives

Facilitates administration

Optimum use of Human Resource

Enhances Creativity

Prevents corruption

Fosters growth of enterprise

Eliminates overlapping of work


Principle of Organising: Includes principle of objective, specialisation, authority, span of control, unity of command, parity of authority and responsibility, supremacy of organisational objectives and the scalar principle.

Process of organising:

Fixing the organisational objectives

Finding activities which are must for achieving the set objectives

Grouping the similar activities

Defining responsibilities of each employee

Delegating authority to employees

Providing employees the required resources

Coordinating efforts of all to achieve goals

Formal Structure: A hierarchical concept of subordination of entities that collaborate and contribute to serve a common goal.

Informal Structure:Informal organization is any human group interactions that occur spontaneously and naturally over long period of time.

Types of Organisation Structure:

Functional Structure

Divisional Structure

Matrix Structure

Network Structure

Line and Staff organisation

Virtual Organisation

Tall and Flat structures

Span of Control:Span of control refers to the number of people that a manager can supervise.

Narrow Span of Control

Broad Span of Control

Centralization and Decentralisation of Authority:

Centralisation:Centralization is systematic and consistent reservation of authority at central points within an organization.

Decentralization:Decentralization applies to systematic delegation of authority in an organizational context.