Organization Structure Impact On Its Performance Commerce Essay

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Different organization structures have different impact on organization performance. Organization structure or organization design is a mean to achieve the organizational objectives through coordination, supervision and allocation of tasks. Three main elements that are organization structure considers are decision making, selection of members and leadership. Companies have to make a tradeoff between different sets of benefits when selecting a particular organization structure. Moreover structure is also important to organization performance because firstly it describes daily routine and operating procedures and secondly it points out that who would be involved in decision making process.

Organization structure assists the organization: in maintaining order, resolving issues between different departments and within each department and binds the organization members together. The advantages of strong organization structure include stable hierarchy, smooth flow of communication and a well defined cohesive company message. Organization structure might also entails problems like internal conflicts, high employee turnover, less productivity and delayed decision making. So, it's important to identify organization structure issues and to resolve them as they occur to ensure effective and efficient organization performance.

Background of Organization Structure

For any growing organization its structure is important to guide human resource issues. The history of organization structure dates back to tribal organizations which involved clerical organizational structure and now it has evolved to post industrial structures. Previously organizations histories are ruled by centralization and control which was prevalent after industrial revolution in 19th and early 20th century. After World War II decentralized structures gain sway over organizations. So in post industrial economy smaller organization having decentralized structure more rapidly react to changes as compared to larger organization which have more centralized structures.

Importance of the study with respect to the world:

The major aim of this study is to find out that how the design of an organization affects its overall performance. This question has been clarified under the context of one company operating in Pakistan. By looking at the problems faced by the company that aroused because of hierarchical issues like communication gap, incentive system, attitude towards change, participation in decision making etc would help other organization identify similar problems and resolve them to improve their performance level.

This study would help organizations to consider factors like: is clear channels of communication encourage whistle blowing internally; affect of training, information distortion, team structure and turnover on organization performance; centralized versus decentralized decision making and how employees react when new innovative ideas or strategies are being implemented by an organization.

Importance of study with respect to Organization

Research Question

How organization design impacts the organization performance?

Chapter 2

Literature Review

DeCanio et al (2000) conducted research on "Importance of Organizational Structure for the Adoption of Innovation". The objective of the paper is to study the relationship between organizational structure and its performance. The focus is on economic measures of performance mainly on measures of income inequalities which are result of alternative compensation rules. The model of the research is based on the example of how fitness of the firm gained by the interaction of structure and environmental factors. Now the fitness depends on members adopting the profitable innovation. While the adoption speed and cost depends on firm internal structure and parameters like fixed cost of internal communication, value of innovation and interest rate. The methodology includes representing structures as digraph G. agents representing organization are on vertices and channels of communication are represented of directed edges. The equation formed was π = f(x, G) where π is fitness and x is representing one of the parameters. Then it was assumed that because of changing environmental factors there is a change in x which in turn leads to changing organizational structure. The paper concluded that structure of organization is very important for adoption of innovation and if the impact of organization structure on its performance is not recognized than it would lead to biases in cost estimation and loss of benefits due to change in external circumstances.

King (1999) conducted research on "The Implications of an Organization's Structure on Whistle blowing". The core theme of this paper is that organizational structure is being affected by whistle blowing. The main objective is to examine that how structure of organization affects the decision of employees in reporting the wrong doings of other employees. Whistle blowing has been defined as "the disclosure by organization members (former or current) of illegal, immoral or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action" (Near and Miceli, 1985, p. 4).whistle blowing is also defined as when the illegal act of organization are leaked to third parties. So, whistle blowing can be internal or external. Paper discusses two propositions that are P1: Whistleblowers use of internal disclosure channels may be affected by the structure of an organization and P2: Attributes of various organizational structures may influence internal disclosure of perceived wrongdoings. It has been mentioned that design of organization that is span of control, number of managerial levels, number of subordinates etc affect the behavior of employees. First paper talks about centralized structure which is very close to bureaucratic structure. Information flows from CEO to the upper management and from the management to the subordinates. The prominent features of this system are high levels of control, standardized procedures, uniform policies, specific titles, ranked positions, a high level of bureaucracy, and highly structured communication. As a result the negative views are suppressed and whistle blowing is not reported internally. The second structure that has been discussed is matrix structure. This design has two divisions that are functional and project. Employees report to projects head and also to function department head. So in matrix structure whistle blowing externally would be unlikely if clear and proper structures are available. Thirdly horizontal structure in which information flows between and among same organizational level is discussed. Wrongdoings would be reported externally only if communication channels are unclear and ambiguous. Fourthly divisional structure is discussed which is configured based on the product line. Managers are in control of their departments. So wrongdoings are reported internally because of decentralized decision making. Lastly hybrid structure has been discussed. Decision making is decentralized as operational units and as a result wrongdoings would be reported internally a because of open channel of communication between business unit and upper management. So the organizations with clear channels of communication encourages whistle blowing internally and organization with various levels would result in external whistle blowing.

Harris and Raviv (2002) conducted research on "Organization Design". Three organizational structure are discussed which are functional, divisional and matrix structure. The paper emphasized on the topics that have been ignored in economic literature that are which structure organization adopts and how many managerial levels are involved in it. The main purpose of study is to explore the issues that arise because of selecting a particular design. In order to reap the benefits from interaction of different activities an expert manager is required. Middle managers have the capability to coordinate a pair of interaction but companywide interaction can only be managed by CEO. Company would follow flat structure when cost of hiring middle manager is very high. When salaries of middle managers are low matrix structure would be followed. The methodology includes a hypothetical firm operating four projects named as A, B, C and D. interactions between the two projects have been denoted as AB, CD, AC and BD. Project manager, middle manager and CEO are involved while project manager refers interactions to CEO or middle manager. The paper concludes on the note that new firms have flatter structure with more involvement of CEO and with the passage of time organizational structure will evolve as: highly decentralized structure, matrix structure to decentralized structure or centralized structure followed by decentralized flat structure or matrix structure.

Rivkin and Siggelkow (2003) conducted research to stumble on "Interdependencies among Elements of Organizational Design". The focus of study was to identify major elements of organizational structure that leads firm to broad search and ultimately to stability. The interdependencies among vertical hierarchy, incentive system and decomposition were studied. The other two contextual factors considered were underlying pattern of interaction among firm's decisions and limits imposed on ability of managers to process information. The method used to conduct the research is agent based simulation which involves defining pattern of interaction among decisions. The next step is generation of set of decision problems and lastly firms handle these computer based decision problem. Paper concluded that the reason for Interdependencies arise is because design elements influence how broadly a firm searches its environment to discover good sets of coordinated choices and whether the firm is able to stabilize around those sets once they are discovered. The stage for organizational configurations is set by Interdependencies among design elements, which also results in the interplay among competing firms.

Gehrig (2004) studied "Organizational Form and Information Acquisition". The Sah and Stiglitz frame work is used to address issue of research incentive. This frame work states that in order to implement innovative projects bureaucratic systems needs consensus while liberal polyarchial systems implement too many projects. The paper discusses that individual incentives to invest in information generation is affected by organizational forms. The analysis concluded that private incentives of employees to produce information depend on organization form. External research monopolies dominate independent research in terms of incentives of information production, hierarchical or polyarchical research. Joint ventures may dominate research cartels under plausible economic conditions, especially when independent signals provide additional independent information.

Dean et al (1992) conducted research on "Advanced Manufacturing Technology and Organization Structure: Empowerment or Subordination?" The paper talks about advance manufacturing technologies (AMT) which includes computer-aided design (CAD), engineering (CAE), process planning (CAPP), and manufacturing (CAM), manufacturing resource planning (MRP), and computer-integrated manufacturing (CIM) systems. The argument is that AMT is in association with organization structure. The research question is "What is the nature of AMT's impact on structure?" The methodology adopted is field survey. Factories of the metal-working industries in US were the target population. Upper management like vice presidents of manufacturing and plant managers were addressed by questionnaires and response rate was of 38.3%. Nine functional areas like accounting, purchasing, human resources etc were identified and respondents were requested to indicate extent of computer usage for these areas to measure computerized support functions. 11 manufacturing processes were identified to measure computerization of technical core. Similarly integration of support functions and integration between support functions and core functions were studied using 4 point scale. Integration sophistication was also measured. Control variable includes size and environmental factors. Confirmatory factor analysis was performed to check validity and reliability if variables. LISREL analysis was used to test the dependence between organization design and ATM constructs. Technology Marxist view is subject to subordination and it predicts centralization. Idealistic view is linked to empowerment of employees and it predicts decentralization. The research concluded on the note that AMT's integration capacity allows information to be gathered at lower levels and ATMs flexibility allows departments to adapt to decisions of other departments easily that results in lower centralize organization decisions. Formalization is adopted for efficient use of technology. So, formalization is described as a mechanism for decentralization.

Keck (1997) conducted research on "Top Management Team Structure: Differential Effects by Environmental Context". The core argument of paper is that under different environmental factors team structure affects organization performance differently. Organizational performance is financial performance in this study. The sample for this research includes top management teams from 56 cement and 18 minicomputer firms. The firms with four years of financial data were selected in order to analyze the two year ROA growth and lags. The independent variable was the number of team structure. In service offerings innovativeness is increased as a result of functional heterogeneity. More fluctuation in team tenure results in lower level of communication and commitment. So in heterogeneous measures functional heterogeneity and variation in team tenures are used. Fluctuations were measured by number of executives coming in and existing each year. The stratification includes chairman, corporate president, cement or minicomputer president, executive vice presidents and executive committee members, senior vice presidents, and vice presidents. Dependent Variable was the financial performance. The controls included were firm age, firm size and industry performance. For analysis autoregressive-heteroscedastic model was used. The results of analysis indicated that good financial performance under turbulent contexts includes more heterogeneity in tenure, more fluctuations, lower stratification and shorter team tenure. Better performance in stable context can be achieved by lower fluctuations and heterogeneity, higher stratifications and longer team tenure.

Radner (1993) conducted research on "The Organization of Decentralized Information Processing". The main theme of paper that in decentralizing the activities of information processing "hierarchical" structures is also remarkably effective. This paper considers decentralization of information-processing for decision-making, and considers three applications that are linear decision rules, project selection and pattern-matching. Model of parallel processing has been used to describe the decentralized computation of organizational decision. Paper concluded that Organizations make many different decisions. In principle, different trees might be used to compute different decisions, or different classes of decisions. Even if there is only one tree of authority, many-or most-of the information flows do not follow it.

Podolny and Page (1998) conducted research on "Network Forms of Organization". Paper discuses increase in sociological interest in network forms of organization. Sociologists argued that network forms of organization represent a unique alternative possessing its own logic and it could not be considered hybrids of markets or hierarchies. Second, they argued that the network form of organization have significant efficiency advantages that are not possessed by pure markets or pure hierarchies. Podolny and Page defines a network form of organization as "any collection of actors (N> 2) that pursue repeated, enduring exchange relations with one another and, at the same time, lack a legitimate organizational authority to arbitrate and resolve disputes that may arise during the exchange." Paper emphasizes on the fact that the network form does not represents one of two forms rather it represent one of three alternative forms of governance. A pair wise comparison was made in past like between autonomy of the network form and hierarchy. The system which presents the greater advantage can be assessed by considering strengths and weaknesses of three forms simultaneously.

Hsu and Hannan (2005) conducted research work on "Identities, Genres, and Organizational Forms". The paper discusses organizational ecology and argues that many new organizations have emerged and also many have undergone structural change recently. OEs strategy examines full histories and collects history data from population, examines type of entry and exists and it uses event history method to examine the impact of population, environment and characteristics of organization on hazards of entry and exist. Social rules that organization are expected to follow are called organizational identities. Specific kinds of collective identities represent organizational forms. Two basic issues are addressed when measuring the organizational identities: (1) whose point of view should be considered when measuring identity? (2) How can the social embodied in this point of view be measured? The study concluded that organizational forms are described in term of social identities. Forms or sociological real categories are defined as for which membership matters. To invite consideration of systematic ways in which in order to specify and differentiate forms in terms of identities properties such as simplicity, specificity, sharpness, resonance, and authenticity and their potential impact on key organizational dynamics have been considered.

Mintzberg (1980) conducted research on "Structure in 5's: A Synthesis of the Research on Organization Design". The main purpose of paper is that organizational structuring can better be understood through configurations. Organization consists of five parts that are operating core, strategic apex, middle line, techno structure and support staff. Coordination of organizational tasks is effected by direct supervision, standardization of work processes, standardization of work output, standardization of skills and mutual adjustment. Five different types of decentralization mentioned in paper are vertical and horizontal centralization, limited horizontal decentralization, limited vertical decentralization, horizontal and vertical decentralization and selective decentralization. In simple structure there is no techno structure, few support staffers, a loose division of labor, a small middle line hierarchy, communication flow and decision making is informal. The classic example of this structure is entrepreneurial firm. Machine bureaucracy is highly specialized, routine operating tasks, much formalized procedures and large-sized units in the operating core, little use made of training and of the liaison devices, relatively centralized power for decision making with some use of action planning systems, and an elaborate administrative structure with a sharp distinction between line and staff. Professional Bureaucracy is found in school systems, social work agencies, accounting firms, and craft manufacturing firms. They hire highly trained specialists in its operating core, and then give them considerable autonomy in their work. The techno structure is minimal and support staff is highly elaborated. The divisionalized form is described as a market-based one having large number of divisions which reports to the one central headquarters. The fifth structure is Adhocracy. This configuration consists of organic structure with little formalization of behavior; extensive horizontal job specialization based on formal training; a tendency to group the professional specialists in functional units for housekeeping purposes but to deploy them in small market-based teams to do their project work. These five configurations represent typology that would help to determine how structures emerge, how and why they change over time, why certain pathologies plague organizational.

Yoo et al (2006) conducted research on "From Organization Design to Organization Designing". The paper is based on the argument that managers should move beyond selecting an organization and should create new organizational forms. Four projects of Gehrys Partners over the period of past 15 years have been selected. These projects were build with unique challenges and needs in different environment. 83 interviews were conducted with architects, designers, and engineers working at Gehry Partners, contractors and subcontractors, a surveyor, structural engineering consultants, owner representatives, a building fire inspector, a city building code inspector, lawyers involved in contract negotiations, and several construction crews who worked at the sites. Similarities and differences were identified to study Gehrys Project gestalt of organizational designing. The design embraces three inter dependent elements that are architectural vision, use of representational technologies, and a collaborative network for design and construction. The paper concluded that building a successful project results in organization design. Designing products and designing organization should flow from the common set of capabilities called as "design gestalt" ("virtual" capability that combines ideas, values, resources, tools, and people into ensembles that can create and project remark able artifacts).

Westerman et al (2006) conducted research on "Organization Design and Effectiveness over the Innovation Life Cycle". The Paper examines that in different eras of the innovation's life cycle, how firms adapt to differing strategic contingencies. The research questions are: How do firms organize to adopt innovations at different eras of the innovation life cycle? How can managers address conditions of misfit? How do organization designs change over time? The paired case study has been selected with theoretical sampling to choose pairs of industry leaders who use different designs and competed head to head. For example for retail pharmacy, we compared the number of unique visitors to the company websites each month. The paper concluded on the note that firms use one of three adaptation modes that are separated early, integrated early and wait then transform. None of these adaptation modes are fully autonomous nor fully integrated, and they change over time. Each mode optimizes for one contingency while sub optimally attempting to address the other.

Ouchi (1997) conducted research on "The Relationship between Organizational Structure and Organizational Control". The paper is based on the argument that organization control and structure are not clearly distinguished in organization literature. Control and structure are two different things where control means evaluation process based on monitoring of behavior or output. The research methodology includes the data collected from 78 full-line, non-discount, and retail department store companies located in the Northeastern one-fourth of the United States. The study concluded that structure is related to control. Large organizations have many managerial levels and departments and increased supervisory efficiency of managers. Size is related to danger of control loss which in turn brings measures which minimize the control loss.

Carley and Lin (1997) conducted research on "A Theoretical Study of Organizational Performance under Information Distortion". The addresses the question that how should organizations of intelligent agents be designed so that they exhibit high performance despite information distortion? For this purpose stylized radar detection task has been used. The interrelationship between information distortion, organizational design and task environment has been considered. The results of study showed that training improves performance, the greater the number of information distortions the lower the performance, turnover degrades performance, misinformation leads to lower performance than communication breakdowns, and teams outperform hierarchies. Teams outperform hierarchies when the task environment is unbiased decomposable. Before settling on a particular organizational design or expending effort to minimize information distortions organization should first consider what task environment it is likely to face.

After doing the literature review, it is concluded that different organizational forms have significant impact on organization performance. Different methodologies have been used in research paper to prove the assumptions made. Organization design is strongly linked with information acquisition, innovation, whistle blowing, financial performance, information distortion, organization control and empowerment or subordination of employees.

Chapter 3


Research Type

Qualitative and quantitative both research tools would be used to conduct this research. Qualitative research would be used to explore the problem within the organization and to gather rich information on hierarchical issues being faced through in-depth interviews with upper management as well as with lower management. Quantitative research would be used to find out the relationship between the dependent variable and the independent variable.

Data Type and Research Period

The data for this study would be mostly primary in nature. It would be gathered through questionnaires and face to face interviews. In order to measure impact on performance secondary resources would be used like official documents and financial statements for last four years that is from 2009 to 2012. Time frame for the primary data is from November 2012 to April 2013. The sample size for collection data is 100 and questionnaires would be distributed to the employees of different branches of the same bank.

Sources of Data

In order to gather data internal sources within the organization would be used. These sources include accounting resources (financial statement), internals experts (head of departments), lower level employees and operational reports from HR department.

Population, Working population and Planned sample

The population is all organizations working in Pakistan. Working Population. Planned sample for the research is 100 employees from different branches of bank in Lahore.

Research Hypothesis


After gathering the data from primary and secondary resources the regression analysis would be conducted. Regression will be conducted to check the relationship between the variable over the years.

Data analysis

The SPSS software that stands for Statistical Product and Service Solutions would be used to analyze the data. This software is used for statistical analysis and includes programs like ANOVA, linear regression, t-test and correlation. Regression will be conducted to check the relationship between the variable over the years. Graphs and tables would be used to represent the results.

Data interpretation

The results generated from the statistical software would be compiled and graphs, tables and regression results would be used to interpret the results.

Theoretical Framework