Chapter

Organization Structure

A good organization structure provides the foundation of an effective control system. As the
company grows, along with increase in size, complexities multiply with diversities. New
approaches are developed, systems are redesigned and a more effective organization structure
is worked out. Centralized control at the top level of management gradually allows more
autonomy at the middle level with diversification caused by vertical and horizontal integration
of the business. Instead of rigid control at the corporate level, more flexibility, management
opportunity and entrepreneurship are infused in the division of the organization. Thus, a
functional organization, may gradually assume the structure of a divisional organization.

5.1 A CASE STUDY

National Carbon Company started manufacturing batteries in India in

early thirties. Thirty
years later, when the writer joined the organization, it was named as Union Carbide India
Ltd. At that time, the Company had two battery plants at Calcutta (Kolkata) and Madras
(Chennai), one flashlight plant at Lucknow, one zinc mill and a carbon products factory at
Calcutta (Kolkata). Another battery plant at
Hyderabad and a polyolifin plant at Bombay
(Mumbai) were under construction.
It was a well-managed profit-oriented organization with Managing Director at the
very
top, assisted by Directors of Operations, Marketing, Personnel and
Secretary and Treasurer.
Management control system was extremely efficient and effective. Each of the functions
were managed by highly efficient and
professional executives supported by well-trained
staff and workers.
During the next decade, the company added petro-chemicals, agro-products, EMD Plant
and a satellite plant besides adding another sophisticated
battery plant at Calcutta and
vigorously expanding exports. As a result, the company had to relook into its business and
changed from functional to divisional structure. The company divided its business into ve
operating divisions, viz.
38
 ORGANIZATION STRUCTURE
39
(a) Consumer's products
(b) Industrial products
(c) Chemicals and plastics
(d) Marine products and
(e) Agro-products
Refer to organization charts given in Diagrams 5.1 and 5.2. It will be observed from
the charts that each division is sub-divided with several business units headed by a General
Manager, who operates as a separate business entity. General Managers of business units
enjoy certain autonomy and carry out their own strategies by using key internal resources
effectively and thereby rendering more value-added services. The general manager of a
business unit is responsible for the planning and operation of the business under his/her
control. This involves managing various functions such as factory operation, marketing
products and administration. The SBU manager is also responsible for developing the strategic
plan of the unit and reviewing and integrating operating, functional and business
plans.
The aforesaid change in the organization structure added tremendous growth to the
company, and in course of next decade, the total sales increased from nine crores to over
one hundred crores of rupees.

5.2 DIFFERENT ORGANIZATION STRUCTURES

The structure of any organization depends on the nature of business, its size and complexity,
inter-functional relations and the extent of control needed. Basically, there are three types
of structures used in big organizations, viz.

(a) Functional
(b) Divisional and
(c) Matrix.

5.2.1 Functional Organization

n a functional organization, each manager is responsible for a function such as Production,
ales, Purchase, Personnel and Human resource development, Finance and Management
ACcounting, Secretarial and Legal, etc. and are collectively involved in generating protits or
eving the goals of the organization. A typical functional organization follows a pyramid
of structure, where
pe
OT
authority is delegated from the top executive to the different levels
management, as indicated in the Diagram 5.1.
Advantages. Functional organizations have the potential of operating with great efficiency
4vantage. Efficiency increases as the size of the grows. Economies
activities of scale
quality of service.
W utilization of increasingly specialized inputs and
pecialization of human r e s o u r c e s can
also yield economies of scale. A Production
several plants with his expertise. Similarly, a Sales
Manay
anager can coordinate the activities of
 40 MANAGEMENT CONTROL SYSTEMS

Chief Executive

Staff

General General General

Manager Manager Sales General
Production
Manager Manager
and Marketing Financee Services Secretary

Manager Manager Manager Finance Management

Plant 1 Plant 2 Plant 3 Manager Accountant

Sales Market Sales Personnel Training Industrial

Manager Research Manager Manager Manager Relations
North & Manager South &
East West
Manager
Diagram 5.1 The structure of a typical functional organization.
Manager can coordinate the activities of several selling units. Each functional specialists can
contribute to the overall profits of the organization.

Disadvantages. When the size of the organization remains small or medium and
orproduct-lines are limited, the functional organization structure is quite effective. products
Yet the
responsibility of profit earning cannot be assigned to individual managers, because expense
centres and revenue centres are under the responsibility
of two or more managers.
Besides, no manager has the broader
perspective of the business as the Chief Executive
alone perceives. In fact, managers normally concentrate in
their own area of specialization,
and a eneral overview of the business is
lacking on their part. As a result, it often creates
problem for succession to the position of the Chief Executive, when required.
5.2.2 Divisional Organization
In a divisional organization, each division deals with a particular product or product-line. A
division is treated almost like an independent entity, with all the
functions being controlled
by the Divisional Manager responsible for the result of the unit. The Divisional Manager
develops strategy of his division with his senior executives within the overall framework of
the organization. He may not be concerned about the strategies pursued by other divisions.
 ORGANIZATION STRUCTURE

resnonsibility centres within a

Le responsibi
41
However, the
division perform like functional units,
*hlem is
control problem
is the same for the units as for
whole company that is
a
and the
that is
except that
anized, except on a lower scale. This will be clear from the functionally
chart given in
5.2 below. Diagram
Managing Director

Divisional Divisional Divisional Technical Finance Secretary

Manager Manager Manager Director Director
Product-Line Product-Line Product-Line
A 3 C

Divisional Manager
Product-Line A

General
General
Manager
Operations Manager
Sales

Factory Factory Factory

Manager Sales Sales
Plant 1
Manager Manager Manager
Plant 2 Plant 3 North & West
Manager
South & East

Office Manager Sales Officer

-Purchase Manager
Sales Administrator
- Works Manager

Personnel Manager
Quality Control Manager
Production Planning Manager
Diagram 5.2 The structure of a typical divisional organization.
 MANAGEMENT CONTROL SYSTEMS

42
controls the main elements that
affect the profitability that
hat i.
.

Advantages. A division results. But the Divisional both

accountable for the
divisional
inputs and outputs, hence is of the decisions taken
the profits, because
cannot be held totally responsible for the
controls the entire organization.
higher management, which divisional organization com
straight-forward in a pared
Management control process is
more
Manager has the authority to change,
a Divisional say
to functional ones. For example, customer. But, under 'funet.

production schedule in response

to the request of a particular ctional
to Production Plan
channel from Sales
structure, such request has to go
through proper
and time-consuming.
lanning
to Operations Manager, which
is always circuitous
companies would have organi
is the only criterion, then perhaps ganized
If easiness control
of
into divisional structure.

5.2.3 Matrix Organization

with the customer
responsible for dealing
In a matrix organization,Project managers are
and functional units provide resources to the projects. a specified end-objective
A project is any task or group
of tasks involved in reaching
a system, organizing an advertisine
installation of a plant, new machine, setting
For example,
is set up for a specific purpose.
campaign, etc. Each project are arranged by
functions such as purchase
centres, on the other hand,
Responsibility
etc. The project managers use material, persons
and procurement, operations, engineering, and when the objective
services from various functional units
in accomplishing the objectives,

is achieved, the project is terminated.

research and development units, construction
Organizations like consultancy firms,
are examples of matrix
companies, manufacturers of complicated plant and machinery
structure.
structures-one arranged
It is virtually a marriage between two types of organization
5.3.
by functions and the other arranged by projects, as indicated in Diagram
 ORGANIZATION STRUCTURE
43
Chief Executive

Staff

Functional Managers
Project Managers
Production Manager

Project A
Works Engineer

Project B
Industrial Engineer

Quality Controller Project C

Personnel
Project D

Financial Controller

Diagram 5.3 The structure of a typical matrix organization.

There may be variations in the structure of a matrix organization for planning, coordinating
and controling complex projects. One such variation is illustrated as follows:

Structure of a Matrix Organization

Functions Programme Programnme Programme Programme Total Functional
output
1. Engineering
2. Procurement
3. Manufacturing
4. Programme Control
. Programme Management
6. Quality Assurance
1. Logistics Support

&. Administration
9. Finance
10. Personnel

Total
Programme
Requirements
 44 MANAGEMENT CONTRoL SYSTEMS

Another variation of a Product Matrix Organization structure is found in an American

company, which handles a large number of products along with other businesses. Look at
the chart given in diagram 5.4 below:

General Manager

Controller
Treasurer
Other staff

Manager Production Personnel

Market Product Advertising9 Sales
of Manager Manager
Research |Research Manager Manager Products
Manager Manager

Manager Manager Manager Manager

of Product of Product of Product of Product
A B C D

Diagram 5.4 A variation of product matrix organization.

Advantages. Matrix structure is appropriate for the management of products when

(a) the number of products grows to be relatively large,

and
(b) products require close coordination among many specialized disciplines
(c) the markets are too small to justify separate divisions for each product.

Management control in a matrix organization is obviously more difficult

Disadvantages.
than the other two types because:
(a) Profitability is the joint responsibility of several managers,
(b) Planning must harmonize the requirements of the projects with the resources that
are available at the functional units and
(c) Perfect coordination is required in scheduling the activities, so that the projects are
completed in time, but personnel are not idle at any time.

However, specialized persons of different descriptions in a big consultancy firm are

often either overworked or enjoy lazy hours, that is the nature of the business.
 ORGANIZATION STRUCTURE
45
5.3 THE CHOICE OF THE BEST SYSTEM
Of the three systems discussed so far, which one is the most suitable system to an
organization? The choice is really between the two-functional or divisional. It is easier to
control a divisional organization, but functional organization may be more efficient, because
large functional units ive economies of scale. A divisional organization requires managers
with broader outlook and total perspective of the business, while a functional manager is
requires the skill
aspecialist in one or more disciplines. Amatrix organization personnel with
of a specialist and thereafter, develop the skill for general management. Lastly, the system
not the other way round.
must fit to the organization,

SUMMARY
of effective control system. As the company
Organization structure provides foundation
an

are developed, systems are redesigmed

and a more effective organization
grows, new approaches
Carbon Company explained how a functional
is worked out. The case study of National
assumed the structure of a divisional organization.
organization gradually three
on its activities. Basically, there
are
The structure of any organization depends
in big organizations, viz.
types of structures used
1. Functional
2. Divisional and
3. Matrix.
has its advantages and disadvantages
and the type really
Each organization structure

depends on the needs of the organization.