An organizational structure defines how jobs tasks are formally divided, grouped, and coordinated. Organizational structure refers to the way individuals and groups are arranged with respect to the tasks they perform.

However, organizational design refers to the process of coordinating these structural elements in the most effective manner.

Managers need to address six key elements (components of structure) when they design their organization’s structure: work specialization, departmentalization, chain of command, span of control, centralization and decentralization, and formalization.

1. Work specialization:

The concept of work specialization is based on the principle of specialization and efficiency. The logic is that no single person or a single group can perform the total activities of an organization. Therefore, organizational task have to be divided into smaller and simplified tasks to be performed by individual workers or employees. Work specialization leads to efficiency in work and ultimately results in higher productivity. Greater output with low cost and high quality can be obtained when each person concentrates on doing the thing for which he or she is best qualified.

2. Departmentalization (Group the activities):

After the consideration of work specialization, the next element or component is to identify the activities necessary to achieve them and group the closely related and similar activities into divisions and departments. For example, the activities of a manufacturing company may be grouped into such departments as production, marketing, finance, and human resources, etc. In addition, the activities of each department may be further classified and placed under the charge of different sections of the department. For example, in the production department separate sections may create for research, industrial engineering, etc.

3. Chain of command:

A third component or element of organization structure is chain of command. One result of delegated authority is the creation of a chain of command. The chain of command is the formal channel that defines the authority, responsibility and communication relationships from top to bottom in an organization. In theory, the chain should be followed whenever directives are passed downward or whenever communications are passed upward and downward.

According to S.P. Robbins, “The chain of command is an unbroken line of authority that extends from top of the organization to the lowest echelon and clarifies who reports to whom.”

It answers questions for employees such as;

  • To whom do I go if I have a problem? And
  • To whom am I responsible?

Here, we have to know the two complementary concepts to understand the chain of command.

  1. Authority: The rights inherent in a managerial position to give orders and to expect the orders to be obeyed.
  2. Unity of Command: A subordinate should have only one superior to whom he or she is directly responsible.  

4. Span of control:

The next step or fourth component to be taken in designing an organization’s structure is the span of control. Span of control determines the number of subordinates who should report directly to each executive. The narrower the span, the taller would be the structure with several levels of management, and vice-versa. Span of control indicates the number of subordinates who report directly to a manager. Generally, a span of control comes down to the decision of how many people a manager can effectively supervise or oversee. Narrow spans build a ‘tall organization’ that has many reporting levels. Wide spans create a ‘flat organization’ with fewer reporting levels. An optimal span of control is necessary for maximizing organizational effectiveness.

5. Centralization and decentralization:

Centralization refers to the fixation of decision-making authority in the hierarchy of the organization. It is the function of how much decision making authority is pushed down to lower levels in the organization. In a centralized organization, a high amount of authority and accountability remains at the top of the hierarchy. In other words, when top management keeps much of the decision-making power, the result is a highly centralized structure. It means, centralized organizations tend to concentrate decision making at higher levels. In a highly centralized organization, all the division or department or units directly report to the top management. The general manager or managing director or CEO takes the final decisions.

On the other side, in a decentralized organization structure, decision making authority is delegated to the levels where the work is to be performed. Henry Fayol says that “everything that goes to increase the importance of the subordinates role is decentralization and everything that goes to reduce it is centralization. Decentralization is a situation which results from a systematic distribution of authority throughout the organization. In other words, when managers and supervisors at the middle and lower levels are given considerable autonomy in decision making, the organization is considered to be decentralized.

6. Formalization:

It refers to the degree to which jobs within organization are standardized. The dimension of formalization refers to the extent to which expectations regarding the means (resources) and ends (goals) of work are specified and written. An organization structure which is described as highly formalized would be one in which rules and procedures are available to prescribe what each individual should be doing. In short, formalization is the result of high specialization of work (labor), high delegation of authority, the use of functional departments and wide spans of control. In the modern organizations fully formalization is neither possible nor desirable. Therefore, from the managerial point of view, formalization refers to the degree to which jobs within organization are standardized.

  1. High formalization: In a highly formalized job, the employee gets a minimum amount of self-judgement over what is to be done, when is to be done, and how s/he should do it. To implement high formalization organizations offer the employees with clear job descriptions, lots of organizational rules, and clearly defined procedures to cover work process.
  2. Low formalization: This is just the opposite of high formalization. In low formalization organization structure job behaviors are relatively non-programmed and employees have a high amount/degree of freedom to exercise discretion (self-decision) in their work.

For example: in a university’s management department a professor’s job is naturally low formalized but an accountant’s job in the same department is highly formalized.