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Chapter 4
Fundamentals of Organizing
After reading and studying this chapter, the student
should be able to:
Understand the stages of organization growth.
Identify the advantages and disadvantages of the
functional, product, and matrix departmentalization
approaches.
Explain the principles of unity of command and
span of control.
Describe the difference between line and staff.
Understand how to avoid excessive conflict
between line and staff.
Explain the three types of authority found in
organizations.
Distinguish between centralization and
decentralization.
Discuss the benefits and costs of downsizing.
Explain the four types of contemporary
organizational approaches.
Understand the relationship between management
philosophy, strategy, and newer forms of
organization.
Brief Outline
The Four Stages in Growth of an
Organization
Stage 1: The One-Person Organization
Stage 2: The Organization with
Employees
Stage 3: The Line Organization
Stage 4: The Line-and-Staff
Organization
Departmentalization
Functional Departmentalization
Product Departmentalization
Matrix Departmentalization
Two Important Organizing Principles
Unity of Command
Span of Control
Relationships between Line and Staff
Conflicts between Line and Staff
How to Avoid Excessive Line-Staff
Conflict: Delineating Authority
Decentralization versus Centralization
Factors Affecting Decentralization
Effect of Decentralization on
Organizational Structure
Downsizing
Benefits of Downsizing
Costs of Downsizing
Impact on Remaining Supervisors and
Managers
Ways to Get Beyond Downsizing
Contemporary Organizational
Perspectives
The Inverted Pyramid
The Wagon Wheel
Team Structures
Network Structures
Management Philosophy, Strategy,
and Organization
Strategy and Structure: The Fit
Perspective
Learning Objectives
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Walmart’s Evolution
Walmart grew from a regional chain of discount stores to the top spot on Fortune’s list of the top 500
largest U.S. companies conducting business globally under a variety of corporate brands including
Walmart’s Supercenter, Sam’s Club, and Neighborhood Market. Along the way, they continuously
reorganized and adapted their structure and culture to remain competitive without losing site of their
mission. In 2004, however, Walmart executives realized they had a problem. Between 2% and 8% of their
customers no longer shopped with them, resulting in a significant drop in same-store sales.
Walmart executives knew they had to take action and the sooner the better. Walmart attacked on two
fronts. First, they beefed up their public relations staff by setting up quick response teams to field calls,
handle concerns, and respond to the negative stories. Next, Eduardo Castro-Wright, Vice Chairman of
Walmart, set out to completely overhaul U.S. stores by de-cluttering aisles, creating cleaner, friendlier
servicescapes, and speeding up checkouts.
Walmart aggressively transformed its stores as well as its brand. Based on consumers’ preferences and
buying habits, store layouts were redesigned. The transformation was a success. Today, Walmart stores
provide customers a better shopping experience with less inventory, fewer staff, but same-store sales are
higher than ever.
Organizing is one of the key functions of any manager or supervisor. Failure to understand the organizing
function from a broader viewpoint can lead to the following problems:
• Excessive violation of the unity of command principle.
• Failure to develop additional departments or work groups when needed.
• Unclear and improper assignment of duties and responsibilities to new employees.
• Ineffective use of organizational units and inadequate development of human resources because of
improper decentralization of authority.
• Excessive and unhealthy conflicts between departments and between line supervisors and staff
personnel.
I. The Four Stages in Growth of an Organization
• Usually, a business grows in four stages.
o Stage 1 is the one-person organization
o Stage 2 is the organization with assistants added
o Stage 3 is the line organization
o Stage 4 is the line-and-staff organization
• Not all organizations go through all of the four stages; many skip the first stage and go directly to
stage 2.
A. Stage 1: The One-Person Organization
• In the first stage of organizational growth, one person alone performs all the basic activities
Preview
Lecture Outline
CHAPTER NOTES Chapter 4
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common to all manufacturing operations: administering, financing, producing, and selling.
B. Stage 2: The Organization with Employees
• Employees need to be hired to help carry out the primary activities of a business.
• This stage is a critical one; over 50 percent of new businesses fail in their first year of operation
from lack of capital, ineffective management, or both.
C. Stage 3: The Line Organization
• Line organization means each person in the organization has clearly defined responsibilities and
reports to an immediate supervisor.
• There are two advantages to having a line organization at an early stage of a business
organization’s growth:
o Quick, decisive action on problems is possible because authority is centralized.
o Lines of responsibility and authority are clearly defined. Everyone knows what his or her
job and obligations are. Thus, evasion of responsibility is minimized and accountability is
maximized.
D. Stage 4: The Line-and-Staff Organization
• Line-and-staff organization is an organization structure in which staff positions are added to
serve the basic line departments and help them accomplish the organization objectives more
effectively.
• Organizations need to hire several staff experts to perform some of the activities line managers do.
Line organizational structure tends to overload managers.
II. Departmentalization
• The process of determining how activities are to be grouped is called departmentalization. There
are many ways these activities may be organized.
o However, most organizations use a functional approach at the top and other approaches at
lower levels.
A. Functional Departmentalization
• Functional departmentalization is a form of departmentalization that groups together common
functions or similar activities to form an organizational unit.
• Functional departmentalization would be used at the top management level in dividing the
three major business functions—production, sales, and finance.
1. Advantages of the Functional Approach
• The primary advantages of the functional approach are:
o Maintains the power and prestige of the major functions
o Creates efficiency through the principles of specialization
o Centralizes the organization’s expertise
o Permits tighter top-management control
o Minimizes costly duplications of personnel and equipment
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2. Disadvantages of the functional approach
• There are also many disadvantages to a functional approach.
o Responsibility for total performance rests only at the top.
o Training of future top managers is limited.
o Coordination between and among functions becomes complex and more difficult as the
organization grows in size and scope.
o Individuals identify with their narrow functional responsibilities, causing subgroup
loyalties, identification, and tunnel vision.
B. Product or Service Departmentalization
• A solution for many organizations is to shift to smaller, more natural semiautonomous mini–
organizations built around specific products, each with its own functional capabilities.
o This is known as product departmentalization, in which all the functions associated with a
single product line are grouped.
• Some of the advantages of product departmentalization are as follows:
o Attention can be directed toward specific product lines or services.
o Coordination of functions at the product division level is improved.
o Profit responsibility can be better placed.
o It is easier for the organization to obtain or develop several executives who have broad
managerial experience in running a total entity.
• Some of the disadvantages of product departmentalization are as follows:
1. Advantages of the Matrix Approach
• It permits open communication and coordination of activities.
• The organization is more flexible and can respond rapidly to change.
• Matrix organization is essential in technologically-oriented industries.
2. Disadvantages of the Matrix Approach
• There can be lack of clarity and coordination in assigned roles.
• Conflict may occur when the requirements of the project team results in decisions
contrary to the philosophy and viewpoint of the home office.
• Psychologically, employees may never feel they have “roots” while drifting from one
project to another—perhaps unrelated—project.
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achieving effective results.
• Numerous supervisory managers are required, resulting in high payroll costs.
• An advantage of tight control is the work can be closely directed, so the company can
hire relatively less skilled people.
3. Tendency toward Wider Spans of Control
• Over the years, many companies tended to broaden their span of control at all levels.
There are at least four reasons for this trend:
o Higher educational attainment, management and supervisory development
programs, vocational and technical training, and increased knowledge generally on
the part of the labor force improved the abilities and capacities of both managers
and employees. The greater the supervisor’s capacity, the more people he or she
can supervise.
o Research indicates in many situations, general supervision is more effective than
close supervision.
o New developments in management permitted businesses to broaden their span of
control and supervise by results, without losing control
o Finally—and sometimes this is the primary reason—wider spans of control save
the company money.
IV. Relationships between Line and Staff
• Line personnel carry out the primary activities of a business, such as producing or selling products
and/or services.
o Staff personnel, on the other hand, use their expertise to assist the line people and aid top
management in various areas of business activities.
• Once a business reaches the fourth stage of growth and is no longer a small organization, it becomes
more complex and difficult to coordinate.
• A line-and-staff structure that places competent specialists in certain positions such as human
resources management, legal and governmental departments, research and development, and public
relations, helps eliminate confusion, duplication, and inefficiency.
o However, a growing organization must be continually alert to pitfalls and potential trouble
spots.
A. Conflicts between Line and Staff
• One common problem in most large organizations is excessive conflict between line and staff
personnel and between different departments.
• Differences in viewpoint between people and departments are natural, inevitable, and healthy, but
excessive conflict disrupts an entire organization.
• There are many reasons excessive conflict develops between line and staff personnel within an
organization.
o Staff personnel give direct orders to line personnel.
o Good human relations are not practiced in dealings between line and staff personnel.
o Overlapping authority and responsibility confuse both line and staff personnel.
o Line people believe staff people are not knowledgeable about conditions at the operating
level.
o Staff people, because of their expertise, attempt to influence line decisions against line
managers’ wishes.
o Top management misuses staff personnel or fails to use them properly.
CHAPTER NOTES Chapter 4
o Each department views the organization from a narrow viewpoint instead of looking at the
organization as a whole.
B. How to Avoid Excessive Line-Staff Conflicts: Delineating Authority
• Although conflict between line and staff people is not likely to be eliminated, a major way to avoid
it is to ensure people clearly understand the authority/responsibility relationships between
individuals and departments.
1. Advisory Authority
• The primary responsibility of most staff departments is to serve and advise the line
departments.
o This type of authority is called advisory authority or the authority of ideas.
o However, some staff people may be so zealous in their efforts to sell their ideas to
line personnel they, in effect, hand out orders.
2. Line Authority
• The line authority is the power to directly command or exact performance from others.
o Individuals with this type of authority are directly responsible for the results of a
certain department or group of workers.
o The head of a staff department has line authority over the employees in his or her
department.
3. Functional Authority
• The third type of authority, functional authority, is usually a restricted kind of line
authority.
o It gives a staff person a type of limited line authority over a given function, such as
safety or quality, regardless of where that function is found in the organization.
• Another way to avoid excessive conflict between line and staff people is to have effective
communication between people and between departments.
V. Decentralization versus Centralization
• The concept of decentralization is closely related to the concept of delegation.
o Delegation is the process that managers allocate duties and authority downward to the people
who report to them and assign responsibility for how authority is used.
• Both delegation and decentralization are concerned with giving authority to someone at a lower
level.
o Decentralization is the broader concept, as the extent to which authority is delegated from
one unit of the organization to another.
• In a decentralized organization, middle and lower levels of management make broader, more
important decisions about their units.
o In a centralized organization, upper management makes most of the important decisions that
concern all levels or units within the organization.
A. Factors Affecting Decentralization
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• No organization is completely centralized or decentralized. Decentralization is a relative concept
and depends on a number of factors, including the following:
o Top management philosophy
▪ Some top managers have a need for tight control.
▪ They put together a strong central staff and want to make the most important
decisions themselves.
▪ Others believe in strong delegation and push decisions to the lowest levels of their
organization.
o History of the organization’s growth
▪ Organizations grown by merging with other companies or acquiring them tend to be
decentralized.
▪ Those that have grown on their own tend to be centralized.
o Geographic location(s)
▪ Organizations spread out, with units in different cities or regions, tend to be
decentralized so lower-level managers can make decisions that fit their territory or
circumstances.
o Quality of managers
▪ If an organization has many well-qualified, well-trained managers, it will likely be
decentralized.
o Availability of controls
▪ If top management has an effective control system, good, timely information about
performance at lower levels—the organization tends to be decentralized.
o The economy
▪ Generally, there is a tendency toward more centralization during poor economic
times, such as a recession, and more decentralization during good economic times.
o Mergers, acquisitions, and joint ventures
▪ Unfortunately, many mergers, acquisitions, and joint ventures fail to achieve expected
synergies and positive outcomes because they do not plan and implement an early
strategy to integrate different organization cultures, evaluate old ways of operating,
and when appropriate, develop new ways of functioning.
o The external business environment
▪ Generally, in relatively certain or stable business environments, there is a tendency
toward more centralization because the focus tends to be internally on improving
efficiencies of operations.
▪ In dynamic, turbulent business environments, more decentralization occurs, because
rapidly responding and adjusting to environmental stimuli is most important.
VI. Downsizing
• Downsizing is the process of eliminating unnecessary levels of management and employees, thus
reducing the number of staff personnel and supervisors.
A. Benefits of Downsizing
• One of the major benefits of downsizing is the tremendous cost reductions that occur almost
immediately.
• Turnaround time in decision making is speeded up, and communication usually improves in all
directions
• The organization becomes more responsive to customers and provides faster product delivery.
• Without excessive interference and stifling of creativity at lower levels, line managers have more
opportunity to develop and use their authority to make decisions affecting the bottom line.
CHAPTER NOTES Chapter 4
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o In the final analysis, all these things translate into higher profits.
B. Costs of Downsizing
• Downsizing has some costs that can wreck the prospect of higher profits if the process is not
accomplished ethically and efficiently.
o Some companies downsize so rapidly and prune staff and middle management so much that
they lose control.
o Some companies are insensitive in the way they go about downsizing, telling a number of
loyal, effective managers they are no longer needed.
o Some other potential disadvantages are increased workloads, diminished chances for
promotion, and threatened job security for those remaining.
o Perhaps the greatest costs are the least known—the social costs.
• Downsizing can never be painless, but thoughtful planning can minimize the pain.
C. Impact on Remaining Supervisors and Managers
• Remaining managers must adapt to fuzzier lines of authority and develop skills in team building.
• With the increasing emphasis on quality and service management, a supervisor has to function
more as a coach, a facilitator, an expediter, and a team developer.
D. Ways to Get Beyond Downsizing
• It is important to look on downsizing not as an end in itself but as a means to an end.
• The way to get back to health is to focus on the remaining employees by developing a strategy of
support for survivors and a strategic plan for growth and development for the organization.
o However, it is important not to go back to a traditional management and organizational
design based on principles of command, control, and compartmentalization.
o This danger can be negated by developing effective work teams and using a process called
reengineering.
• Reengineering is a reaction to the way many organizations perform work using the traditional
methods of command, control, and compartmentalization.
o Firms that focus on division or specialization of labor with a resulting fragmentation of
work end up with vertical structures built on narrow pieces of a process.
o Reengineering can be very expensive and so firms should not use it for everything.
o The following types of changes occur when a company successfully reengineers business
processes:
▪ Work units change from functional departments to process teams.
▪ Jobs change from simple tasks to multidimensional work.
▪ Roles change from controlled to empowered.
▪ Job preparation changes from preparation to education.
▪ Focus of compensation shifts from activity to results.
▪ Advancement criteria change from performance to ability.
VII. Contemporary Organizational Perspective
A. The Inverted Pyramid
• The creation of the inverted pyramid—a structure widest at the top and narrowing as it funnels
down—has been attributed to Nordstrom, a successful specialty retailer.
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o Nordstrom’s structure is flat with few levels and employs a bottoms-up management
philosophy.
o The chart portrays “helping hands” symbolizing all other levels are there to help and support
the sales personnel to better serve and satisfy the customer.
B. The Wagon Wheel
• There are usually three main parts to these innovative formats: the hub of the wheel; a series of
spokes that radiate from the hub; and, finally, the outer rim.
o Customers are at the center, called the Hub.
o Spokes are business functions or teams.
o Outer rim are the chief executive and the board, who are placed there to make sure
everybody has at his or her fingertips everything needed to serve customers.
C. Team Structures
• Team structure utilizes permanent and temporary cross-functional teams to improve horizontal
coordination and cooperation.
o Teams provide speed and flexibility to meet the challenges associated with increasingly
dynamic business environments.
o Teams provide supervisors the opportunity to use the diverse talents of each member to
achieve effective outcomes.
D. Network Structures
• Network structure sometimes referred to as a modular structure, includes a central business unit
or “hub” linked to a network of external suppliers and contractors.
o With technology, such as the Internet, companies operate efficiently and effectively with a
virtual network by focusing only on those core activities they do quite well.
VIII. Management Philosophy, Strategy, and Organization
• In a world of rapid change and global competition, more firms are shifting to increased
decentralization, team development, and empowerment.
• Likert’s internal systems model groups the dimensions of a company’s human organization into
three categories of variables: causal, intervening, and end result.
o Causal variables determine the course of developments within an organization and the results
achieved by the organization.
o Intervening variables reflect the internal state and health of the organization.
o End-result variables are dependent variables that reflect the achievements of the organization.
A. Strategy and Structure: The Fit Perspective
1. Competitive Strategies
• Managers in organizations use a variety of competitive strategies to be effective.
• A cost leadership strategy attempts to lower costs below competitors by focusing on creating
efficiencies within organizational systems.
• A differentiation strategy is used to gain a competitive advantage through goods and/or
services that are clearly unique or different from the competition.
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PowerPoint Slide 4-34 Example of a Virtual Network (Text Exhibit 4-16)
PowerPoint Slide 4-35 Management Philosophy, Strategy, and Organization
PowerPoint Slide 4-36 Types of Variables
PowerPoint Slide 4-37 Organizational Strategy and Structure: A Fit Perspective (Text Exhibit 4-18)
PowerPoint Slide 4-38 Important Terms
1. Outline the four stages of organizational growth, and relate them to an organization with which you
are familiar.
Students’ answers may vary. The first stage of an organization’s growth is the one-person
2. What two important management principles affect the successful operation of a growing
organization? Do you think John Moody’s difficulties could have been avoided if he understood these
principles? Discuss the advantages and disadvantages of functional, matrix, and product
departmentalization.
Students’ answers may vary. Unity of command and span of control are the two important principles
control would have eased managerial pressures due to overwork and lack of planning.
Advantages of the functional approach:
Disadvantages of the functional approach:
Advantages of product departmentalization:
Solutions to the Questions for Review and Discussion
CHAPTER NOTES Chapter 4
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• Promising product lines and services can be given special attention.
• Coordination of functions at the product level is improved.
• Profit responsibility can be better placed.
• It is easier to develop executives with broad managerial experience.
Disadvantages of product departmentalization:
Advantages of matrix departmentalization:
Disadvantages of matrix departmentalization:
• Lack of clarity and coordination in assigned roles.
3. What is the relationship between levels of management and span of control? Explain the advantages
and disadvantages.
The higher a manager is in an organization, the fewer people should be reporting directly to him or
4. Distinguish between line and staff functions. Are they always easily identified in various types of
business enterprises? Justify the existence of both line and staff departments.
help eliminate confusion, duplication, and inefficiency, but will not solve all future problems.
5. What conflicts may arise between line and staff personnel? What reasons can you give for these
problems? How does effective communication ease the conflict?
SUPERVISORY MANAGEMENT Instructor’s Manual
authority and responsibility of one department begin or end and what authority staff people have.
whole. When this happens, members of a department fail to see that the duties of other departments
are just as important as their own.
Effective communication between people and between departments can help avoid excessive conflict
6. What are the three types of authority? Do they all exist in all four stages of functional growth?
7. What are some factors that favor centralization or decentralization?
Factors that affect centralization or decentralization are top management’s philosophy, history of the
8. How can a company minimize the negative effects of downsizing?
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9. What are the potential benefits and potential drawbacks of reengineering?
10. What contemporary organization form would be the easiest to implement in a traditional functional
organization?
11. Discuss the relationship between management philosophy, strategy, and forms of organization. If you
were the owner/manager of 10 convenience stores in the same city, what type of structure would you
use? If you were the owner/manager of 10 Certified Public Accountant (CPA) offices in various
cities, what type of strategy and structure would you use?
Students’ answers may vary. Some top managers have a need for tight control. They put together a
Skill Builder 4.1
YDL (You Deserve Luxury) Corporation
Works with SCANS competencies: Information
1. What type of business strategy do you think YDL is pursuing? Explain.
Solutions to the Skill Builders
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© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2. What form of departmentalization (organizational structure) do you believe YDL utilizes? Why?
Skill Builder 4.2
Reducing Costs in an Accounting Firm
Works with SCANS competencies: Interpersonal Skill, Resources, Systems
Skill Builder 4.3
Google’s Organizational Structure (Group Activity)
Works with SCANS competencies: Interpersonal Skill, Information, Technology
Case 4-1
John Moody is Facing Reorganization
1. Using the information about John’s company in the chapter, particularly the organizational chart in
Exhibit 4-6, analyze his current situation. Consider whether John’s strategy and structure are still
useful.
2. Prepare a report to include your recommends regarding what should be done to turn this situation
around. You should include an organizational chart in your report reflecting your recommendations.
Solutions to the Case
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© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.