Lecture 2. Organization Structures C.

Span of control
D. Authority and responsibility
Chapter Outline E. Centralization vs. decentralization
F. Departmentalization
Definition
Factors consideration to form an organization
Key elements of organization structure
Contingency factors that impact organization A. Work specialization
design
Legal forms of business organizations The first component is the division of labor, or
Comparison work specialization. It describes the degree to
which tasks are subdivided into separate jobs. An
Organization entire job is not done by one person. Individuals
specialize in doing part of an activity rather than
A consciously coordinated social unit composed of the entire activity. Work specialization makes
two or more people that functions on a relatively efficient use of the broad skills that workers have.
continuous basis to achieve a common goal or set
of goals. B. Chain of command

Factors to be considered during formation of an The next component is the chain of command--the
organization principle that no person should report to more
than one boss. As you can see in this example, one
Liability individual only reports to another individual.
Taxation
Sharing Profits and Losses
Control and Decision Making
Blending and division of Assets
Workloads
Legal actions
Agency
Expenses
Starting and Stopping
Continuity and Growing
Paper works
Regulatory affairs

Key Elements of Organization Structure

The structure of the organization is the framework C. Span of control

or skeleton for dividing, assigning and coordinating
work.
Whenever managers develop or change the
structure, it is called organization design.
There are six elements of structure:
A. Work specialization
B. Chain of command
The span of control refers to the number of
employees a manager can effectively and
efficiently manage. The span of control now is
greatly influence by contingency variables such as
the training and experience employees have,
complexity of tasks, physical proximity of manager
and employees, the culture of the organization,
and the preferred managing style of the manager.
 D. Authority Vs responsibility
Authority is the right to perform or command. It is
important to note that the concept of authority is
related to the position and not the person.
When a person has been delegated authority, the
person also has the responsibility--or obligation to
perform the tasks or assignments.
Empowerment is the delegation of decision-making
(authority) over some work process. However, for
this to work effectively, employees need to be
responsible for the success of the process. And
empowerment truly works, when a person has
both responsibility and authority--it isnt
appropriate to hold someone accountable for
something that they have no authority over.
There are mainly 2 types of authorities
Line Authority: It is the authority that a manager
has over other employees. It extends from the top
of the organization to the bottom.
Staff Authority: Staff authority is the right to advise
or assist others who possess line authority as well
as other staff personnel.
Line and Staff personnel must work together
closely to maintain the efficiency and effectiveness
of the organization.
E. Centralization vs. decentralization
Centralization refers to how much decision-making
authority is pushed down to lower levels in the
organization. Traditional organizations are
structured in a pyramid, with power and authority
centralized at the top. For dynamic decision making
decisions need to be made closed to the problems.
As a consequence, managers will make decisions
about the best amount of decentralization to
achieve organizational goals.
*Recall our discussion earlier about empowerment.
For this to work, decision-making must be
decentralized.
F. Departmentalization
Traditionally, work activities have been specialized
and grouped into departments. Those specialists
are under the direction of a manager. There are
mainly 5 ways in which departments are designed.
Functional: by placing employees with shared
skills and knowledge into work-groups. These
are referred to as functional departments.
Examples would be engineering, accounting,
human resources, and marketing.
Product: Tasks can also be grouped according
to a specific product, thus placing all activities
related to the product under one manager.
This is called product departmentalization.
Customer: Jobs may be grouped according to
the type of customer served by the
organization. For example, in an organization
like Staples or Grand and Toy, it could break the
departments into those that serve retail
customers, home-based business customers, or
government customers.
Geographic: If an organizations customers are
geographically dispersed, it can group jobs
based on geography. For example, Coca-Cola
has two broad geographic areas--the North
American sector and the international sector.
Process: an organization can departmentalize
based on the basis of work flow or customer
flow. This is referred to as process
departmentalization.
It is important to remember is that there is no
single structure that will fit all situations.
Contingency factors & Organization design
There are 4 factors that impact on the design of an
organization.
1) Strategy: Since the structure is designed to
achieve objectives, and because these
objectives flow from the overall strategy, it
makes sense that structure and strategy are
closely linked. If a company has developed a
strategy to compete more aggressively on a
world market, then it will need to be more
flexible to respond to various external factors.
2) Size: The larger an organization is, the more
bureaucratic it tends to become. There is more
division of labor, rules and regulations.
3) Technology: Generally speaking, the more
routine the technology is within the productive
capacity of the firm, the more standard and
simple is the structure.
4) Environmental uncertainty: The last element
to consider is the degree of environmental
uncertainty facing the organization. Simply put,
the more uncertain the environment, the more
flexible and adaptable the structure needs to
be to respond effectively.
Legal forms of Business organizations
The type of business may not be the first question
a new or potential business owner. It is, however, a
question that must be carefully addressed because
of the tax, managerial, legal and liability impacts
that the business formation has. There are a
number of legal forms that a business can take.
Sole Proprietorship: A sole proprietorship is one
person alone. He or she will have unlimited liability
for all debts of the business, and the income or loss
from the business will be reported on his or her
personal income tax return along with all other
income and expense he or she normally reports.
Although proprietorship avoids the expense of
forming a partnership or corporation, many start
businesses this way because they are unfamiliar
with the other forms of organizations.
General Partnership: In a general partnership, each
of the two or more partners will have unlimited
liability for the debts of the business. The income
and expense is reported on a separate return for
tax purposes, but each partner then reports his or
her pro-rata share of the profit or loss from the
business as one line on his personal tax return.
Formulations of companies are in many manners.
1. Private limited company: A Company
incorporates with more than two persons and it is
limited to fifty members. In this case it is only a
huge partnership and the liability is unlimited.
2. Public Limited companies: A company which is
constituted with a minimum of seven members
and maximum is unlimited, and members called
share holders. Here the liability is limited up to
level of what he is invested.
3. Corporation: A corporation is a legal entity,
separate from its owners, with many of the rights
of an individual: a name, enter contracts, own
property, sue & be sued and so on. (It can't get a
Driver's License or Register to vote). General
characteristics of corporations include:
Dividends
Double taxation
Shielded from personal liability as "owner"
(stockholders)
Ownerships (shares of stock) freely
transferable
4. Government companies: Companies which are
incorporated solely or jointly with state and central
government or 51% & 49% with other joint
ventures or with other public limited companies.
Here also liabilities are limited by shares.
Differences between public and private limited
companies
A private limited company's requirements are
lighter, but for this reason its shares may not be
offered to the general public (and therefore cannot
be traded on a public stock exchange.) This is the
major distinguishing feature between a private
limited company and a public limited company.
Most companies, particularly small companies, are
private.
How private limited companies convert to a public
limited company?
A private ltd company might change into a public
limited company if it desires to raise more capital
for its business. Whenever a limited company is
converted into a public limited company it is
allowed to put its share in public and on stock
exchange i.e. It can now sell the shares not just to
its friends and family but anywhere around the
world. Though the effect on control and ownership
might get less strengthen.
How are Corporations and Limited Liability
Companies alike?
Both corporations and limited companies limit the
liability of the owners/shareholders from the debts
of the business and against lawsuits against the
business.
Difference between Limited companies and
corporations
Limited company is formed by one or more
business people, as owners. The owners, called
"Members," file Articles of Organization and set
out an Operating Agreement. In other words, the
business income is considered as the owner's or
shareholder's income, and the owner/shareholder
pays the tax on his or her personal tax return.
A Corporation is a separate legal entity. It is formed
by filing corporate organization forms in the state
where the corporation is located, and by
designating shareholders, each with a specific
number of shares. The corporation also creates a
Board of Directors to oversee the corporate
business. The profits and losses of the corporation
are taxable to the corporation, not the owners
(shareholders).
Limited Company: This is a business owned by a
group of people who do not want to have unlimited
personal liability for the debts of the business. This
is because the company has its own legal identity,
separate and distinct from the owners. Liability is
defined as limited because the maximum that the
owners can lose is the money that they have
invested in the business. The owners are not
personally responsible for the debts of the business
so personal assets such as homes and personal
bank accounts are safe. It must have:
I. Memorandum: The Memorandum states the
companys name, location, share capital and
what the company can and cant do.
II. Articles of Association: Articles of Association
can loosely be described as the rulebook of
the company because they will describe the
conduct expected of/from the directors and
govern administrative matters and the calling
of meetings.
III. Certificate of Incorporation: The Certificate of
Incorporation often referred to as the birth
certificate of a company and is issued (in the
form of a single sheet of paper) by the
Companies House. The Certificate of
Incorporation details when the company was
formed, the company name and the company
number.
Companies are managed by directors and owned by
shareholders. The share owned by each person will
often reflect the size of their investment in the
company. In the case of small companies the
directors and shareholders are usually the same
people. A company must be registered at the
Companies Office. Every year each company has to
send the Companies House an annual return and
financial statements. This is because the accounts
for the limited company have to be audited and
made available to the public.
Comparison Table: Legal Forms of Business Organization

Ownership
Structure Requirements Tax Treatment Liability Advantages Drawbacks
Sole One owner Income and Unlimited Low start-up Unlimited
proprietorship losses pass personal liability costs personal liability
through to Freedom from Personal
owner and are most regulations finances at risk
taxed at
Owner has direct Miss out on
personal rate
control many business
All profits go to tax deductions
owner Total
Easy to exit responsibility
business May be more
difficult to raise
financing
General Two or more Income and Unlimited Ease of Unlimited
partnership owners losses pass personal liability formation personal liability
through to Pooled talent Divided authority
partners and are and decisions
Pooled resources
taxed at
Somewhat easier Potential for
personal rate
access to conflict
flexibility in
financing Continuity of
profit-loss
Some tax transfer of
allocations to
benefits ownership
partners
Limited Two or more Income and Limited, Good way to Cost and
companies owners losses pass although one acquire capital complexity of
through to partners must from limited forming can be
partner and are retain unlimited partners high
taxed at liability Limited partners
personal rate; cannot
flexibility in participate in
profit-loss management of
allocations to business without
partners losing liability
protection
Corporation Unlimited number Dividend income Limited Limited liability Expensive to set
of shareholders; no is taxed at Transferable up
limits on types of corporate and ownership Closely regulated
stock or voting personal Continuous
Double taxation
arrangements shareholder existence
levels; losses and Extensive record
Easier access to
deductions are keeping
resources
corporate Charter
restrictions