ENGINEERING ECONOMICS & MANAGEMENT

Unit IV
Forms of Business Organization: Single trader, partnership and public limited
company.

Principles of Organization: Types of organization; Span of management;

Authority, delegation and decentralization, source of formal authority,
difference between authority and power, line and staff authority, simple case
studies.
Organization

• Organization is an organized group of people with a particular purpose, such as a business or government
policies.
• It is a group of people who work together. 
• Organizations exist because people working together can achieve more than a person working alone.
Significance
• Organization is an important means of creating coordination and communication among various depts.
• Different jobs and positions are interrelated by structural relationship.
• It specifies the channel and mode of communication among different members.
Forms of organization
The various forms of organization are as follows:
1) Sole
proprietorship / single trader

2) Partnership
3) Co-operative Society
4) Joint stock company (Private and Public)
Forms of organization Contd…

1. Sole proprietorship / single trader

The sole proprietorship is a form of business that is owned, managed
and controlled by an individual.
Features of a sole-proprietary organization
(i) Individual Initiative.
(ii) Risk Bearing.
(iii) Management and control.
(iv) Minimum government regulations
(v) Unlimited liability
(vi) Secrecy
Forms of organization Contd…

• 1. Sole proprietorship / single trader contd…

• Advantages of Sole proprietorship / single trader
•(i).Easy formation
• (ii).Better Control
• (iii). Sole beneficiary of profits
•(iv). Inexpensive Management
• (v). Flexibility in Operation
• (vi). Maintenance of Business Secrets
(i).Easy formation
• A sole proprietorship business is easy to form where no legal formality involved in setting up this type of organization.
• It is not governed by any specific law.
• It is simply required that the business activity should be lawful and should comply with the rules and regulations laid
down by local authorities.
(ii).Better Control:
In sole proprietary organization, all the decisions relating to business operations are taken by one person, which makes
functioning of business simple and easy.
The sole proprietor can also bring about changes in the size and nature of activity.
This gives better control to business.
Forms of organization Contd…
• 1. Sole proprietorship / single trader contd…
• Advantages of Sole proprietorship / single trader contd…
• (iii). Sole beneficiary of profits:
• The sole proprietorship is generally organized for small-scale business.
• This helps the proprietor’s family members to be employed in business.
• At the same time such a business is also entitled to certain concessions from the government.
• For example, small industrial organizations can get electricity and water supply at concessional rates on a priority basis

(iv). Inexpensive Management:

The sole proprietor does not appoint any specialists for various functions.
He personally supervises various activities and can avoid wastage in the business .
(v). Flexibility in Operation
It is very easy to effect changes as per the requirements of the business.
The expansion or curtailment of business activities does not require many formalities as in the case of other forms of business organization.
(vi). Maintenance of Business Secrets:
• The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so
decides.
• He is also not bound to publish his business accounts. Quick Decision and Prompt Action:
• As stated earlier, nobody interferes in the affairs of the sole proprietary organization.
• So he/she can take quick decisions on the various issues relating to business and accordingly prompt action can be taken.
Forms of organization Contd…
• 1. Sole proprietorship / single trader contd…
• Limitations of sole proprietorship/single tarder
(i).Limitation of management skills
(ii). Limitation of Resources
(iii).Unlimited liability
(iv). Not Suitable for Large Scale Operations
(i).Limitation of management skills
A sole proprietor may not be able to manage the business efficiently as he is not likely to have necessary skills regarding
all aspects of the business. This poses difficulties in the growth of business also.
(ii).Limitation of Resources
The sole proprietor of a business is generally at a disadvantage in raising sufficient capital. His own capital may be limited,
and his personal assets may also be insufficient for raising loans against their security. This reduces the scope of business
growth.
(iii).Unlimited liability
The sole proprietor is personally liable for all business obligations. For payment of business debts, his personal property
can also be used if the business assets are insufficient.
(iv). Not Suitable for Large Scale Operations
Since the resources and the managerial ability is limited, sole proprietorship form of business organization is not suitable
for large-scale business
Forms of organization Contd…
2. Partnership
The Indian Partnership Act defines partnership as,
“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them
acting for all.
The persons who have agreed to join in partnership are individually called “Partners” and collectively a ‘firm’. A partnership firm can be
formed with a minimum of two partners, and it can have a maximum of twenty partners.
• Features of Partnership
• (i). Existence of an agreement
• (ii). Engagement in business
• (iii). Sharing of profits and losses
• (iv). Agency relationship
• (v). Unlimited Liability
• (vi). Common Management
• (vii). Restriction on transferability of share
• (viii). Registration
• (ix). Duration
Forms of organization Contd…
• 2. Partnership contd…
• Features of Partnership contd…
(i)Existence of an agreement
Partnership is formed on the basis of an agreement between two or more persons to carry on business.
It does not arise out of the operation of law as in the case of joint Hindu family business. The terms
and conditions of partnership are laid down in a document known as Partnership Deed.
(ii).Engagement in business
A partnership can be formed only on the basis of a business activity. Its business may include any
trade, industry or profession. Thus, a partnership can engage in any occupation - production and/or
distribution of goods and services with a view to earning profits.
(iii). Sharing of profits and losses
In a partnership firm, partners are entitled to share in the profits and are also to bear the losses, if any.
(iv). Agency relationship
The partnership business may be carried on by all or any of the partners acting for all. Thus, each
partner is a principal and so can act in his own right. At the same time, he can act on behalf of other
partners as their agent. Thus, every partner can bind the firm by his acts.
Forms of organization Contd…
• 2. Partnership contd…
• Features of Partnership contd…
(v). Unlimited Liability
• The liability of partners is unlimited as in the case of sole proprietorship.
• In case some obligation arises, then not only the partnership assets but also the private property of the partners can be taken for
the payment of liabilities of the firm.
(vi). Common Management
• Every partner has a right to take part in the running of the business.
• It is not necessary for all partners to participate in the day-to-day activities of the business, but they are entitled to participate.
• Even if partnership business is run by some partners, the consent of all other partners is necessary for taking important decisions.
(vii). Restriction on transferability of share
No partner can transfer his share in partnership to any other person. He may, however, do so with the consent of all other partners.
(viii). Registration
To form a partnership firm, it is not compulsory to register it. However, if the partners so decide, it may be registered with the
Registrar of Firms.
(ix). Duration
The partnership firm continues at the pleasure of the partners. Legally a partnership comes to an end if any partner dies, retires or
becomes insolvent.
However, if the remaining partners agree to work together under the original firm’s name, the firm will not be dissolved and will
continue its business after settling the claim of the outgoing partner
Forms of organization Contd…

• 2. Partnership contd…
• Partnership Deed
Since partnership rests on an agreement among persons, its formation
does not involve any special legal problems.
• Partnership agreement is not registered in the court of law, its a an
agreement between the partners whereas a partnership deed is a
written agreement between the partners and is registered in the court
of law.
• Partnership Deed lays down the terms and conditions of partnership
and the rights, duties and obligations of partners.
Forms of organization Contd…

• 2. Partnership contd…
• Partnership Deed contd…
• The following points are generally covered in the Deed:
• (i) The nature of business.
• (ii) Name of the firm and the place where its business will be carried on
• (iii) Amount of capital to be contributed by each partner.
• (iv) Duties, powers and obligations of all the partners.
• (v) Method of preparing accounts and arrangement for audit.
• (vi) Whether loans will be accepted from a partner over and above the capital also, if so, at what rate
of interest.
• (vii) The amount to be allowed as private drawings by each partner and the interest to be charged
thereon.
• (viii) The ratio in which profits are to be shared.
• (ix) Whether a partner can be expelled and, if so, the procedure for the same.
• (x) Method for the settlement of disputes.
Forms of organization Contd…

2. Partnership contd…

Registration of firm

• Name of the Partnership Firm.

• Name and address of all partners.
• Place of business (address of main and branch offices)
• Duration of the partnership.
• Date of joining of partners.
• Date of commencement of business.
Forms of organization Contd…
• 2. Partnership contd…
Types of Partners
•The various types of partner found in partnership firms are as follows:
•(i) Active Partners: Partners who take active part in the conduct of day-to-day business of the firm are called active
partners. These partners carry on business on behalf of the other partners.
•(ii) Sleeping or dormant partners: Sleeping or dormant partners are those who do not take active part in the
management of the business. Such partners only contribute capital in the firm and are bound by the activities of other
partners. However, they share in the profits and losses of the business.
•(iii) Others: Active and sleeping partners are, as a matter of fact, the full-fledged partners i.e. they share in profits
and losses of the business and are liable for its dues. However, there are other types of partners also who may be
associated with partnership directly or indirectly.
•They are not full-fledged partners; such partners may include the following:
•(a) Nominal Partners: Nominal partners are those who do not have interest in the business but lend their name to the
firm. They do not make any capital contribution, and are not entitled to take part in management, but are liable, like
other partners, to third parties. Such partners generally have a pecuniary interest (like a share in the profits) in
lending their name to a firm. However, in certain cases they may not have any pecuniary interest in doing so. For
example, a reputed industrialist may, without any profit motive lend his name to a firm run by his family members.
•(b) Partners by holding out: If a person by his words or conduct holds out to another that he is a partner, he will be
prevented from denying that he is not a partner. The person who thus becomes liable to third parties to pay the debts
of the firm is known as a partner by holding out.
•
Forms of organization Contd…

• 2. Partnership contd…
• Merits of Partnership:
A partnership form of organization offers the following advantages:
• (i) Ease in formation: A partnership is very easy to form. All that is required is an agreement among
the partners. Even the expenses to be incurred for registration are-not much.
• (ii) Pooling of financial resources: A partnership commands more financial resources compared to
sole proprietorship. This helps in expanding business and earning more profits. As and when a firm
requires more money, more partners can be admitted.
• (iii) Pooling of managerial skills: A partnership facilitates pooling of managerial skills of all its
partners. This leads to greater efficiency in business operations. For instance, in a big partnership
firm, one partner can handle production function, another partner can look after all marketing activity,
still another can attend to legal and personnel problems, and so on.
• (iv) Balanced business decisions: In a partnership firm, decisions are taken unanimously after
considering all the major aspects of a problem. This ensures not only balanced business decisions but
also removes difficulties in the smooth implementation of those decisions.
• (v) Sharing of risks: Unlike sole proprietary organization, the risks of partnership business are shared
by partners on a predetermined basis. This encourages partners to undertake risky but profitable
business activities.
Forms of organization Contd…

• 2. Partnership contd…
• Limitations of Partnership:
A partnership form of organization suffers from the following major limitations:
• (i) Uncertainty of existence: The existence of a partnership firm is very uncertain. The retirement, death, bankruptcy or lunacy of
any partner can put an end to the partnership. Further, the partnership business can come to a close if any partner demands it.
• (ii) Risks of implied authority: It is true that like the sole proprietor each partner has unlimited liability. But his liability may arise
not only from his own acts but also from the acts and mistakes of co-partners over whom he has no control. This discourages many
persons with money and ability, to join a partnership firm as partner.
• (iii) Risks of disharmony: In partnership, since decisions are taken unanimously, it is essential that all partners reconcile their
views for the common good of the organization. But there may arise situations when some partners may adopt rigid attitudes and
make it impossible to arrive at a commonly agreed decision. Lack of harmony may paralyze the business and cause conflict and
mutual bickering.
• (iv) Difficulty in withdrawal from the firm: Investment in a partnership can be easily made but cannot be easily withdrawn. This
is so because the withdrawal of a partner’s share requires the consent of all other partners.
• (v) Lack of institutional confidence: A partnership business does not enjoy much confidence of banks and financial institutions. It
is because the nature of its activities is not disclosed at public and the agreement among partners is not regulated by any law. As a
result, large financial resources cannot be raised by partnership and growth of business cannot be ensured.
• (vi) Difficulties of expansion: It is difficult for a partnership firm to undertake modernization of expansion of its operations. This is
because of its inability to raise adequate funds for the purpose. Limited membership (restricted to 20) and their limited personal
resources do not permit large amounts of capital to be raised by the partners. Therefore, large-scale business cannot generally be
organized by partnerships.
Forms of organization Contd…

• 3. Joint Stock Companies Sto

With the technological improvements, the scale of operations has increased.
The requirements for finances and managerial resources have gone up. The
traditional forms of organization such as sole-proprietorship and partnership
could not meet the requirements of business. The increase in business
volumes also brings in more liabilities. Under these circumstances the
company form of organization developed as the most suitable alternative.
In this form of organization many persons known as shareholders join hands
to start a bigger business and the liability of members is also limited to the
extent of shares they have subscribed to. Joint stock company form of
organisation was first started in Italy in thirteenth century.
•c
• k Companies
Forms of organization Contd…

• 3. Joint Stock Companies contd…

• Definitions
• Company is “an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or
business, and who share the profit and loss (as the case may be)
arising therefrom.” —James Stephenson
• “A Joint Stock Company is a voluntary association of individuals for
profit, having a capital divided into transferable shares, the ownership
of which is the condition of membership.” —Prof. L.H. Haney
Forms of organization Contd…
• 3. Joint Stock Companies contd…

There are several types of companies. Their classifications can be made from many
ways.
In brief they are :
1. According to Incorporation
2. According to Liability
3. According to Number of Members

According to Number of Members : According to the number of members,

companies may be classified into two categories.
1. Private Company
2. Public Company
Forms of organization Contd…

• 3. Joint Stock Companies contd…

A public company, publicly traded company, publicly held company, publicly listed company,
or public limited company is a company whose ownership is organized via shares of stock which are
intended to be freely and publicly traded on a stock exchange.
On the other hand, a private limited company is neither listed on the stock exchange nor are they
traded. It is privately held by its members only. A private limited company is a company which is
privately held for small businesses. The liability of the members of a Private Limited Company is
limited to the amount of shares respectively held by them. Shares of Private Limited Company
cannot be publicly traded.
• A public company has the following trait:
(i) It is formed with a minimum of seven members.
(ii) It invites general public to subscribe to its shares.
(iii) There is no restriction on the maximum number of members.
(iv) It permits the transfer of shares.
(v) Has minimum paid up capital of Rs. Five lakhs
(vi) It must allot shares within 120 days from the issue of prospectus.
(vii) Before starting the business, it requires a certificate of commencement from the Registrar of Companies.
Forms of organization Contd…
• 3. Joint Stock Companies contd…
• Advantages of Joint Stock Company
(i) Large financial resources: A joint stock company is able to collect a large amount of capital through small
contributions from a large number of people. In public limited company shares can be offered to the general
public to raise capital. They can also accept deposits from the public and issue debentures to raise funds.
(ii) Limited Liability: In case of a company, the liability of its members is limited to the extent of the value of shares
held by them. Private property of members cannot be attached for debts of the company. This advantage attracts
many people to invest their savings in the company and it encourages the owners to take more risk.
(iii)Professional management: Management of a company is vested in the hands of directors, who are elected
democratically by the members or shareholders. These directors as a group known as Board of Directors ( or
simply Board) manage the affairs of the company and are accountable to all the members. So members elect
capable persons having sound financial, legal and business knowledge to the board so that they can manage the
company efficiently.
(iv)Large-scale production: Due to the availability of large financial resources and technical expertise it is possible for
the companies to have large-scale production. It enables the company to produce more efficiently and at lower
cost.
(v) Contribution to society: A joint stock company offers employment to many people. It facilitates promotion of
various ancillary industries, trade and auxiliaries to trade. Sometimes it also donates money towards education,
health and community services.
(vi)Research and Development: Only in company form of business it is possible to invest a lot of money on research
and development for improved processes of production, new design, better quality products, etc. It also takes care
of training and development of its employees
Forms of organization Contd…
• 3. Joint Stock Companies contd…
• Limitations of Joint Stock Company
(i) Difficult to form: The formation or registration of joint stock company involves a complicated
procedure. A number of legal documents and formalities have to be completed before a company
can start its business. It requires the services of specialists such as Chartered Accountants,
Company Secretaries, etc. Therefore, cost of formation of a company is very high.
(ii) Excessive government control: Joint stock companies are regulated by government through
Companies Act and other economic legislations. Particularly, public limited companies are required
to adhere to various legal formalities as provided in the Companies Act and other legislations. Non-
compliance with these invites heavy penalty. This affects the smooth functioning of the companies.
(iii) Delay in policy decisions: Generally, policy decisions are taken at the Board meetings of the
company. Further the company has to fulfill certain procedural formalities. These procedures are
time consuming and therefore, may delay action on the decisions.
(iv) Concentration of economic power and wealth in few hands: A joint stock company is a large-scale
business organisation having huge resources. This gives a lot of economic and other power to the
persons who manage the company. Any misuse of such power creates unhealthy conditions in the
society, e.g., having monopoly over a particular business or industry or product; exploitation of
workers, consumers and investors
TYPES OF ORGANISATIONS:

• Line Organization
• Line and Staff Organization
• Functional Organization
• Project Organization
• Matrix Organization:
Line Organisation
• It is the simplest and oldest form of
organization structure.
• It is called as military or departmental or
scalar type of organization. Under this
system, authority flows directly and
vertically from the top of the managerial
hierarchy ‘down to different levels of
managers and subordinates and down to
the operative level of workers.
• Line organization clearly identifies
authority, responsibility and
accountability at each level. The persons
in Line organization are directly involved
in achieving the objectives of the
organization.
Advantages of Line Organization
a. The line organization structure is very simple to understand and simple to operate.
b. Communication is fast and easy. And feedback can be taken quickly.
c. Responsibility is fixed and unified at each level and accountability are clear-cut, hence each individual knows to whom he
is responsible and who is responsible to him.
d. It is especially useful when the company is small in size, and it provides for greater control and discipline in the
organization.
e. It makes rapid decisions and effective coordination possible. So it is economic and effective.
f. The people in line type of organization get to know each other better and tend to feel close to each other.
g. The system is capable of adjusting itself to changing conditions for the simple reason that each executive has sole
responsibility in his own sphere
Disadvantages of Line Organization
. It is a rigid and inflexible form of organization.
h. There is a tendency for line authority to become dictatorial.
i. It overloads the executive with pressing activities so that long-range planning and policy formulation are often neglected
j. There is no provision for specialists and specialization, which is essential for growth and optimization.
k. Different departments may be much interested in their self-interests, rather than overall organizational interests and
welfare. It is likely to encourage nepotism.
l. It does not provide any means by which a good worker may be rewarded and a bad one punished.
Line and Staff Organization
• In the line and staff organization, staffs
assist the line managers in their duties in
order to achieve the high performance.
• So, in an organization which has the
production of textiles, the production
manger, marketing manager and the
finance manager may be treated as line
executives, and the department headed
by them may be called line departments
On the other hand, the personnel
manager who deal with the recruitment,
training and placement of workers, the
quality control manager who ensure the
quality of products and the public
relations manager are the executives who
perform staff functions.
Advantages of Line and Staff Organization:
a. Line officers can concentrate mainly on the doing function as the work of planning and
investigation is performed by the staff. Specialization provides for experts advice and
efficiency in management.
b. Since the organization comprises line and staff functions, decisions can be taken easily.
c. The staff officers supply complete factual data to the line officers covering activity
within and without their own units. This will help in greater co-ordination.
d. It provides an adequate opportunity for the advancement of workers
e. The staff services provide a training for the different positions.
f. Adequate organization, a balance among the various activities can be attained easily.
g. The system is flexible for new activities may be undertaken by the staff without
forcing early adjustments of line arrangements.
h. Staff specialists are conceptually oriented towards looking ahead and have the time to
do program and strategic planning and analyze the possible effects of expected future
events.
Disadvantages of Line and Staff Organization:
a. Confusion and conflict may arise between line and staff. Because the allocation of authority and responsibility is
not clear and members of the lower levels may be confused by various line orders and staff advices.
b. Staff generally advise to the lines, but line decides and acts. Therefore, the staffs often feel powerless.
c. Too much reliance on staff officers may not be beneficial to the business because line officials may lose much of
their judgment and imitative.
d. Normally, staff employees have specialized knowledge and expert. Line makes the final decisions, even though
staff give their suggestions.
e. Staff officers are much educated so their ideas may be more theoretical and academic rather than practical.
f. Although expert advice is available it reaches the workers through the managers. Here it is liable to create a greater
deal of misunderstanding as the interpretation may differ.
g. The staff are unable to carry out its plan or recommendations because of lack of authority. So, they become
ineffective sometimes, it will make them careless and indifferent towards their jobs.
h. Since the line is performed, with the advice provided by the staff, if things go right then the staff takes the
credit and if things go wrong then the line get the blame for it.
Functional Organization :

Features
a. Each worker receives instructions not only from one superior, but
also from a group of specialists.
b. Three types of authority relationships are in the functional
organization such as line authority, staff authority and functional
authority.
c. Staff specialists are given the authority to decide and do things in a
limited way.
d. The scope of the work is kept limited but the area of authority is left
unlimited.
e. There is a grouping of activities of the enterprise into certain major
functional departments
Advantages of Functional Organisation
• Each manager is an expert in his field. He has to perform a limited number
of functions. So, complete specialization exists in functional organisation.
• The greater degree of specialization leads to improvement in the quality of
product.
• Since the job requirements are definite and tangible, organization can
achieve the intensive utilization of the principle of specialization of labour
at the managerial level.
• Specialization will lead for mass production and standardization.
• Since experts get sufficient time for creative thinking, planning and
supervision are made efficient.
• It increases the work satisfaction for specialists who presumably do what
they like to do.
Disadvantages of Functional Organization:
a. Since there is no direct boss or controller of the workers, co-ordination is hard to achieve.
b. Since workers are under different bosses, discipline is hard to achieve. As results there will be
low morale on the part of the workers.
c. The non-supervisory employees are uncertain as to whom they should turn for advice and aid
when problem requires analysis.
d. As control is divided, action cannot be taken immediately.
e. Since there will be many foreman of equal rank in the same department, the conflicts of
leadership may arise.
f. It reduces the opportunities for the training of all-round executives to assume further leadership
in the firm.
Project Organization:
• This organizational structure are temporarily formed for specific
projects for a specific period of time, for the project of achieving the
goal of developing new product, the specialists from different
functional departments such as production, engineering, quality
control, marketing research etc., will be drawn to work together. These
specialists go back to their respective duties as soon as the project is
completed.
• The project organization is set-up with the object of overcoming the
major weakness of the functional organization, such as absence of
unity of command, delay in decision-making, and lack of
coordination.
Advantages of Project Organization:

a. It is a remarkable illustration of relationship between environment, strategy and structure.

b. The grouping of activities on the basis of each project results in introduction of new
authority patterns.
c. Since the specialists from different departments are drawn to work together under the
project organization it helps in better coordination.
d. It helps in meaningful control and fixation of individual responsibility.
Disadvantages of Project Organization
e. Sometimes coordination may become difficult as the people are from diverse backgrounds.
f. The project manager finds it difficult to motivate and control the staff in a traditional way
in the absence of well-defined areas of responsibility lines of communication and criteria to
judge performance.
g. Delay in completion of the project may happen. Effective project management may also be
disturbed by the top management who may not be wholly aware of the problems at the
project center.
Matrix
Organization:

According to Stanley Davis

and Paul Lawrence matrix
organization is “any
organization that employs a
multiple command system
that includes not only the
multiple command structure,
but also related support
mechanism and an associated
organizational culture and
behaviour pattern.”
• A matrix organization, also referred to as the “multiple command
system” has two chains of command. One chain of command is
functional in which the flow of authority is vertical. The second chain
is horizontal depicted by a project team, which is led by the project, or
group manager who is an expert in his team’s assigned area of
specialization. Since the matrix structure integrates the efforts of
functional and project authority, the vertical and horizontal lines of
authority are combination of the authority flows both down and
across.
Advantages of Matrix Organization:
1. Since there is both vertical and horizontal communication it increases the coordination and this
coordination leads to greater and more effective control over operations
2. Since the matrix organization is handling a number of projects, available resources will be used fully.
3. It focuses the organizational resources on the specified projects, thus enabling better planning and control.
4. It is highly flexible as regards adherence to rules, procedures etc. Here experience is the best guide to
establishing rules and procedures.
5. As any department or division has to harness its effort towards accomplishment of a single project,
employees are effectively motivated.
Disadvantages of Matrix Organization
6. Since there is more than one supervisor for each worker, it causes confusion and conflicts and reduce
effective control.
7. There is continuous communication both vertically as well horizontally, which increases paperwork and
costs.
8. It is difficult to achieve a balance below on the project's technical and administrative aspects
Span of management
• The number of subordinates that a superior can effectively supervise is known as span of management or span of
control.
• Depending upon the complexity of organizational activities and relationships amongst superiors and subordinates,
it becomes important the superiors manage an optimum number of subordinates that result in optimum
organizational output.
• All the subordinates cannot be managed by one superior. There has to be a limit on the number of subordinates
who can be effectively managed by one superior.
• Beyond this number, managers can face problems like:
• 1. Overburdened with work. 2.
Difficulty in coordinating the activities of large number of people. 3. Difficulty in
controlling.
Thus, optimum number of subordinates that a manager could supervise was determinable but today, it is not so. Exact
number of employees that managers can effectively supervise cannot be defined. Span of management is situational in
nature. Depending on
the number of employees that can be supervised or controlled by managers, there can be two kinds of structures in the
organisation:
• The Span of Management refers to the number of subordinates who can be managed efficiently by a superior. Simply,
the manager having the group of subordinates who report him directly is called as the span of management.
• The Span of Management refers to the number of subordinates who report directly to a manager.
Factors Determining Span of Management
The span of management can be determined on the basis of a number of people that a manager can manage.
These are:
1.Capacity of Superior
Here the capacity means the ability of a superior to comprehend the problems quickly and gel up with the staff such that he gets
respect from all. Also, the communication skills, decision-making ability, controlling power, leadership skills are important
determinants of supervisory capacity. Thus, a superior possessing such capacity can manage more subordinates as compared to
an individual who lack these abilities.
2. Capacity of Subordinate
If the subordinate is trained and efficient in discharging his functions without much help from the superior, the organization can
have a wide span. This means a superior can manage a large number of subordinates as he will be required just to give the broad
guidelines and devote less time on each.
3. Depending on the subordinate Nature of Work
If the subordinate are required to do a routine job, with which they are well versed, then the manager can have a wider span. But, if
the work is complex and the manager is required to give directions, then the span has to be narrower. Also, the change in the
policies affects the span of management. If the policies change frequently, then the manager needs to devote more time and hence
the span would be narrow whereas if the policies remain stable, then a manager can focus on a large number of subordinates.
Likewise, policies technology also plays a crucial role in determining the span.
4. Degree of Decentralization
If the manager delegates authority to the subordinates, then he is required to give less attention to them. Thus, higher the degree of
decentralization, the wider is the span of management. But in case, subordinates do not have enough authority, then the manager is
frequently consulted for the clarifications, and as a result superior spends a lot of time in this.
Factors Determining Span of Management contd…
5. Planning
If the subordinates are well informed about their job roles, then they will do their work without consulting the manager
again and again. This is possible only because of the standing plans that they follow in their repetitive decisions.
Through a proper plan, the burden of a manager reduces manifold and can have a wider span of management .
6. Staff Assistance
The use of staff assistance can help the manager in reducing his workload by performing certain managerial tasks such as
collecting information, processing communications and issuing orders, on his behalf. By doing so, the managers can
save their time and the degree of span can be increased
7. Supervision from Others
The classical approach to the span of management, i.e., each person should have a single supervisor which is changing
these days.
Now the subordinates are being supervised by other managers in the organization such as staff personnel. This has
helped the manager to have a large number of subordinates under him.
8. Communication Techniques
The mode of communication also determines the span of management.
If in the manager is required to do a face to face communication with each subordinate, then more time will be
consumed. As a result, the manager cannot have a wider span.
But in case, the communication is in writing and is collected through a staff personnel; the manager can save a lot of
time and can have many subordinates under him.
Types of Span of management or span of control or span of supervision
• The span of management is also called as the span of supervision or
span of control, which influences the complexity of the individual
manager’s job and determine the shape or configuration of the
organization.
Span of control is of two types:
1. Narrow span of control
2. Wide span of control
Span of management or span of control types contd…
1. Narrow Span of control means a single manager or supervisor can manage few
subordinates. This gives rise to a tall organizational structure.
Advantages:
Close supervision
Close control of subordinates
Fast communication
Disadvantages:
Too much control
Many levels of management
High costs
Excessive distance between lowest level and highest level
Span of management or span of control types contd…
• 2. Wide span of control means a single manager or supervisor oversees a large
number of subordinates. This gives rise to a flat organizational structure.
Advantages
(i).More Delegation of Authority
(ii).Development of Managers
(iii).Clear policies
Disadvantages
(i).Overloaded supervisors
(ii).Danger of superiors loss of control
(iii).Requirement of highly trained
managerial personnel
(iv).Block in decision making
Power and Authority
• Power
• Power can be defined as the ability of a person or a group to influence the
beliefs and actions of other people, and to influence or control actions or events.
• Power is the possession or the ability or the right to control the actions and
performances of others either by authority or by other means.
• Authority
• Authority is the right given to a person or a post to achieve particular objectives.
• It is the right to get things done by others, to take decisions and give orders and
get obedience from them.
• It comes from the duties and responsibilities awarded to a position holder in any
official structure.
Difference between authority and power
Power Authority

Power comes from knowledge and expertise. Authority comes from position and office.

Power is the personal ability of a person to control or influence Authority is the formal right to take decisions or making
others. commands.

Power does not come with rank or designation; a person is either Authority comes with rank and designation.
powerful or not.

The scope of power cannot be written down or explained because The scope of authority can be written down and explained in
it is too broad a concept. explicit terms.

Power is not dependant on levels as it is broader in context and Authority is dependent on levels or positions and can be used in
has a more extensive approach. a limited manner as awarded.
Delegation

Delegation is a group of people who have been tasked with a specific

job or given a specific purpose, or the act of assigning a specific task
or purpose to a person or group of chosen to represent another or
others.
Delegation of Authority is an organizational process wherein, the
manager divides his work among the subordinates and give them the
responsibility to accomplish the respective tasks. Along with the
responsibility, he also shares the authority, i.e. the power to take
decisions with the subordinates, such that responsibilities can be
completed efficiently.
Delegation contd…
Advantages
1.Builds Trust and Understanding
2.Motivates employees
3.Tests employee skills
4. Providing training
5. Achieves work Distribution
6. Give scope for innovation
7. Builds team spirit
Disadvantages
1.Misuse of power
2.Failure to fulfill the task
3.Delay
4. Impact of quality of work
Importance of Delegation
1. It saves time
2. Allows for management development
3. Maintains harmony
4. It develops team spirit
5. It Increases the morale, confidence, and productivity of employees
6. Delegation creates hierarchy
7. It helps both the superior and subordinates
8. Allows for efficiency and fast action
Importance of Delegation contd…
It saves time
• It provides you with additional time and allows you to focus on most critical issues. By means
of delegation, a manager can divide the work and allocate it to the employees. This helps in
cutting his work load so that he can focus on crucial areas like – planning, business analysis,
business strategy, etc. By delegating a manager is in a position to bring efficiency in his work.
This effectiveness allows a manager to demonstrate his capability and expertise in the best
possible way. It is extremely important not just because it frees the manager from overload
but also since each individual possesses a unique mix of abilities, knowledge and skills.
Delegating right work to a right individual can significantly accelerate the progress in
addition to drastically reducing the risk of failure.
It Increases the morale, confidence, and productivity of employees
• Delegation in an organisation is the foundation on which the superior-subordinate
relationship stands. Subordinates are motivated to give their best at the job when they have
authority with responsibility. They put much more effort in the work and are generally
cautious and careful in their work. It results in motivation of subordinates. The mindset and
outlook of employees towards work given gets more positive
Importance of Delegation contd…
Delegation Creates Hierarchy
It produces a structure inside the company, which is essential to create authority as well as a system of
responsibility. If workers know they’ve someone to answer to, apart from their overworked owner/manager,
they’re very likely to finish jobs to the fullest of their capability. This authority runs from top to bottom,
which produces relationships in accordance with results, which, in turn, results in an extremely efficient
company
It helps both the superior and subordinates
This provides stability to an organizations functioning. With effective results, a company can consider making
more divisions. This will likely call for creation of more managers which can be achieved by transferring the
knowledgeable, experienced managers to these positions.
This helps in both in virtual and horizontal growth of an organization which is extremely crucial for stability.
It develops team spirit
Because of delegation of authority, efficient communication evolves amongst the superiors and subordinates.
The subordinates are answerable to superiors and the superiors are responsible for the performance of
employees.
This improves relations and builds team spirit between the superiors and subordinates.
Importance of Delegation contd…
Allows for management development
It provides for a training ground for management development.
It provides an opportunity to subordinates to learn, to progress and to develop new competencies
and expertise.
It builds up a reservoir of professionals, which can be used whenever needed.
It produces managers rather than messengers.
Allows for efficiency and fast action
Delegation saves time allowing the employees to handle the challenges quickly. They can take the
decisions speedily within their authority. There is no need to go to the superiors for day to day
issues. This enhances the all round efficiency within an enterprise and delivers far better results in
regards to production, revenues and profit.
Maintains Harmony
The superiors have confidence in subordinates and give them required authority. The subordinates
accept their responsibility and this helps to develop cordial relationship between superiors and
subordinates
Steps in delegation of authority

1.Estimation of results
2. Assignment of duties
3. Create authority
4. Create accountability
5. Process of delegation of authority
6. Assignment
7.Transfer
8. Acceptance
9. Accountability
Decentralization
• Decentralization is the process of distributing or dispersing functions,
powers, people or things away from a central location. The meaning of
decentralization may vary in part because of the different ways it is
applied.
• Concepts of decentralization have been applied to group dynamics and
management science in private businesses and organizations, political
science, law and public administration, economics and technology.
• Transfer of decision-making power and assignment of accountability
and responsibility for results.
• It is accompanied by delegation of commensurate authority to
individuals or units at all levels of an organization even those far
removed from headquarters or other centers of power.
Objectives of Decentralization
The following are the main objectives which a decentralized system of
organization seeks to achieve.
• To relieve the burden of work on the chief executive
• To develop the managerial faculties
• To satisfy lower level of workers and motivate them
• To take quick and appropriate decision on the sport at the level which
it is really required with a view of cash on the opportunity available
• To reduce the communication work and fill the gap in communication,
if there any
Decentralization contd…
Advantages
1. Distribution of burden of top executive—De centralization enables to its executive to share his burden
with others at lower levels because here authority is delegated. The top executive is relieved of some
burden and concentrates his activities to think for the future of the organization.
2. Increased motivation and morale .The morality of the employees are increased because of delegation
of authority. De centralization helps to increase employee's morale because it involves delegation. The
employees are motivated to work
3. Greater efficiency and output: Decentralization gives emphasis on care, caution and enthusiastic
approach to the work which in turn results in increased efficiency and output. This is possible because it
involves delegation of authority and responsibility.
4. Diversification of Activities—De centralization helps in diversification of activities. It crests more
employment opportunities because new managers are to be entrusted with new assignments
5. Better Co-ordination—The various operations and activities are coordinated in a decentralized set up.
6. Maintenance of Secrecy — Decentralization enables to maintain secrecy without much cost and
unnecessary trouble.
7. Facilitate effective control and quick decision-De-centralisation enables to measure the work
according to standard easily and quickly. This facilitate taking up quick decision.
Decentralization contd…
Disadvantages
• Not withstanding the merits of decentralization, there are certain difficulties in its application to all cases and in all
circumstances The serious limitations of decentralization are as follows:
• 1. Decentralization makes the utilization of the services of exceptionally talented people difficult. Because of weak financial
resources, appointment of such persons may not be possible.
• 2. Decentralization increases the problems of coordination among the various units.
• 3. In some cases, decentralization may not be possible at all. External factors make this difficult, such as company wide
strikes.
• 4. It increases the administrative expenses because highly-paid managers have to be appointed.
• 5. High Cost of Operation: Establishing of various departments and employment of specialists in each department will result
in a higher cost of operation.
• 6. Lack of Uniformity: There shall not be uniformity in policies and actions, since each manager will form his own genius in
designing them.
• 7. Unsuitable for Small Firms: Departmentalization is completely unsuitable for small firms as it involves high operating
costs.
• 8. Reliance on the Manager: Decentralized organization has to place undue reliance on the efficiency of the divisional
managers. If they do not have enough skill or competence to take appropriate decisions, the enterprise has to incur heavy
losses due to their faulty decisions.
• 9. Self Centered Attitude: Each department will tend to be self centered ignoring the broader interests of other departments
and that of the entire firm.
Difference between delegation & decentralization

• 1. Responsibility: In delegation, a superior delegates or transfers some rights and duties to a subordinate but his
responsibility in respect of that work does not end. On the other hand, decentralization relieves him from
responsibility and the subordinate becomes liable for that work.
2. Process: Delegation is process while de-centralization is
the end result of a deliberate policy of making delegation of authority to the lowest levels in managerial
hierarchy. 3. Need. Delegation is almost essential
for the management to get things done in the organization i.e., delegating requisite authority for performance of
work assigned. De-centralization may or may not be practiced as a systematic policy in the organization
• 4.Control: In delegation the final control over the activities of organization lies with the top executive while in
decentralization the power of control is exercised by the unit head to which the authority has been delegated.
• 5. Authority: Delegation represents selecting dispersal of authority whereas decentralization signifies the
creation of autonomous and self-sufficient units or divisions.
6. Scope: Delegation hardly poses any problem of co- ordination to the
delegator of authority.
While de-centralization poses a great problem in this regard since extreme freedom of action is given to the
people by creating self-sufficient or autonomous units.
7 .Good Results: De-centralization is effective only in big organizations whereas delegation is required and
gives good results in all types of organizations irrespective of their size.
8. Nature: Delegation is the result of human limitation to the
span of management. De-centralization is the other hand, is the result of the big size and multifarious functions
of the enterprise.
Line and Staff Authority
Line authority
• It is that authority which a superior exercises over his
subordinates to accomplish primary objectives of the
organization.
• The superior issues orders and instructions to his sub
ordinates to complete the tasks.
• This authority is delegated to those positions or elements of
the organization which have direct responsibility for
accomplishing the primary enterprise objectives.
• The flow of authority is always in the downward direction
from the superior to the subordinate and such relationship is
called LINE RELATIONSHIP that exists in all departments
of an organization
• Line relationship helps the organization to work properly
by
• Providing the decisions required for functioning.
• Furnishing reference points for the approval of proposals.
• Serving as a means of control by setting the limits of
authority.
• Establishing authentic communication channels to make
leadership process effective.
• Line and Staff Authority Relationship
• ROLES OF THE LINE RELATIONSHIP:
• 1. As a Chain of Command: Line officials are in the chain
of command from the highest position to the lowest
position in the organization. Each successive manager
exercises command over his subordinates.
• 2. As a career of accountability: Each executive in the line
is accountable for the proper performance of the tasks
assigned to him and every subordinate is answerable to
his superior.
• 3. As a Channel of communication: Since the line
relationship involves issue of instructions from the
authorities and reporting from subordinates, it facilitates
and serves as an effective channel of communication.
Staff Authority
• In the context of management, it implies to those elements that help
the line authorities to function effectively in accomplishing the
primary objectives of the enterprise.
• Staff authority provides
• advice
• assistance and
• information to line managers and they are distinguished into three
categories namely, personal, specialized and general staff.
• They reduce the burden of line authorities and they too have the right
to command and extract work from their subordinates.
Line and Staff Authority Conflicts
• As always, functional and decisional conflicts arise between line and staff members. The causes may be
attributed to the following reasons.
• 1. Line managers grudge against the staff personnel:
• a) The staff authorities try to encroach upon the line managers and tell them how to do their work.
• b) Lack of well balanced advice from the staff managers.
• c) Staff managers are not directly accountable and sport a jealous attitude towards line authorities.
• d) Staff managers fail to see the big picture objectively and their interests are confined to specified situations.
• e) Staff often tend to impose their superiority on line managers.
• 2. Staff personnel complaints against the line managers
• a) Line managers don’t want to listen to the suggestions of the staff and make it a point to resist new ideas.
• b) Lack of authority on the part of staff managers to implement their innovative ideas and hence the
dependence on line authorities.
• c) Line managers do not utilize the services of staff personnel properly and effectively.
• 3. The workers’ attitude
• a) The authority relationships between line and staff specialists are not clearly defined most of the time
• b) The basic difference in attitude and perception of the line and staff managers create difficulties for the work
force in carrying out orders and instructions.