CHAPTER 6

Organization Size
 Definition

• Organization size is defined as the total number of

employees.
• Since its people and their interactions that are
structured, the number of people should be more closely
associated with structure than with any other size
measure.
 Organization structure
• The form of an organization is evident in the way divisions,
departments, functions, and people link together and interact.
• Organization structure reveals vertical operational
responsibilities, and horizontal linkages, and is represented by
an organization chart.
• The complexity of an organization's structure is often
proportional to its size and its geographic dispersal.
• The core dimensions of organizational structure are:
Complexity, Formalization & Centralization.
Complexity, Formalization & Centralization –
explained again.
• Complexity: The degree of differentiation that exists within an
organization. Differentiation may be horizontal or vertical or
spatial.
• Formalization refers to the degree to which jobs within the
organization are standardized…. rules, procedures, and written
documentation.
• Centralization refers to the degree to which decision making is
concentrated at a single point in the organization…. level of
hierarchy with authority to make decisions.
 A Sample Organization Chart

CEO

Vice President Vice President Director

Fianance Manufacturing Human Resources

Chief Budget Plant Maintenance Training Benefits

Accountant Analyst Superintendent Superintendent Specialist Administrator

©2001 3-5
South-Western College
Cincinnati, Publishing
Ohio
Daft, Organization Theory and Design 7/e
 What constitutes an Organization Size?
Points to ponder: Examples
• Total no of employees may be an adequate measure for organizations composed
solely of full-time employees. What if the organization has a large no of part-time
workers? How are they to be counted?
• What if the business is seasonal? Like on special occasions like Christmas.
• How would we assess small & big companies in different industries. e.g A small
beauty parlour may have 3 workers while a large one may have 50. A steel plant
with 200 employees is small in an industry where large plants have thousands of
employees.
• What about efficiency? e.g. to carry out the same activities, an organization
requires 100 people while another one requires only 50. According to the no of
employees, the first one is large but less efficient, while the second one is small
but more efficient.
 Advocates of the Size Imperative
• Peter Blau concluded, based on his research, that “size is the most
important condition affecting the structure of the Organizations”.
• Aston group concluded that increased size was associated with
greater specialization and formalization.
• Meyer concluded that the impact of other variables that appeared to
affect structure disappeared when the size was controlled.
• Large organizations are more specialized, have more rules, more
documentation and more extended hierarchies.
• As size increases, Specialization, Formalization and Vertical Span also
increase but at a declining rate. At the same time Centralization
decreases and also at a declining rate.
 Critics of the Size Imperative

• Various people criticized the size imperative and among

them were Chris Argyris, Mayhew, Aldrich and Hall.
• Size may be that related to structure only in organizations
that have professional managers and are owner controlled.
 Conclusions on the Size-Structure
Relationship
• Big guys don’t always win against their smaller competitors.
• The only American Steel Plants making money are minimills,
which are more efficient than the huge plants.
• General Motors’ size and its dependence on vertical integration
puts it at a disadvantage against Chrysler, because of Chrysler’s
flexibility.
• Chrysler purchases 70% of its components from low-cost
suppliers from outside whereas GM is able to buy only 30% of its
components from outside.
 How Big is Big?
• Those organizations are normally considered large which have 2000
or more employees.
• Adding employees to an organization having 2000 or more members
has a minimal impact on its structure.
• e.g. if you double the size of big organizations having 5000 or 10,000
employees, no significant change is observed in its structure.
• Change in size will have its greatest impact on structure when the
organization is small.
• e.g. if you double the size of a small organization having 500 members,
significant change is observed in its structure.
 Differences Between Large and
Small Organizations
• LARGE • SMALL
• Economies of • Responsive
scale • Flexible
• Global reach • Regional reach
• Vertical hierarchy • Flat structure
• Mechanistic • Organic, Practical
• Complex • Simple
• Stable market • Niche finding
• Professional Managers • Entrepreneurs

Source: Based on John A. Byrne, 8-11

“Is Your Company Too Big?”
Business Week, 27 March 1989, 84-94.
 Administrative Component
• Administrative Component is defined as the relationship
between organizational size and the number of
administrative and supporting staff.
• It is also defined as all the personnel in an organization who
engage in support activities.
• Examples:
• Ratio between Managers & Employees
• Line Managers and Support Staff vs Operating or Production personnel
• Staff vs Line (normally used)
 Special issues relating to
organization size
Administrative-component debate
• Parkinson’s law: according to Parkinson, the number of
officials in an organization and the quantity of work to be done are
not related to each other at all.
• Parkinson put up three theories on the relationship between
Organizational Size & Administrative Component.
1. The Positive-Correlation Argument
2. The Negative-Correlation Argument
3. The Curvilinear Argument
 The Positive-Correlation Argument

• There is a positive relationship between Organizational Size &

Administrative Component.
• As Organizations increase in size, the relative size of the
Administrative Component would increase, but disproportionately.
• As more employees who contribute directly to the Organization’s
goals are added, coordination becomes increasingly difficult. Then the
Administrative Component can be expected to increase out of
proportion to the increase in size.
 The Negative-Correlation Argument

• There is a negative relationship between Organizational Size &

Administrative Component.
• As Organizations increase in size, the relative size of the
Administrative Component should decline as a proportion as size
increases. This is based on the assumption of efficiencies from
economies of scale.
• As Organizations expand, they require more Managers and staff to
facilitate coordination, but not in the same proportion as size
increases.
e.g. if production is doubled, HR Manager required is still one.
 The Curvilinear Argument
• The Size-Administrative Component relationship is not linear. It is
Curvilinear.
• The Administrative Component is greater for smaller and larger
Organizations than for moderate size Organizations.
• When Small Organizations become Moderate Organizations, benefits of
economies of scale are enjoyed. Thus Administrative Component does not
increase.
• When Moderate Organizations become Large Organizations, then at a
certain point they lose the benefits of economies of scale and become
complex.
• Here they require significant increase in Administrative Component to
facilitate coordination and control.
Other Factors which affect Administrative
Component

• Type of Organization
• Environment
• Technology
• Complexity
• Organization is undergrowing growth or decline
 Organization Theory & Small Business
• Does Organization Theory applies to those who manage or
aim to manage a small business?
• The answer is YES!
• The right structural design is critical if a small business is to
succeed.
• Small businesses face different problems than large
organizations, so different priority has to be assigned to
Organization Theory issues by the small business Manager.
 Issues of Reduced Importance in Small
Businesses
• Small businesses have low degree of horizontal, vertical &
spatial Differentiation.
• Low Formalization.
• High Centralization.
• Less internal Specialization. They out-source most of their
work.
 Issues of Increased Importance in Small
Businesses
• Control and Accountability is important than monetary award.
• Control is through direct supervision and observation instead of
Formalization. ‘Management by walking around’ is practiced.
• Efficiency is more important because of low resources.
• Small businesses rarely have much influence over their environmental
factors such as suppliers, competitors, financial sources.
• Effective small businesses must have a structural design that facilitates
rapid and accurate assessment of its environment and to use this
information for prompt action.
• Small business managers have a more limited set of structural options.
They should guard against building a complex and sophisticated design.