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Organization Size - Definition and Importance

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Lecture - 14
Organization Size - I

Welcome to this course on Organization Theory/Structure and Design. Now we will talk
about module 14. So, in module 14 and 15, we are to talk about Organization Size and
we are talking of part 2 that is the determinants of organisation structure. In the earlier
three modules that is module 11, 12 and 13 we have talked about strategy. So, now let us
start with organization sizes, so that is module 14, and these are the things that we will
talk about in this module.
(Refer Slide Time: 00:53)

First is understanding what organization size is, then defining organisation size,
understanding the importance of organisation size, describing the critics of organisation
size and then understanding the relationship between size and structure of an
organization.

(Refer Slide Time: 01:13)

To introduce now to get the picture, Eastman Kodak has sales in excess of dollar 13
billion a year and employs 125,000 people. These employees obviously cannot fit neatly
into one building or into several departments supervised by a couple of managers. It is
hard to envision that 125000 people being organized in any manner other than one that
would be labelled as high in complexity.
(Refer Slide Time: 01:46)

On the other hand, a local one hour photo processing firm that employs six people and
generate less than dollar 2,00,000 a year in sales is not likely to need decentralized

decision making or extensive written documentation defining companies policies and
regulations.
Comparing these two photography related firms, suggests that an organisations size will
influence its structure. The conclusion that size influence structure can also be arrived at
through a more sophisticated reasoning process. As an organisation hires more operative
employees, it will attempt to take advantage of the economic benefits from
specialization. The result will be increased horizontal differentiation.
(Refer Slide Time: 02:39)

Grouping likes functions together will facilitate intragroup efficiencies but at the expense
of intergroup relations, which will suffer as each performs its different activities.
Management therefore will need to increase vertical differentiation to coordinate the
horizontally differentiated units.

(Refer Slide Time: 03:04)

This expansion in size is also likely to result in spatial differentiation. All this increase in
complexity will reduce top management’s ability to supervise directly the activities
within the organisation. The control achieved through direct surveillance therefore will
be replaced by the implementation of formal rules and regulations.
This increase in formalization may also be accompanied by still greater vertical
differentiation as management creates new units to coordinate the expanding and the
diverse activities of organizational members. Finally, with top management further
removed from the operating level, it becomes difficult for senior executives to make
rapid and informative decisions. The solution is to substitute decentralized decision
making for centralization.

(Refer Slide Time: 04:04)

Following this reasoning we see changes in size leading to major structural changes.
While the description is logical enough does it happen this way in practice?
(Refer Slide Time: 04:14)

Now, we will start with defining organization size. There is a wide agreement by
organisation theory researchers on how an organisation size is defined. Over 80 percent
of the studies using organisation size as a variable define it as total number of
employees. So, over 80 percent of the studies they say that the total number of employee
means organization size.

This is consistent with the assumption that since it is people and their interactions that
are structured, their numbers should be more closely associated with structure than with
any other size measures. However just because there is high agreement among
researchers on what constitutes an organization size is no assurance that they are right.
(Refer Slide Time: 05:11)

For example, the total number of employees may be an adequate measure for
organisations composed solely of full time employees. But what if the organisation has a
large number of part time workers? How are they to be counted? Or what if the business
is seasonal? It is not unusual for retail stores to increase their sales staff by 50 percent
during the Diwali holiday season? How should these seasonal workers be assessed?
Counting the total number of employees also does not distinguish among different types
of industries. A small beauty parlour may have three employees while one with 50
employees will be quite large.
On the other hand, a steel plant with 200 employees is small in an industry where
average plants employ several thousand workers. Should the measure of an organisation
size and the subsequent assessment of whether it is small or large be qualified to reflect
industry norms?

(Refer Slide Time: 06:24)

Finally, it has been noted that using a count of the total number of employees as a
measure of organization size inherently mixes size with efficiency. If one organisation
requires one hundred people to carry out the same activities performed by fifty people in
another organization, is the first twice as large or merely half as efficient? The answer to
these questions are not easy.
(Refer Slide Time: 06:54)

Although it can be argued that different measures of size are not interchangeable, most of
the evidence suggested that counting the total number of employees is as good as many

other measures; the reason being that total numbers is highly related to other measures of
size. For instance, one study found the correlation between number of employees and the
organizations net assets to be 0.78. Number of employees also appeared valid in
hospitals and colleges. The correlation between total hospital labour force and average
daily patient load was found to exceed 0.96.
(Refer Slide Time: 07:40)

Whereas size of full time and part time faculty correlates with student enrolment at
above 0.94. One can conclude from these studies that the total number of employees
appears to be highly related to other popular gauges of size.
As such, it should be fairly accurate measure across organisations. Now, let us look at
what the advocates of the size imperative say. So, one of the stronger argument for the
importance of size as a determinant of structure has been made by Peter Blau.

(Refer Slide Time: 08:24)

Based on studies of government agencies, universities and department stores, he
concluded that size is the most important condition affecting the structure of
organization. For instance, in one of Blau’s most cited studies he looked at fifty-three
autonomous state and territorial employment security agencies whose responsibilities
included administering unemployment insurance and providing employment services.
(Refer Slide Time: 08:58)

In addition, his analysis included the structure of over twelve hundred local agencies
branches and three hundred and fifty headquarter divisions. What Blau found was that

increasing size promotes a structural differentiation, but at a decreasing rate. Increases in
organization size are accompanied by; one initially rapid and subsequently more gradual
increase in the number of local branches into which the agency is spatially dispersed, two
the number of official occupational positions expressing division of labour.
(Refer Slide Time: 09:40)

The third is the number of vertical levels in the hierarchy, the fourth is the number of
functional divisions at the headquarters and the fifth one is the number of sections per
division. Various conclusions are visibly depicted in this figure 14.1.
So, on the x axis we have organisation sizes, so it starts from 300, 800 to 2,800 and on
the y axis we have degree of structural differentiation. And this is the graph that goes
from low to high. So, you see that as the degree of structural differentiation moves up the
number of employees they become high.

(Refer Slide Time: 10:21)

An increase of say five hundred employees when organization has only three hundred
members has a significantly larger impact on structural differentiation than a similar
addition of five hundred employees to an organization that already employs twenty-three
hundred. That is, the difference between Xˈ and Yˈ is smaller than the difference
between X and Y.
(Refer Slide Time: 10:46)

Research at the University of Aston in Great Britain also found size to be the major
determinant of structure. For example, the Aston Group looked at forty six organizations

and fond that increased size was associated with greater specialization and formalization.
They concluded that an increased scale of operation increases the frequency of recurrent
events and the reputation of decisions which makes standardization preferable.
(Refer Slide Time: 11:20)

One researcher’s efforts to replicate the Aston findings resulted in supportive evidence.
He found that organisational size was related positively to specialization, formalization
and vertical span and negatively to centralization.
In further comparing his results with Blau, he concluded that “larger organizations are
more specialized, have more rules, more documentations, more extended hierarchies and
a greater decentralization of decision making further down such hierarchie”s.

(Refer Slide Time: 11:57)

He also agreed with Blau that the impact of size on these dimensions expanded at the
decreasing rate as size increased. That is, as size increased, specialization, formalization
and vertical span also increased but at a declining rate; whereas, centralization decreased
but at a declining rate, as size increased.
(Refer Slide Time: 12:25)

One of the strongest cases for the size imperative has been made by Meyer.
Acknowledging that a relationship between size and structural dimensions does not
imply causation, he designed a research project that allowed for causal inferences.

He created a longitudinal study of 194 city, county and state departments of finance in
the United States. He compared them over a five-year period.
(Refer Slide Time: 12:54)

He argued that only by comparing organizations over time would it be possible to
determine the time ordering of variables. That is even if size and structure were found to
be related among a set of organizations at a specific time only a longitudinal analysis
would permit the elimination of the counterhypothesis that structure causes size. Meyer’s
finding led him to conclude that one cannot underestimate the impact of size on other
characteristics of the organisation.

(Refer Slide Time: 13:31)

Specifically, he found that the effect of size showed everywhere. The relationship was
unidirectional that is, size caused structure, but not the reverse. The impact of other
variables that appeared to affect structure disappeared when size was controlled. So, that
was about the advantages of the size imperative now we will talk about the critics of the
size imperative.
There has been no shortage of critics of the size imperative. Attacks have been launched
specifically against Blau and the Aston groups research.
(Refer Slide Time: 14:08)

In addition, the independent studies have demonstrated no impact or minimal impact of
size upon structure. Finally, there is some preliminary evidence indicating that size
affects structure only in organizations that have professional managers, not among those
that are owner controlled.
(Refer Slide Time: 14:30)

Chris Argyris analysed Blau’s data, questioned his measures and argued that civil service
organisations are unique. On this last point he noted that civil service organisations have
budget limitations, distinct geographic boundaries, predetermined staff sizes and are
influenced primarily by regulations. He also acknowledged the role of managerial
discretion. Managers in government bureaus follow traditional management theories
regarding task specialization, unity of command, span of control and so forth.

(Refer Slide Time: 15:11)

Thus you would expect to find that an increase in the number of employees was
accompanied by an increasing differentiation because managers believe in the
appropriateness of management theories and are able to act on their beliefs. Size may be
related to structure, Argyris concluded, but you cannot say that it causes it.
(Refer Slide Time: 15:38)

Blau’s size imperative was also challenged by Mayhew and his associates. Using a
computer program that determined the degrees of differentiation possible for each level
of size they concluded that, Blau’s findings of a relationship between size and

complexity were a mathematical certainty when equal probabilities were assigned to all
possible structural combinations.
(Refer Slide Time: 16:07)

The Aston group’s research has had its share of critics too. Aldrich reanalysed the Aston
data and proposed several alternatives and equally plausible interpretations. For example,
size is the result not the cause. Technology determines structure which in turns
determines size. Aldrich said that the firms that were high in complexity and
formalization simply needed to employ a larger workforce than less structured firms did.
(Refer Slide Time: 16:43)

Even some of the Aston researchers have questioned the group’s original position after
an abbreviated replication. They used fourteen of the organizations that had been
included previously. Since some time has gone by between the original study and the
replication, there was an opportunity to do a partial longitudinal test on Aston’s original
findings.
The data however showed that although the size generally decreased over the time
period, the measure of structure dimensions increased. This was counter to the original
findings.
(Refer Slide Time: 17:20)

The general attack on the size imperative has come from Hall and his associates. They
studied seventy-five highly diverse organisations. They ranged in the size from six
employees to over nine thousand and included businesses, governmental, religious,
educational and penal organizations. Hall believed that if size and the structure
dimensions of complexity and formalization were related, this diverse set of
organizations would allow the relationship to surface.

(Refer Slide Time: 17:58)

Their results were mixed. The researchers concluded that neither complexity nor
formalization can be implied from organization size. Even though some relationships
were statistically significant, enough deviant cases existed to question seriously the
assumption that larger organizations are necessarily more complex than small ones.
Hall sided with Aldrich structure-cause size thesis when he concluded; if a decision is
made to enlarge the number of functions or activities carried out in an organisation, it
then becomes necessary to add more members to staff the new functional areas.
(Refer Slide Time: 18:47)

.

However in terms of objectivity, it must be noted that the evidence was more
inconsistent than damning. Hall and his associates therefore may question the size
structure relationship, but their research has certainly not demonstrated that the two are
unrelated.
(Refer Slide Time: 19:10)

A final consideration relates to the status of the management in the organization. A study
of 142 small and medium sized businesses found that changes in size were related to
changes in a structure among those firms that were run by professional managers, but no
such relationships appeared among the businesses that were controlled by owner
managers.

(Refer Slide Time: 19:38)

Specifically, it was found that increases in size were associated with more horizontal
differentiation, more formalization and more delegation of decision making only in firms
controlled by professional managers.
While it is dangerous to generalise from a single study, this research may help to explain
some of the diverse findings in previous studies where there have been large number of
business firms in the sample, but no control for the type of ownership.
(Refer Slide Time: 20:19)

For example, if the owner managers are unwilling to dilute their personal power over the
organization by decentralising decision making even if this unwillingness reduces their
organization’s effectiveness. We should expect the relationships between a business
organization’s size and its structure to be moderate by the kind of management the firm
has.
(Refer Slide Time: 20:39)

Now, how the economies of scales been oversold in this debate on size? Organization
theorist have long assumed that there was a positive relationship between an organization
size and economies of scales. As one author puts it, it has been believed that big is good,
bigger is better and biggest is best. The big guy today does not seem to always be
winning against their smaller competitors. In fact, more often than not the reverse seems
to be true.

(Refer Slide Time: 21:19)

For instance, General Motors’ size and its dependence on vertical integration puts it at a
distinct disadvantage against the likes of Chrysler. Why? And the answer is flexibility.
Chrysler purchases 70 percent of its components outside the firm and can find the lowest
cost supplier; whereas, general motor's is able to go outside for only 30 percent of its
components.
(Refer Slide Time: 21:50)

These results are not aberrations. Review of more than thirty studies, which covered a
wide range of organisational types and assessed the size-efficiency relationship found no

economies of scale effects. But how can that be? Why is not bigger more efficient? Why
might the long held assumptions of economies of scales no longer be accurate? Certainly
there have always been diseconomies associated with large size, but they did not tend to
matter much in more stable times.
(Refer Slide Time: 22:32)

Now, the foreign competition, deregulation, corporate raiders and similar forces are
putting a premium on flexibility and change. And in such times the large size can be a
liability.
So, additionally many of the traditional advantages of size such as access to low cost
capital markets and internal manufacturing efficiencies can now be achieved by midsize
organizations through; issuance of junk bonds, subcontracting out of manufacturing and
services, participation in joint ventures, use of franchising and similar strategies.

(Refer Slide Time: 23:15)

So, the conclusion on the size-structure relationship in overview terms, the relationship
between size and structure is not clear. Although some have found a strong relationship
and argue for its causal nature, others have challenged these findings on methodological
grounds or have argued that size is a consequence rather than a cause of structure.
But when we look at the research in more specific terms, a clearer pattern seems to
evolve. We will demonstrate that size certainly does not dictate all of an organization
structure, but that it is important in predicting some dimensions of structure.
(Refer Slide Time: 24:02)

Size and complexity; Blau found that the impact of size on complexity was at a
decreasing rate. As noted by Argyris this conclusion may apply only to government type
agencies that had the unique characteristics of the unemployment offices studied.
Meyer’s findings certainly cannot be ignored. Although also restricted to government
offices, he demonstrated strong evidence in favour of the size imperative.
(Refer Slide Time: 24:35)

So, we might conclude tentatively that size affects complexity but at a decreasing rate in
the government organizations. Whether this also holds in business firms is questionable.
It may well be that in business organizations where managers have greater discretion,
structure causes size.
Consistent with the strategy imperative if managers have discretion they may choose to
make their structure more complex, consistent with management theory as more
activities and personnel are added. Neither can it be ruled out that the size structure
relationship is circular.

(Refer Slide Time: 25:21)

There is evidence indicating that size generates differentiation and that increasing
differentiation also generates increasing size. The strongest case can be made for the
effect of size on vertical differentiation. In fact, one study found that size alone was the
dominant predictor of vertical differentiation explaining between 50 and 59 percent of
the variance.
(Refer Slide Time: 25:46)

A less strong but certainly solid case can be made for the size-horizontal differentiation
relationship. That is, the larger the organization, the more pronounced (at declining rates)

the division of labour within it, the same being true for the functional differentiation of
the organization into divisions. The size-spatial differentiation relationship is
problematic. Blau’s high correlation are almost certainly attributable to the kind of
organizations he studied.
(Refer Slide Time: 26:22)

Other efforts to assess this relationship have failed to generate Blau’s strong positive
relationship. However, still other investigations support Blau. What about the criticism
of the Aston Group’s work and Hall’s research? Our position is that they have not
demonstrated the importance of size.

(Refer Slide Time: 26:44)

.

We propose that the critics have pointed out methodological problems with several other
important studies confirming the impact of size on complexity and have suggested
potential alternative hypotheses. Although they certainly have not demonstrated size to
be irrelevant. Even Hall noted that six of the eleven measures of complexity were
significantly related to size.
The Aston findings supported the view that size affects formalization. Hall’s conclusion
was that formalization could not be implied from knowledge of organization size, but he
also acknowledged that it could not be ignored either. A recent comprehensive review of
twenty-seven studies covering more than one thousand organizations concluded that the
relationship between size and formalization was high, positive and statistically
significant.

(Refer Slide Time: 27:45)

(Refer Slide Time: 27:46)

There would appear to be a logical connection between an increase in size and increase
in formalization. Management seeks to control the behaviour of employees. Two popular
methods are direct surveillance and the use of formalized regulations. Although no
perfect substitute for each other, as one increases, the need for the other should decrease.
Because surveillance cost would increase very rapidly as organizations expands in size, it
seems reasonable to propose that there would be economies if management substituted

formalization for direct surveillance as size increased. The evidence supports this
contention.
Rules and surveillance are both aspects of control. The former is impersonal the later
requires such activities as supervising, work closely and inspecting the quality and
quantity of work done. In small organizations control through surveillance may be
achieved relatively easily through informal face to face relationships.
(Refer Slide Time: 29:04)

But as the organization grows there are more subordinates to supervise so it becomes
increasingly efficient to rely more on rules and regulations for exerting control. We can
expect, therefore to find an increase in formal rules and regulations within an
organisation as that organization increases in size.

(Refer Slide Time: 29:29)

After reviewing the size-formalization literature, one author proposed boldly that the
larger the organization, the more formalized its behaviour. This explanation however
emphasized that larger organizations formalize those activities that have a propensity to
recur often.
The larger the organization, the more that behaviours repeat themselves, and hence
management is motivated to handle them more efficiently through standardization. With
increased size comes greater internal confusion.
(Refer Slide Time: 30:15)

Given managements’ general desire to minimize this confusion, they seek means to make
behaviour at lower levels in the hierarchy more predictable. Management turns to rules,
procedures, job descriptions and other formalization techniques to bring about this
predictability.
A final point on the size-formulization relationship should be noted. We cannot ignore
whether the organization is independent or is a subsidiary of a larger organization. Parent
firms often impose rules and regulations to maintain financial and reporting consistencies
that would be unnecessary if the small firms were independent.
(Refer Slide Time: 31:00)

So, a moderating factor on size’s effect on formalization would be whether the
organisation was a subsidiary of a larger firm. If so, expect the former to have higher
formalization than its size would alone dictate. It is only common sense that it is
impossible to control large organizations from the top because much more is happening
than an individual or a set of individuals can comprehend, there is inevitable delegation.

(Refer Slide Time: 31:40)

Is that the way the evidence stacks? As we concluded, formalization increases with size.
These rules and regulations allow top managers to delegate decision making while at the
same time ensure that the decisions are made in accordance with the desires of top
management.
(Refer Slide Time: 31:53)

But the research is mixed in demonstrating that size leads to decentralization. In fact, one
comprehensive review concluded that the relationship between size and centralization is
not significantly different from zero. Precisely why this occurs is not clear. One

possibility is that these studies combine professionally managed and owner managed
business enterprises.
(Refer Slide Time: 32:18)

The desire to maintain control by the owner-manager is likely to override the loss in
organizational effectiveness, with the result being no move towards decentralized
decision making as size increases.
(Refer Slide Time: 32:34)

So, in order to conclude, we started this module by discussing what is organization size.
We understood the importance of organisation size. Also, we discussed the critics of

organisation size; and finally, we summarized the discussion by exploring the
relationship between size and structure of an organization. And these are the four books
from which the material for this module was taken.
Thank you.