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Organizational Size and The Administrative Component

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Lecture - 15
Organisation Size - II

Welcome to this course on Organization Theory Structure and Design. Now, it is time
for module 15; this is the second part of Organization Size. We have talked about
organizational size in module 14 also. And, we will continue with this discussion in
module 15.
And, these are the things that we will cover in this module, understand what organization
size is, then we will try to understand, the relationship between organization size and the
administrative component.
(Refer Slide Time: 00:47)

Thereafter, we will understand which OT that is organization theory issues, are of greater
or lesser importance to small business managers.

(Refer Slide Time: 01:22)

Now, to start with, the critical question is how big is big? Throughout the previous
module, we have tried to assess what effect, if any, changes in an organization size have
on its structure. One interesting finding has been that size’s influence seems to dissipate
as the number of employees expands.
Once an organization becomes large in size, it tends to be high in complexity, high in
formalization and decentralization. That is, once an organization becomes big, increases
in the number of employees have no noticeable further influence on the structure
(Refer Slide Time: 01:56)

This conclusion, then begs the question: how big is big? Put another way, at what point
do additional employees become irrelevant, in determining an organization’s structure?
Our answer can only be an approximation to this number. However, most estimates tend
to fall in the range of fifteen hundred to two thousand employees.
(Refer Slide Time: 02:21)

Organization with fewer than fifteen hundred employees tend to be labelled as small. On
the other hand, when an organization or any of its sub units gets to around two thousand
employees, it becomes increasingly difficult to coordinate without differentiating units,
creating formalized rules and regulations or delegating decision making downwards. So,
we will define a large organization as one having approximately two thousand or more
employees.

(Refer Slide Time: 02:58)

The preceding definition, now allows us to make two important statements. The first
statement is adding employees to an organization, once it has approximately two
thousand members should have a minimal impact on its structure. Second, a change in
size will have its greatest impact on a structure when the organization is small?
The big organizations with five or ten thousand employees can double its size and you
are not likely to see any significant changes in its structure. But, if an organization with
five hundred employees doubles its size, you should expect that it will be followed by
significant structural changes.
Now, let us look at how to go about keeping it small. And, we are talking of the case of
HP and Magna internationals.

(Refer Slide Time: 04:01)

Among organizations that purposely seek to keep their organizational units small in
order to maintain flexibility and responsiveness to change, there is no clear consensus on
when a unit has become too big. For instance, compare HP and Magna international
solutions to the problem. Both of these highly successful firms pride themselves as
keeping units small.
(Refer Slide Time: 04:27)

Hp on one hand tend to use about two thousand employees as a cut off. When plants get
permanently beyond that number, HP builds a new facility to absorb future growth. On

the other hand, Magna international is a diversified Canadian auto part manufacturer
with more than ten thousand employees and almost 1 billion Canadian dollars in annual
sales. It uses two hundred people as its cut off. So, you see that HP uses two thousand
and Magna uses two hundred.
(Refer Slide Time: 05:05)

So, Magna is made up of more than one hundred separate enterprises, each operates
under its own name and has exactly one factory. When a plant gets more work than it can
handle, Magna does not add to it rather it clones the facility and it starts a new operation.
Magna’s CEO believes small units encourage entrepreneurship and focus responsibility
squarely with the plant manager. Now, let us look at some special issues relating to
organizational size. In this section we address two issues related to size.

(Refer Slide Time: 05:48)

First is, as the number of operative personnel increases, what effect does it have on the
number of administrators and supporting staff? And the second, is organizational theory
applicable to small organizations also?
(Refer Slide Time: 06:12)

So, let us start with this administrative component debate. Most of us have heard of
Parkinson’s Law, partly written in jest and partly in truth. Parkinson declared that work
expands so as to fill the time available for its completion. He argued that in government
at least, there needs to be little or no relationship between the work to be done and the

size of the staff to which it may be assigned. 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. To prove his law, he trotted out figures on the British Royal Navy.
(Refer Slide Time: 06:57)

So, as shown in figure 15.1 between 1914 and 1928, the number of warships
commissioned declined by nearly 68 percent. Total personnel in the Navy declined by
approximately 32 percent, but that apparently had no bearing on the administrative staff,
whose purpose was to manage the ships and personnel. The number of onshore officials
and clerks rose by 40 percent over the fourteen year period, and the officer corp
increased by a startling 78 percent.
Now, this is what we are talking about. This is comparative data on the British Royal
Navy, that is from 1914 versus 1928.

(Refer Slide Time: 07:41)

So, ships in commission in 1914 are 62 while in 1928 they are 20. So, the percentage
decreases 67.74 percent. Similarly, total Navy personnel are 146000 in 1914 and 100000
in 1928 that is again a decrease of 31.5 percent.
Dockyard workers increased by 9.5 percent, dockyard officials and clerks, they also
increased by 40 percent, while admiralty officers they increased by 78 percent. So,
Parkinson’s insight initiated a wealth of research into what is now referred to as the
administrative component.
(Refer Slide Time: 08:34)

It has been stated in fact, that probably more studies have been conducted on the
relationship between organizational size and the administrative component, then on any
other aspect of organization structure. But, what exactly does this term administrative
component means?
(Refer Slide Time: 08:54)

As with so many concepts to which you have been introduced in this course, the
administrative component has no universally agreed upon definition. For example, it may
include the ratio between managers and employees, the proportion of line managers and
their support staff to operating or production personnel; staff versus line with the staff
composing the administrative component and all the personnel in an organization who
engage in support activities. Although there is no general agreement on one of these
definitions, we will use the last one.

(Refer Slide Time: 09:36)

It can be used in various types of organizations and attempts to identify administrative
overhead. Thus, custodial workers, some drivers, cafeteria employees, clerical help and
so on are included in the administrative component. Regardless of whether they are
directly employed in staff or general administrative divisions.
(Refer Slide Time: 10:00)

These persons who contribute indirectly to the attainment of the organization’s goals,
whether operative or managers become part of the administrative component. This then

is our working definition. However, keep in mind that researchers have used various
definitions, and that may explain some of the diversity in the findings we will report.
Now, within this administrative component debate, we are now talking about the positive
correlation argument. So, Parkinson’s theory says basically that there would be a positive
relationship between organizational size and the administrative component.
(Refer Slide Time: 10:46)

As organizations increase in size, the relative size of the administrative component
would increase disproportionately. Can this relationship be defended intuitively? The
basic explanation would be that administrators and staffs are responsible for providing
coordination.

(Refer Slide Time: 11:04)

Also, coordination becomes increasingly difficult as more employees who contribute
directly to the organization’s goals are added. Hence, the administrative component can
be expected to increase out of proportion to increase in size. Some studies support this
positive relationship. But, there are far more studies showing the size administrative
component relationship to be either negative or curvilinear.
(Refer Slide Time: 11:37)

Till now, we were talking about the positive correlation argument now we will talk about
the negative correlation argument. Exclusive to any empirical data, it seems more
reasonable to expect the administrative component to decline as size increases.
We are not arguing that the absolute number of supportive personnel would decline, but
rather that it should decline as a proportion as size increases. This conclusion is based on
the assumptions of efficiencies from economies of scale.
(Refer Slide Time: 12:14)

As organizations expand, they of course require more managers and staff to facilitate
coordination but not in the same proportion as size increases. A manufacturing firm that
does dollar 5 million a year in sales and employs sixty people may require the services of
a full time purchasing agent. If sales doubled, it is unlikely that the firm would need two
purchasing agents.

(Refer Slide Time: 12:44)

Similarly, a typical hospital can increase its patient load by 10 percent with little or no
addition of accounting personnel, dieticians and the like. Both examples illustrate
economies of scale that suggest that as an organization grows, there should be decrease
in the proportion of personnel allocated to indirect activities. The logic of this argument
has received substantial empirical support.
(Refer Slide Time: 13:15)

A study of veteran’s administration hospitals found the administrative component to
decrease as the organizations increased in size. And investigation of five sets of

organizations including package delivery services, automobile dealerships, volunteer fire
companies, labour union locals and political associations also found a negative
relationship. In each of the sets of the organization as the size of the organizations
increased the administrative component declined.
(Refer Slide Time: 13:50)

Census information by industry was used by another investigator to test the size
administrative component relationship. When a negative relationship was found, it was
concluded that this would be explained better as due to the loss of control across
hierarchical levels, than to economies of scales with large sizes.

(Refer Slide Time: 14:26)

Moreover, owner-managed organizations and partnerships, were found to be less likely
to add administrators than incorporated firms were because to do so, would result in
dilution of the owners’ personal power.
So, while this research confirms the negative correlation, it suggests that maintenance of
the control may be primary motivator for owners of firms to keep the numbers of
administrators and support staff in check as the size of the organization increases.
(Refer Slide Time: 14:49)

Now, let us look at the curvilinear argument. There is also evidence to suggest that the
size administrative component relationship is not linear. Rather, it is curvilinear that is,
the administrative component is greater for a smaller and larger organizations than for
those of moderate size.
As organizations move out of the small category, they enjoy the benefits from economies
of scale. But, as they become large they lose these benefits and become so complex as to
require significant increases in the administrative component to facilitate coordination
and control.
(Refer Slide Time: 15:40)

Now, to conclude this administrative component debate trying to draw practical
conclusions from the research on the administrative component may be impossible. No
consistent patterns emerge.
Whether this is due to the fact that any relationship found between size and the
administrative component is purely spurious or due to inconsistencies, in the way that the
administrative component is measured can be answered only through more research. It is
possible for example, that the dominant determinant of the administrative component is
not size at all.

(Refer Slide Time: 16:23)

Arguments have been made that better predictors include, complexity, technology and
environment, and whether the organization is declining or growing. On this last
determinant, for instance, several investigations have found that the process of decline in
organizations does not have the opposite effect on the administrative component as does
growth.
(Refer Slide Time: 16:46)

The administrative component tends to increase on the up swings, but the decreases on
the down swings are not as great, suggesting that management may be reluctant to let
members of the administrative component go during the periods of decline.
(Refer Slide Time: 17:04)

So, where does all this leave us? First, there are economies of scales operating to reduce
the relative size of the administrative component as the organization’s size increases. But
these economies do not exist regardless of the increase in size. At some point, that
diseconomies of size offset the economies, and more support staff is required to
coordinate the organization’s activities.
Just, where this “point” is, however, is unclear. It undoubtedly varies by industry or type
of organization, reflecting different technologies and environments. Second, size is not
the only factor that influences the administrative component.

(Refer Slide Time: 17:55)

Other factors undoubtedly include the type of organizations, environment and
technology, complexity, and whether the organization is undergoing growth or decline.
(Refer Slide Time: 18:11)

Finally, maybe Parkinson was right given the “animal” he chose to observe, the British
Royal Navy. The navy was probably operating in the diseconomy zone, where increases
in size were accompanied by; comparable or large increases in the administrative
component.

Also, government employees in organizations such as the military and public-school
systems, have little motivation to keep the administrative component in check as we
might expect in owner dominated business firms.
(Refer Slide Time: 18:57)

Maybe what Parkinson discovered is that in the absence of direct performance measures,
managers build empires. However, Parkinson’s observation is undoubtedly not a law.
Rather, he has given us an accurate description of what occurs under certain specific
conditions.
(Refer Slide Time: 19:15)

Now, let us look at some special issues relating to organization size. And, now we are
talking about the relationship of organization theory and small businesses. We live in a
society which is dominated by large organizations. There might be huge number of small
organizations operating at present, but they employ only a meagre size of the available
workforce.
In contrast, organizations with thousand or more employees may not be many in
numbers, but they employ nearly 25 percent of the entire workforce. Hence, there may be
a greater number of small organizations; large organizations have the greatest impact on
our society. These considerations have not been lost on those who study organization
theory.
(Refer Slide Time: 20:14)

Studies are made up almost exclusively of medium sized and large organizations, those
with hundreds of employees or more. Even textbook authors fall prey to this bias. Does
the organization theory being described in this course have any application to those who
manage or expect to manage a small business? The answer is a resounding Yes. The
right structural design is critical if a small business is to succeed.

(Refer Slide Time: 20:49)

An important point; however, is that small businesses face different problems than large
organizations. Therefore, we would expect a different priority to be assigned to
organization theory issues by their small business managers.
(Refer Slide Time: 21:05)

Now, let us talk about the issue of reduced importance. All the structural variables take
on lesser importance to the small business managers because the range of variation in
small businesses is typically limited.

Small businesses tend to have a minimal degree of horizontal, vertical, and spatial
differentiation; and most are categorized by low formalization and high centralization.
There is less internal specialization.
(Refer Slide Time: 21:42)

When a specialized expertise is needed, it is typically purchased from outside. For
instance, instead of having full time accountants and lawyers on staff, these services can
be sought as and when they are needed. Vertical differentiation in the small businesses is
usually low for the obvious reasons that these structures tend to be flat.
Similarly, spatial differentiation is usually low because small businesses do not spread
their activities widely. Even separate units, such as in a chain of a small, retail, women’s
wear stores, tend to be geographically close in most small businesses.

(Refer Slide Time: 22:30)

You will also find little formalization in small businesses. The small business managers
achieve control, but not usually through high formalization. Some of that control is
achieved by holding on to the decision-making machinery that is, you can expect most
small businesses to be characterized by centralized decision making.
(Refer Slide Time: 22:53)

In addition to these structural issues, there are many concerns that take on reduced
importance in small business organizations. These include stimulating innovation
managing conflict, and changing the organization’s culture. The topic of stimulating

innovation has reduced importance to small businesses. The concern of organization
theorist with innovation is largely a response to the constraints, that high complexity and
formalization impose on an organization’s creative juices.
(Refer Slide Time: 23:28)

These constraints do not exist in most small businesses. Managing conflict should be of
lesser importance for the small business managers because small size:
(Refer Slide Time: 23:48)

1 facilitates communication, 2 allows for all members to have a clear sense of the
organization’s mission and 3 reduces the likelihood of goal incompatibility. Finally,

organization culture presents less of a problem for small businesses. Small organizations
tend to be young in age.
(Refer Slide Time: 24:18)

As a result, they have less sense of history and fewer traditions. Because, their cultures
are younger and less entrenched, they are less likely to require change. When change is
required, it is easier to implement. So, till now we were talking about issues of reduced
importance. Now, we will talk about issues of increased importance.
(Refer Slide Time: 24:46)

The OT issues that take on greater importance for small businesses include control and
accountability, efficiency, and environmental dependence. The small business owner is
often willing to settle for lesser monetary reward, in return for personal control and
accountability.
(Refer Slide Time: 25:05)

In place of formalization, he tends to control through direct supervision and observation.
Small-business managers are strong advocates of “management by walking around”.
(Refer Slide Time: 25:19)

Achieving high efficiency is typically more important in small businesses than in large
for the simple reason that large organization have more slack resources. Slack resources
act as shock absorbers to reduce the impact of mistakes. In fact, the fact that small
organizations have less tolerance for inefficiency, than established large organizations,
do place an increased importance on ensuring that the right structural design is chosen.
(Refer Slide Time: 25:56)

Therefore, the structural design problem may be more critical to the small business
managers. Last, we suggest that the environment that confronts the small business is
often very different from the one facing its large counterpart.
The larger an organization is, the more it is able to use its power to control its
environment and reduce its dependence on such constituencies as suppliers, competitors,
and financial sources. Small businesses rarely have much influence over their
environment.

(Refer Slide Time: 26:43)

This place is an increased importance on the organization’s environment monitoring
system. The effective small business must have a structural design that facilitates rapid
and accurate assessment of its environment and allows for this information to be acted
upon promptly.
(Refer Slide Time: 27:03)

To conclude, small businesses are different from their larger counterparts. They have
different concerns and priorities. Some issues discussed in this course, have limited
relevance to the small organizations while others take on much greater importance.

In addition to the different OT agenda that small businesses have, we have argued that
their managers have a more limited set of structural options. If there is any message in
this section, it may be for the small business managers to guard against what can be
called General motorists.
(Refer Slide Time: 27:49)

It is the desire to build a complex and sophisticated organization design, regardless of
whether it is appropriate. The small business has unique problems that require unique
structural solutions. The appropriate structural design for a small business is not merely a
scaled-down version of the design used by its industry’s giants.

(Refer Slide Time: 28:15)

So, to conclude this module, we had discussed relationship between organization size
and the administrative component. Then, we defined the administrative component as all
the personnel in an organization who engage in supportive activities.
Next, we concluded that the relationship between size and the administrative component
is curvilinear, and that other factors, the type of organization, environment and
technology, complexity, and whether the organization is growing or declining in size in
addition to size influence the administrative component. Finally, we noted that OT is
based on studies made up almost exclusively of medium sized and large organizations.

(Refer Slide Time: 29:09)

However, small businesses face different problems and have a different priority in terms
of importance of OT concepts. In addition to the fact that small businesses have a
different OT agenda, their managers have a more limited set of structural options.
(Refer Slide Time: 29:31)

And, these are the four books from which material for this module was taken.
Thank you.