What is Formal/Informal, Delegation, Decentralisation & Exercises in Class 12 Business Studies NCERT?

Interactive NCERT Class 12 Business Studies lesson on Formal/Informal, Delegation, Decentralisation & Exercises

Differentiate delegation from decentralisation in one line.

Delegation is between two persons; decentralisation is across the whole organisation.

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Formal/Informal, Delegation, Decentralisation & Exercises

🎓 Class 12 Social Science CBSE Theory Chapter 5 — Organising ⏱ ~28 min

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5.13 Formal and Informal Organisation

In all organisations, employees are guided by rules and procedures. To enable smooth functioning of the enterprise, job descriptions and rules and procedures related to work have to be laid down. This is done through the formal organisation^?. But human beings, when they work together, also build relationships that go beyond such written rules — these spontaneous personal networks form the informal organisation^?. Both are present in every enterprise.

Formal Organisation — Meaning & Features

Formal organisation refers to the organisation structure which is designed by the management to accomplish a particular task. It specifies clearly the boundaries of authority and responsibility and there is a systematic coordination among the various activities to achieve organisational goals. The structure may be functional or divisional (covered in Part 2). Its features are:

① Specifies relationships

It specifies relationships among various job positions and the nature of their inter-relationship — clarifying who has to report to whom.

② Means to achieve objectives

It is a means to achieve the objectives specified in the plans, by laying down rules and procedures essential for their achievement.

③ Coordinates departments

Efforts of various departments are coordinated, interlinked and integrated through the formal organisation.

④ Deliberately designed

It is deliberately designed by top management to facilitate smooth functioning of the organisation.

⑤ Work over relationships

It places more emphasis on the work to be performed than on interpersonal relationships among employees.

📜 Definitions of Formal Organisation

"The formal organisation is a system of well-defined jobs, each bearing a definite measure of authority, responsibility and accountability." — Louis Allen · "Formal organisation is a system of consciously coordinated activities of two or more persons toward a common objective." — Chester Barnard

— NCERT, Class 12 Business Studies (Part I)

✅ Advantages of Formal Organisation

Easier to fix responsibility — mutual relationships are clearly defined.
No ambiguity in roles — duties are specified, avoiding duplication of effort.
Unity of command — maintained through an established chain of command.
Effective accomplishment of goals — provides a framework for operations and ensures each employee knows his role.
Stability — behaviour is predictable since specific rules guide employees.

❌ Limitations of Formal Organisation

Procedural delays — formal communication must follow the chain of command, increasing decision-making time.
Inadequate recognition of creativity — rigid policies do not allow deviation, so creative talent may be ignored.
Incomplete picture — emphasis on structure and work means human relationships are not fully captured; the formal organisation alone does not show how the organisation actually works.

Informal Organisation — Meaning & Features

Interaction among people at work gives rise to a "network of social relationships among employees" called the informal organisation. It emerges from within the formal organisation when people interact beyond their officially defined roles. With frequent contact, people cannot be forced into a rigid structure — they form groups based on shared interest. Examples in NCERT include those who play cricket on Sundays, meet for coffee in the cafeteria, or share interest in dramatics. The informal organisation has no written rules, is fluid in form and scope, and has no fixed lines of communication.

① Originates inside the formal

Originates from within the formal organisation as a result of personal interaction among employees.

② Group norms over rules

Standards of behaviour evolve from group norms rather than from officially laid-down rules and regulations.

③ Independent communication

Independent communication channels are developed by group members without specified direction of flow.

④ Spontaneous, not designed

It emerges spontaneously and is not deliberately created by the management.

⑤ No definite structure

It has no definite structure or form because it is a complex network of social relationships among members.

📜 Definitions of Informal Organisation

"An informal organisation is an aggregate of interpersonal relationships without any conscious purpose but which may contribute to joint results." — Chester Barnard · "Informal organisation is a network of personal and social relations not established or required by the formal organisation but arising spontaneously as people associate with one another." — Keith Davis

— NCERT, Class 12 Business Studies (Part I)

✅ Advantages of Informal Organisation

Faster spread of information & quick feedback — prescribed lines of communication are not required.
Fulfils social needs — members find like-minded people, raising job satisfaction and a sense of belongingness.
Compensates for inadequacies of formal organisation — for instance, employee reactions to plans and policies can be tested through the informal network.

❌ Disadvantages of Informal Organisation

Spreads rumours — can become a destructive force against the interests of the formal organisation.
Resists change — if it opposes change, management may be unable to implement reforms; this can delay or restrict growth.
Pressure to conform — pressurises members to follow group expectations, which can harm the organisation if group norms are against organisational interests.

Comparative View — Formal vs Informal

Table 5.2 — Formal vs Informal Organisation (NCERT)
Basis	Formal Organisation	Informal Organisation
Meaning	Structure of authority relationships created by the management.	Network of social relationships arising out of interaction among employees.
Origin	Arises as a result of company rules and policies.	Arises as a result of social interaction.
Authority	Arises by virtue of position in management.	Arises out of personal qualities.
Behaviour	Directed by rules.	No set behaviour pattern.
Flow of communication	Through the scalar chain.	Not through a planned route — can take place in any direction.
Nature	Rigid.	Flexible.
Leadership	Managers are leaders.	Leaders may or may not be managers — they are chosen by the group.

🎯 Managerial Take-away

NCERT advises that informal organisation cannot be eliminated. It is in the best interest of the enterprise to recognise these groups, identify the roles their members play and tap their knowledge. Such groups can be useful communication channels and a source of support; instead of confronting them, management should skilfully use both formal and informal organisations together.

5.14 Delegation of Authority

A manager, no matter how capable he is, cannot manage to do every task on his own. The volume of work makes it impractical for him to handle everything personally. As a consequence, if he wants to meet organisational goals, focus on objectives and ensure all work is accomplished, he must delegate authority. Delegation^? refers to the downward transfer of authority from a superior to a subordinate.

Delegation is a pre-requisite to efficient functioning because it enables a manager to use his time on high-priority activities. It also satisfies the subordinate's need for recognition and provides opportunities to develop and exercise initiative. Without it, a manager's activities would be restricted to only what he himself can do.

⚠️ Delegation ≠ Abdication

Delegation does not mean abdication. The manager remains accountable for the performance of the assigned tasks. Authority granted to a subordinate can be taken back and re-delegated to another person. Irrespective of the extent of delegated authority, the manager shall still be accountable to the same extent as before delegation.

📜 Definitions of Delegation

"Delegation is the process a manager follows in dividing the work assigned to him so that he performs that part which only he, because of his unique organisational placement, can perform effectively, and so that he can get others to help with what remains." — Louis Allen · "Delegation of authority merely means the granting of authority to subordinates to operate within prescribed limits." — Theo Haimann

Elements of Delegation

According to Louis Allen, delegation is the entrustment of responsibility and authority to another and the creation of accountability for performance. A detailed analysis brings out three essential elements.

(i) Authority

Authority^? refers to the right of an individual to command his subordinates and to take action within the scope of his position. The concept arises from the established scalar chain^? which links the various job positions and levels of an organisation. Authority also refers to the right to take decisions inherent in a managerial position. In a formal organisation, authority originates by virtue of an individual's position; the extent of authority is highest at top management and reduces successively as we go down the corporate ladder. Thus, authority flows from top to bottom. Authority is restricted by laws and the rules and regulations of the organisation, but its scope increases as we go higher up the management hierarchy.

(ii) Responsibility

Responsibility^? is the obligation of a subordinate to properly perform the assigned duty. It arises from a superior–subordinate relationship because the subordinate is bound to perform the duty assigned to him. Thus, responsibility flows upwards. NCERT emphasises a critical balance: when an employee is given responsibility for a job he must also be given the degree of authority necessary to carry it out. Authority granted must be commensurate with the responsibility assigned. If authority is more than responsibility, it may lead to misuse; if responsibility is more than authority, the person becomes ineffective.

(iii) Accountability

Delegation undoubtedly empowers an employee to act for his superior, but the superior remains accountable for the outcome. Accountability^? implies being answerable for the final outcome. Once authority has been delegated and responsibility accepted, one cannot deny accountability. It cannot be delegated and flows upwards. It is generally enforced through regular feedback. The subordinate is expected to explain the consequences of his actions or omissions.

🧠 Memory Triplet

While authority is delegated, responsibility is assumed, and accountability is imposed. Responsibility is derived from authority, and accountability is derived from responsibility.

Table 5.3 — Overview of the Three Elements of Delegation (NCERT)
Basis	Authority	Responsibility	Accountability
Meaning	Right to command.	Obligation to perform an assigned task.	Answerability for outcome of the assigned task.
Delegation	Can be delegated.	Cannot be entirely delegated.	Cannot be delegated at all.
Origin	Arises from formal position.	Arises from delegated authority.	Arises from responsibility.
Flow	Flows downward — superior to subordinate.	Flows upward — subordinate to superior.	Flows upward — subordinate to superior.

Importance of Delegation

① Effective management

Empowering employees lets managers function more efficiently — they get more time to focus on important matters and explore new areas.

② Employee development

Employees get more opportunities to use their talent; latent abilities surface; complex tasks become manageable; future managers are prepared.

③ Motivation of employees

Sharing work involves trust and commitment. Responsibility builds self-esteem and confidence, encouraging better performance.

④ Facilitation of growth

Delegation creates a ready workforce for new ventures — trained employees can replicate the work ethos in newly set up branches.

⑤ Basis of management hierarchy

Delegation establishes superior–subordinate relationships, the basis of hierarchy. The degree and flow of authority decide who reports to whom.

⑥ Better coordination

Authority, responsibility and accountability help define powers, duties and answerability — avoiding overlap and duplication of effort.

5.15 Decentralisation

In many organisations, the top management plays an active role in taking all decisions; in others, this power is shared with lower levels. Organisations where decision-making authority lies with top management are centralised; those where it is shared with lower levels are decentralised.

Decentralisation^? explains the manner in which decision-making responsibilities are divided among hierarchical levels. Put simply, decentralisation refers to delegation of authority throughout all the levels of the organisation. Decision-making authority is shared with lower levels and consequently placed nearest to the points of action — pushing decision-making down the chain of command. When decisions taken at lower levels are numerous and important, an organisation can be regarded as greatly decentralised.

📜 Definitions of Decentralisation

"Decentralisation refers to systematic effort to delegate to the lowest level all authority except that which can be exercised at central points." — Louis Allen · "Everything which goes to increase the importance of a subordinate's role is decentralisation, everything that goes to reduce it is centralisation." — Henri Fayol

Centralisation and Decentralisation — A Continuum

Centralisation and decentralisation are relative terms. An organisation is centralised when decision-making authority is retained by higher management levels; it is decentralised when such authority is delegated. Complete centralisation would imply concentration of all decision-making at the apex — eliminating the need for a hierarchy. Complete decentralisation would mean delegating all decision-making functions to the lowest level — eliminating the need for higher managerial positions. Both scenarios are unrealistic. NCERT concludes: every organisation will be characterised by both centralisation and decentralisation.

Importance of Decentralisation

① Develops initiative

Promotes self-reliance and confidence among subordinates; they learn to depend on their own judgement, and a decentralisation policy identifies executives with leadership potential.

② Develops managerial talent

Formal training equips subordinates, but experience gained from handling assignments independently is equally important. Creates a reservoir of qualified manpower for future promotions.

③ Quick decision making

Decisions are taken at levels nearest to the points of action — fewer levels to traverse, less information distortion, faster response to dynamic operating conditions.

④ Relief to top management

Reduces direct supervision; personal supervision is replaced by other forms of control such as return on investment. Top management can focus on policy rather than operations.

⑤ Facilitates growth

Awards greater autonomy to lower levels and divisional heads; fosters competition among departments; productivity rises and the organisation generates more returns for expansion.

⑥ Better control

Performance can be evaluated at each level; departments can be held individually accountable. Decentralisation compels innovation in performance measurement (e.g. balanced scorecard, MIS).

⚠️ Caution from NCERT

Decentralisation should be applied with caution — it can lead to organisational disintegration if departments start operating on their own guidelines contrary to the interest of the organisation. Decentralisation must always be balanced with centralisation in areas of major policy decisions.

Centralisation vs Decentralisation — Comparison

Table 5.4 — Delegation vs Decentralisation (NCERT)
Basis	Delegation	Decentralisation
Nature	Compulsory act — no individual can perform all tasks alone.	Optional policy decision — done at the discretion of top management.
Freedom of action	More control by superiors, hence less freedom to take own decisions.	Less control over executives, hence greater freedom of action.
Status	A process followed to share tasks.	Result of the policy decision of the top management.
Scope	Narrow — limited to a superior and his immediate subordinate.	Wide — implies extension of delegation to the lowest level of management.
Purpose	To lessen the burden of the manager.	To increase the role of subordinates by giving them more autonomy.

5.16 Conclusion — Structure Should Follow Strategy

Business operates in a dynamic environment, and enterprises which fail to adapt to change cannot survive. Management must continuously review its plans and objectives and the organisation structure should also be subjected to periodic review to determine if modification is required. An organisation structure should always contribute towards achievement of the enterprise's objectives and provide scope for initiative so that the contribution of personnel can be maximum and effective.

The Wipro story that opened this chapter is a textbook illustration: planning identified the global ambition; organising redesigned subsidiaries by product line; delegation and de-layering empowered business leaders; decentralisation pushed growth responsibility to each entity. Together these decisions translated a strategic plan into a working enterprise capable of competing globally.

Activity 5.7 — Think About It (NCERT)

If you were a manager, would you decentralise, knowing that it would mean dispersal of decision-making authority?

Yes — pros worth gaining: develops talent, speeds decisions, gives top management time for policy, fosters initiative, supports growth, improves control through better performance systems.
But with caution: retain centralised control over major policy areas — investments, brand, ethics, capital allocation — to prevent organisational disintegration.
Hybrid recommendation: Delegate operational decisions widely; centralise strategic decisions; introduce performance dashboards (like balanced scorecard) so accountability survives in the absence of direct supervision.

Activity 5.8 — Source: Decentralisation at Johnson & Johnson

NCERT presents a McNeil/Johnson & Johnson mini-case. Instead of operating as one large multi-billion-dollar corporation, Johnson & Johnson is operated as 190 smaller companies, each focused on a specific medical or product franchise and/or geographic area, with each affiliate generating multiple options for growth. What does this teach about decentralisation?

Combines big with small: "We combine the advantages of being big with the agility and focus of smaller firms."
Customer proximity: Decentralisation enables each company to stay close to its customers.
Short communication lines: with both customers and employees.
Talent acceleration: accelerates the development of talent — exactly NCERT's point on managerial development.
Lesson: Decentralisation is not merely transfer of authority — it is a philosophy that recognises the decision-maker's need for autonomy.

5.17 NCERT Exercises — Full Model Answers

📌 Very Short Answer Type

Q1. Identify the network of social relationships which arises spontaneously due to interaction at work.

Answer: Informal organisation. It is a network of personal and social relationships not established or required by the formal organisation but arising spontaneously as people associate with one another (Keith Davis).

Q2. What does the term "Span of Management" refer to?

Answer: Span of management refers to the number of subordinates that can be effectively managed by a superior. It determines the levels of management in the organisation structure — a narrow span gives a tall structure, a wide span gives a flat structure.

Q3. State any two circumstances under which the functional structure will prove to be an appropriate choice.

Answer: (i) When the organisation is large in size with diversified activities. (ii) When operations require a high degree of specialisation and the firm produces a single or limited range of related products.

Q4. Draw a diagram depicting a functional structure.

Answer: The diagram shows the Managing Director at the top, with five major functional departments reporting directly: Production, Marketing, Finance, Human Resources and Research & Development. Each function may be further divided into sections (sub-units). All departments report to one coordinating head — typically the MD. (See the SVG functional-structure organogram in Part 2 of this chapter for the visual.)

Q5. A company has its registered office in Delhi, manufacturing unit at Gurgaon and marketing-and-sales department at Faridabad. The company manufactures consumer products. Which type of organisational structure should it adopt to achieve its target?

Answer: The company should adopt a functional structure. The activities are clearly grouped by similar function — registered office (administration), Gurgaon (manufacturing/production), Faridabad (marketing & sales) — and these are different functions of one consumer-products business. A functional structure will offer specialisation, control within each function, lower duplication, easier training and due attention to each function. Since the firm produces consumer products without diversification into multiple unrelated lines, a divisional structure is unnecessary at this stage.

📌 Short Answer Type

Q1. What are the steps in the process of organising?

Answer: The process consists of: (i) Identification and Division of Work — work is identified and split into manageable activities to avoid duplication; (ii) Departmentalisation — similar activities are grouped together using bases such as territory or products; (iii) Assignment of Duties — jobs are allocated to individuals based on a match with their skills and competencies; (iv) Establishing Authority and Reporting Relationships — each individual is told who he reports to and is accountable to, creating a hierarchical structure; (v) Coordination — clear reporting relationships help coordinate departments and integrate effort.

Q2. Discuss the elements of delegation.

Answer: Delegation has three essential elements. (i) Authority — the right of an individual to command subordinates and take action within the scope of his position; arises from formal position; flows downward. (ii) Responsibility — the obligation of a subordinate to properly perform an assigned duty; arises from delegated authority; flows upward; cannot be entirely delegated. (iii) Accountability — answerability for the final outcome; arises from responsibility; flows upward; cannot be delegated at all. NCERT summarises: authority is delegated, responsibility is assumed, accountability is imposed. For effective delegation, authority granted must be commensurate with responsibility assigned.

Q3. How does informal organisation support the formal organisation?

Answer: Informal organisation supports the formal in three principal ways: (i) Faster information flow and quick feedback — prescribed lines of communication are bypassed, so news spreads quickly through the social network; (ii) Fulfilment of social needs — members find like-minded colleagues, raising job satisfaction and a sense of belongingness; (iii) Compensates for inadequacies of formal organisation — for example, the management can test employee reactions to plans and policies through the informal network. Wise managers do not try to eliminate the informal organisation; they recognise it and use it as a support to the formal structure.

Q4. Can a large-sized organisation be totally centralised or decentralised? Give your opinion.

Answer: No. NCERT is explicit: an organisation can never be completely centralised or decentralised. Complete centralisation would concentrate all decision-making at the apex and obviate the need for any management hierarchy — unrealistic in a large firm where subordinates must exercise some judgement. Complete decentralisation would push all decisions down and obviate the need for higher managerial positions — equally unrealistic, since major policy decisions, capital allocation and strategy must be retained centrally to avoid organisational disintegration. As a firm grows in size and complexity, there is a tendency to move toward decentralised decision-making (because operating personnel know operations better) — but a balance with centralised policy control is always required. Hence every large organisation is characterised by both centralisation and decentralisation.

Q5. Decentralisation is extending delegation to the lowest level. Comment.

Answer: The statement is essentially correct, with one important addition. Delegation is the downward transfer of authority from one superior to one subordinate — it has narrow scope. Decentralisation is the systematic, organisation-wide effort to push decision-making authority down through every level of the management hierarchy. In Louis Allen's words: "Decentralisation refers to systematic effort to delegate to the lowest level all authority except that which can be exercised at central points." Therefore, decentralisation is delegation extended (i) to all levels, not just one; (ii) as a policy decision of top management, not as a one-off act; (iii) with the express purpose of giving subordinates greater autonomy. The qualifier is that some authority on major policy must always be retained at the centre to prevent disintegration.

Q6. Neha runs a factory wherein she manufactures shoes. The business has been doing well and she intends to expand by diversifying into leather bags as well as western formal wear, thereby making her company a complete provider of corporate wear. This will enable her to market her business unit as the one stop for working women. Which type of structure would you recommend for her expanded organisation and why?

Answer: Recommend a divisional structure with three divisions — Footwear (shoes), Leather Goods (bags) and Apparel (western formal wear) — each headed by a divisional manager who acts as a profit-centre head reporting to Neha as MD. Reasons: (i) Product specialisation — each product line has different production processes, suppliers and customer expectations, demanding divisional expertise; (ii) Accountability — revenues and costs of each division can be identified separately, so performance is measurable and remedial action targeted; (iii) Flexibility & faster decisions — each division operates as an autonomous unit, fitting the dynamic fashion-and-corporate-wear market; (iv) Easy expansion — if Neha later adds, say, women's accessories, she can plug in another division without disrupting existing ones. The trade-off (some duplication and higher cost) is justified by the diversity of product lines.

Q7. The production manager asked the foreman to achieve a target production of 200 units per day, but he doesn't give him the authority to requisition tools and materials from the stores department. Can the production manager blame the foreman if he is not able to achieve the desired target? Give reasons.

Answer: No, the production manager cannot blame the foreman. NCERT lays down a fundamental principle of delegation: authority granted must be commensurate with the responsibility assigned. The foreman has been given a clear responsibility — produce 200 units a day — but has not been given the corresponding authority to draw tools and materials from stores. With responsibility larger than authority, the foreman becomes ineffective; he cannot perform an obligation for which he lacks the means. The fault lies with the production manager who delegated responsibility without delegating commensurate authority. Furthermore, accountability for the outcome remains with the manager — he cannot escape it by blaming the subordinate. The corrective action is to grant the foreman explicit authority to requisition stores up to a defined limit.

📌 Long Answer Type

Q1. Why is delegation considered essential for effective organising?

Answer: Delegation is essential for effective organising for six NCERT reasons. (i) Effective management — by empowering employees, managers function more efficiently and concentrate on important matters; freedom from routine work creates space to excel in new areas. (ii) Employee development — subordinates get opportunities to use their talent, develop latent abilities, perform complex tasks and take on responsibilities that improve career prospects, becoming better leaders and decision-makers. (iii) Motivation — entrusting work involves trust on the superior's part and commitment by the subordinate; responsibility builds self-esteem and improves confidence. (iv) Facilitation of growth — delegation creates a ready workforce for new ventures and replicates work ethos in newly set-up branches. (v) Basis of management hierarchy — establishes superior–subordinate relationships, the very basis of hierarchy; degree and flow of authority decide who reports to whom and how much power each position carries. (vi) Better coordination — the three elements (authority, responsibility, accountability) define powers, duties and answerability, avoiding overlap and duplication of effort. Together, these benefits make delegation a key element of effective organising.

Q2. What is a divisional structure? Discuss its advantages and limitations.

Answer: A divisional structure comprises separate business units or divisions, each headed by a divisional manager responsible for performance and holding authority over the unit. Manpower is grouped on the basis of different products, projects or regions. Each division is multifunctional — production, marketing, finance, purchase etc. are all performed within the division — and each division is self-contained, working as a profit centre with the divisional head responsible for profit or loss. Example: a large company may have divisions such as cosmetics, garments, footwear and skincare. Advantages: (a) Product specialisation — develops varied skills in the divisional head and prepares him for higher positions; (b) Accountability for profits — revenues and costs are easily identified and assigned, providing a proper basis for performance measurement and remedial action; (c) Flexibility and initiative — each division functions as an autonomous unit, leading to faster decision-making; (d) Facilitates expansion and growth — new divisions can be added without interrupting existing operations, by adding a divisional head and staff. Limitations: (a) Conflict among divisions over allocation of funds; a particular division may seek to maximise its profit at the cost of others; (b) Increased costs due to duplication of activities — providing each division with its own set of similar functions raises expenditure; (c) Ignoring company-wide interests — managers with authority over a whole division may, in the course of time, gain power and assert independence at the cost of organisational interests.

Q3. Decentralisation is an optional policy. Explain why an organisation would choose to be decentralised.

Answer: Decentralisation is optional because, unlike delegation (which is compulsory because no individual can perform every task), it is a deliberate top-management choice about how widely to disperse decision-making authority. An organisation chooses decentralisation for six reasons set out by NCERT. (i) Develops initiative among subordinates — when given freedom to take their own decisions, lower managers learn self-reliance, depend on their judgement, are challenged to find solutions, and the policy identifies executives with leadership potential. (ii) Develops managerial talent for the future — decentralisation gives subordinates a chance to handle assignments independently, creating a reservoir of qualified manpower for promotions and identifying those unable to assume greater responsibility. (iii) Quick decision making — decisions taken at levels nearest to the points of action travel through fewer levels, suffer less distortion and respond faster to dynamic conditions. (iv) Relief to top management — diminishes direct supervision; top management gets time to focus on policy rather than operations; personal supervision is replaced by other forms of control such as ROI. (v) Facilitates growth — autonomy fosters competition among departments, raising productivity and generating returns for expansion. (vi) Better control — performance can be evaluated at each level and departments held individually accountable; decentralisation drives the adoption of innovative measurement systems like the balanced scorecard. NCERT cautions that decentralisation must be balanced with centralisation in major policy decisions to avoid organisational disintegration.

Q4. Distinguish between centralisation and decentralisation.

Answer: They are relative terms describing how decision-making authority is distributed. Centralisation means authority is retained by higher management levels — top management plays an active role in taking all decisions, with the chain of command kept tight. Decentralisation means authority is delegated systematically throughout the levels — decision-making power is shared with lower levels, placed nearest to points of action. Differences: (i) Authority — concentrated at the top vs dispersed across levels; (ii) Decision making — slow, traverses many levels vs faster, taken near points of action; (iii) Subordinate role — limited vs enhanced; (iv) Top management workload — heavy operational burden vs relief to focus on policy; (v) Initiative — limited vs encouraged; (vi) Control — through direct supervision vs through performance measurement systems; (vii) Suitability — small or simple firms vs large or growing firms; (viii) Risk — bottlenecks at the top vs disintegration if unchecked. Henri Fayol summarised: "Everything which goes to increase the importance of a subordinate's role is decentralisation; everything that goes to reduce it is centralisation." NCERT stresses that every organisation will be characterised by both, and management must choose the right balance.

Q5. How is a functional structure different from a divisional structure?

Answer: The differences are summarised in NCERT's comparative table. (i) Formation — Functional is based on functions; Divisional is based on product lines and supported by functions. (ii) Specialisation — Functional gives functional specialisation; Divisional gives product specialisation. (iii) Responsibility — Functional makes it difficult to fix responsibility on a department; Divisional makes responsibility easy to fix because each division is a profit centre. (iv) Managerial development — Functional makes it difficult, as each functional manager reports to top management with limited cross-functional exposure; Divisional makes it easier because autonomy plus the chance to perform multiple functions develops managers. (v) Cost — Functional avoids duplication, hence economical; Divisional duplicates resources across divisions, hence costly. (vi) Coordination — Functional is difficult for a multi-product company; Divisional is easy, because all functions for a particular product are integrated in one department. Suitability: Functional is best when the firm is large but operates with related products requiring specialisation; Divisional is best when the firm has multiple, distinct product lines. Wipro's restructuring (NCERT opening case) shifted from functional to divisional precisely because product-line diversity required separate, accountable, customer-oriented subsidiaries.

Q6. A company, which manufactures a popular brand of toys, has been enjoying good market reputation. It has a functional organisational structure with separate departments for Production, Marketing, Finance, Human Resources and Research and Development. Lately, to use its brand name and also to cash in on new business opportunities, it is thinking to diversify into manufacture of new range of electronic toys for which a new market is emerging. Which organisation structure should be adopted in this situation? Give concrete reasons with regard to benefits the company will derive from the steps it should take.

Answer: The company should move from its existing functional structure to a divisional structure, with two divisions — Traditional Toys and Electronic Toys — each headed by a divisional manager (profit-centre head) reporting to the MD. Within each division, the existing functions (Production, Marketing, Finance, HR, R&D) will be replicated to the extent required. Concrete benefits: (i) Product specialisation — the electronic-toys division will develop expertise in micro-electronics, software firmware and digital marketing, while the traditional-toys division retains expertise in moulding, assembly and FMCG-style retail; (ii) Accountability for profits — separate revenue and cost identification will allow the management to see whether the diversification gamble is paying off; (iii) Flexibility & faster decisions — electronic-toys markets evolve quickly (new chips, new battery technology, fast-changing consumer trends) and a divisional head can take rapid calls without crossing five functional silos; (iv) Easy expansion — once electronic toys succeed, sub-divisions (e.g. educational electronic toys, gaming devices) can be added by simply appointing new heads; (v) Use of brand name — both divisions share the parent brand but tailor messaging to their distinct customer base; (vi) Managerial development — divisional heads gain end-to-end experience, building a leadership pipeline. The trade-off (duplication of HR, finance functions across divisions) is justified by the diversity and growth potential of the new electronic-toys market.

Q7. A company manufacturing sewing machines, set up in 1945 by British promoters, follows a formal organisation culture in totality. It is facing problems of delays in decision making. As a result it is not able to adapt to changing business environment. The work force is also not motivated since they cannot vent their grievances except through formal channels, which involve red tape. Employee turnover is high. Its market share is also declining. You are to advise the company with regard to changes it should bring about in its organisation structure to overcome the problems. Give reasons in terms of benefits it will derive from the changes suggested.

Answer: The company is suffering because it has relied only on formal organisation. The recommended changes are two-fold. (A) Recognise and tap the informal organisation: instead of insisting that all communication and grievances flow only through formal channels, the management should encourage informal social interactions, identify natural group leaders, and use these networks as a fast feedback channel. Benefits: (i) faster spread of information and quicker feedback bypassing red tape; (ii) fulfilment of social needs raising motivation and reducing turnover; (iii) compensating for the inadequacies of the rigid formal structure (employees' reactions to policy changes can be tested informally before hard rules are issued). (B) Decentralise decision-making: shift from rigid centralisation to a more decentralised structure, delegating operational decisions to mid- and lower-level managers. Benefits: (i) Quick decisions — decisions taken nearer to points of action remove the delay caused by red tape; (ii) Initiative and motivation — subordinates feel trusted and gain self-esteem; (iii) Adaptation to change — faster response to a changing market environment will help arrest the decline in market share; (iv) Managerial development — a reservoir of trained managers will reduce dependence on top management; (v) Better control through performance measurement — turnover and productivity can be tracked at each level. The combined approach (recognising informal organisation + decentralisation) will reduce delays, improve motivation, lower turnover and help the company adapt and recapture market share.

Q8. A company X Limited manufacturing cosmetics, which has enjoyed a pre-eminent position in business, has grown in size. Its business was very good till 1991. But after that, the new liberalised environment has seen entry of many MNCs in the sector. With the result the market share of X Limited has declined. The company had followed a very centralised business model with directors and divisional heads making even minor decisions. Before 1991 this business model had served the company very well, but now the company is under pressure to reform. What organisation structure changes should the company bring about in order to retain its market share? How will the changes suggested by you help the firm? Keep in mind that the sector is FMCG.

Answer: X Limited needs two structural changes. (A) Move from centralisation to a decentralised structure: directors and divisional heads should stop taking minor decisions; operational authority must be pushed down to the level closest to the action — area managers, brand managers, regional sales heads. Benefits in an FMCG context: (i) Quick decisions — FMCG markets demand rapid response to MNC promotions, price wars and new product launches; speed at the point of action is critical; (ii) Develops initiative — empowered junior managers can experiment with local promotions and trade schemes; (iii) Develops managerial talent — competing with MNCs requires deeper management benches that decentralisation builds; (iv) Relief to top management — directors will be free to focus on strategy, brand, R&D and capital allocation rather than minor approvals; (v) Better control — adopt performance-based systems (ROI, market-share dashboards, balanced scorecard) so accountability survives without direct supervision. (B) Adopt a divisional structure — given that cosmetics is a multi-SKU, multi-segment FMCG sector (skincare, haircare, colour cosmetics), restructure into product divisions, each as a profit centre. Benefits: (i) Product specialisation against focused MNC entrants; (ii) Accountability for profits at division level so under-performing categories can be quickly fixed; (iii) Flexibility and faster decisions — essential when MNCs are launching new products quickly; (iv) Easy expansion into newer segments (e.g. wellness, men's grooming) by adding new divisions. Cautions: retain centralised control over brand identity, capital expenditure and R&D priorities to avoid disintegration; recognise the informal organisation to ease change-management.

5.18 Summary (NCERT)

📚 Chapter Summary

Organising is the process of defining and grouping activities and establishing authority relationships among them.
Process consists of: (a) identification and division of work; (b) departmentalisation; (c) assignment of duties; (d) establishing reporting relationships.
Importance: organising leads to division of work, clarity in reporting relationships, optimum utilisation of resources, growth, better administration and greater creativity.
Organisation structure is the framework within which managerial and operating tasks are performed; it can be functional or divisional.
Span of management is the number of subordinates under a superior.
Functional structure groups activities on the basis of functions. Advantages: specialisation, better control, managerial efficiency, ease of training. Disadvantages: functional empires, conflict of interest, inflexibility, restriction in managerial development.
Divisional structure groups activities on the basis of products. Advantages: integration, product specialisation, greater accountability, flexibility, better coordination, more initiative. Disadvantages: departmental conflicts, costly process, ignoring of organisational interests, increase in requirement of general managers.
Formal organisation is designed by management to achieve organisational goals. Advantages: fixation of responsibility, clarity of roles, unity of command, effective accomplishment of goals. Disadvantages: procedural delays, inadequate recognition of creativity, limited scope.
Informal organisation arises out of interaction among people at work. Advantages: speed, fulfilment of social needs, fills inadequacies of formal structure. Disadvantages: disruptive force, resistance to change, priority to group interests.
Delegation is the transfer of authority from superior to subordinate; three elements — authority, responsibility, accountability. It helps in effective management, employee development, motivation, growth and coordination.
Decentralisation is delegation of authority throughout the organisation. It helps in development of managerial talent, quick decisions, reducing burden on top management, development of initiative, growth and better control.

5.19 Key Terms

Organising

Organisational Structure

Departmentalisation

Delegation

Authority

Responsibility

Accountability

Functional Structure

Divisional Structure

Formal Organisation

Informal Organisation

Span of Management

Centralisation

Decentralisation

Scalar Chain

5.20 Indicative Visualisation — Centralised vs Decentralised Decision Mix

The chart below is an indicative pedagogical sample showing how the proportion of decisions taken at each managerial level shifts as a firm moves from centralised to decentralised mode. It is designed for classroom discussion only.

📝 Competency-Based Questions — Formal/Informal · Delegation · Decentralisation

Source-based scenario: Anita is the GM of a large mid-sized cosmetics firm. She is overworked because every minor decision — from a courier vendor change to a poster proof — comes to her desk. Employee turnover is high; staff complain that grievances must travel through five formal levels. The Cricket Sunday WhatsApp group of mid-managers has become a faster grapevine than any office circular. Anita has now decided to (i) formally delegate vendor and design approvals to her two department heads, and (ii) introduce divisional profit-centre accountability for the firm's three product lines.

Q1. The "Cricket Sunday WhatsApp group" that spreads news faster than office circulars is best described as:

L2 Understand

(a) A formal organisation with rigid rules
(b) An informal organisation arising from social interaction
(c) A divisional structure
(d) A scalar chain

Answer: (b) An informal organisation arising from social interaction — NCERT explicitly cites Sunday cricket players as an example of informal organisation. It is a network of personal/social relationships, fluid in form, with no fixed lines of communication.

Q2. Anita's move to "formally delegate vendor and design approvals" is delegation. Which of the three elements of delegation can she NOT pass on to her department heads?

L3 Apply

Answer: She cannot pass on accountability. Accountability arises from responsibility, flows upwards and cannot be delegated at all. Anita can grant authority and have responsibility assumed by the heads, but if a vendor scandal blows up, she is still answerable to the Board.

Q3. Critically evaluate: "By introducing divisional profit-centres AND decentralised approvals, Anita is using two unrelated tools." Defend or refute, using NCERT logic.

L5 Evaluate

Answer: Refute — the two tools are tightly linked. Decentralisation is the systematic delegation of authority across all levels of the organisation; divisional structure is the structural form that requires decentralisation to work, since each division must operate as an autonomous profit centre with its head making decisions for that division. NCERT positions divisional structures as natural homes for decentralised decision-making — autonomy, faster decisions and accountability for profits all assume that the divisional head has been given the authority to act. Anita's two moves are not "unrelated" — they are complementary halves of one solution: divisional structure + decentralised authority. Refuted.

Q4. (HOT) Design a 3-point safeguard plan for Anita to ensure her decentralisation does not lead to "organisational disintegration." Map each safeguard to a specific NCERT-mentioned risk.

L6 Create

Sample answer: (1) Reserve major policy decisions centrally — capital expenditure above ₹50 lakh, brand identity, R&D priorities, executive hiring (mitigates the NCERT risk that "departments start to operate on their own guidelines contrary to the interest of the organisation"). (2) Adopt a balanced-scorecard control system — replace personal supervision with monthly division-level scorecards covering financial, customer, process and learning metrics (mitigates the NCERT challenge that decentralisation creates an accountability gap). (3) Periodic structural review — review the divisional design every 18 months and recalibrate (mitigates the NCERT warning that structures must be subjected to periodic review to determine if modification is required and that fail-to-adapt firms cannot survive). Together, the three safeguards preserve the speed and initiative gains of decentralisation while preventing disintegration.

🔗 Assertion–Reason Questions (Class 12 Format)

Options: (A) Both A & R true, R correctly explains A · (B) Both true, R does not explain A · (C) A true, R false · (D) A false, R true.

Assertion (A): Accountability cannot be delegated.

Reason (R): Accountability arises from responsibility and flows upward — the manager remains answerable for outcomes even after authority is delegated.

Answer: (A) — Both A and R are true; R correctly explains A. NCERT explicitly states accountability "cannot be delegated at all" because it arises from responsibility and flows upward — a delegating manager remains accountable for the outcome of the assigned task.

Assertion (A): Delegation is a compulsory act, while decentralisation is an optional policy decision.

Reason (R): A single individual can perform every task in a large organisation by working harder.

Answer: (C) — A is true (NCERT comparative table — delegation is compulsory because no individual can do every task; decentralisation is optional, taken at top management's discretion). R is false — NCERT specifically says no manager, however capable, can manage every task himself; that is precisely why delegation is compulsory. The reason inverts NCERT's logic.

Assertion (A): Informal organisation should be eliminated to ensure smooth functioning of the formal organisation.

Reason (R): Informal organisation can spread rumours and resist change.

Answer: (D) — A is false. NCERT explicitly says informal organisation cannot be altogether eliminated; it is in the best interest of the organisation if its existence is recognised and used skilfully alongside the formal structure. R is true on its own — informal organisations can spread rumours and resist change — but this does not mean elimination is the right response.

Frequently Asked Questions

What is the difference between formal and informal organisation?

Formal organisation is deliberately created by management with defined positions, fixed authority and prescribed reporting relationships. Informal organisation arises spontaneously from social interaction among employees — friendships, common interests and unwritten norms. Both coexist in every organisation.

What is delegation of authority?

Delegation is the entrusting of responsibility and authority to another person and the creation of accountability for performance. It involves three elements — assigning responsibility, granting authority and creating accountability. It lightens the manager's load and develops subordinates' skills.

What are the elements of delegation?

Delegation has three inseparable elements: (1) Authority — the right to give orders and take decisions. (2) Responsibility — the obligation to perform the assigned duty. (3) Accountability — the answerability for results. Authority and responsibility can be delegated; accountability cannot.

What is decentralisation in management?

Decentralisation is the systematic delegation of authority throughout the organisation — pushing decision-making power down to lower levels. NCERT treats decentralisation as an extension of delegation across the entire organisation rather than a one-off transfer.

What is the difference between delegation and decentralisation?

Delegation is a person-to-person transfer of authority within a single hierarchy. Decentralisation is an organisation-wide policy of spreading authority across many levels. Delegation is a technique; decentralisation is a philosophy.

Why is delegation important?

Delegation reduces the manager's burden, enables completion of more work, develops subordinates' decision-making capacity, motivates them through trust, and supports growth as the firm expands beyond what a single person can supervise.

What are the advantages of decentralisation?

Decentralisation develops initiative among subordinates, improves managerial talent for the future, allows quick decision-making at the point of action, relieves top management of routine matters, supports growth and creates better control through clear divisional accountability.

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Class 12 Business Studies Part I

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