i. How Organisational Size Affects Efficiency

How Organisational Size Affects Efficiency

Humans have evolved, biologically, to co-operate in small groups. Our ability to co-operate in larger groups has a cultural rather than a biological basis.

As the size of an organisation of any type increases, so too does its complexity. So, inefficiencies inevitably arise as the size of an organisation increases. This can be offset to a limited extent by breaking the organisation down into small groups or teams. Nevertheless, inefficiencies can outweigh efficiencies as size increases.

Every human organisation is a system. Its outputs are satisfiers and, sometimes, contra-satisfiers. Their nature varies according to the type of organisation. For a business they can be goods and services, for a health service medical treatments, for a religion or social club emotional wellbeing, and so on. Irrespective of their nature, they can be measured in terms of number of units per person per day. In economics, this is known as productivity, but here the term is used in a broader context.

Productivity is affected not only by human factors, but also by non-human ones such as equipment, location, etc. If non-human factors are held constant, then maximum productivity occurs when human factors are ideal. However, this maximum can be reduced by human inefficiencies such as difficulties in communicating. As the size of an organisation increases, some of these inefficiencies will decrease and others will increase.

The following graph is indicative only and shows just two inefficiencies. It will vary from organisation to organisation, but its general shape is typical.

An inefficiency can be measured on a scale from zero, where it is greatest, to one, where it is least.

The green curve shows an inefficiency which decreases with organisational size. As the size of the organisation increases, the inefficiency becomes ever closer to 1. Such inefficiencies decrease at a rapid rate for small organisations, but this rate steadily decreases with organisational size. This is because we first seek the greatest reductions in inefficiency, e.g., splitting roles into chair, secretary, and treasurer. However, further specialisation has progressively less impact.

The red curve shows an inefficiency which increases with organisational size. As the size of the organisation increases, the inefficiency becomes ever closer to zero. Such inefficiencies increase at a rapid rate for small organisations and then at a diminishing rate as organisational size increases. This is because the influence of an increase in size on a small organisation is greater than that of a similar increase in size on a large one. For example, increasing the size of an organisation from one to two people introduces far greater communication difficulties than an increase from one hundred to one hundred and one.

If the two inefficiencies are multiplied this yields the total inefficiency shown by the black curve. Multiplying maximum productivity by the value given on the black curve then yields actual productivity. This shows that, so long as inefficiencies which increase with organisational size exist, and they always do, there will be an optimum size of organisation at which productivity is greatest.

I will now discuss several human inefficiencies which vary with the size of an organisation.

Specialisation, also known as the division of labour, and formalisation, or the extent to which specialised tasks are specified and governed by rules or regulations, both increase with organisational size. Formalisation occurs because direct supervision becomes increasingly difficult. Furthermore, because events repeat more frequently in larger organisations, managers are motivated to reduce inefficiencies in the way that subordinates respond to them. Increased specialisation and formalisation can reduce inefficiency up to a point. However, they also reduce a subordinate’s understanding of the purpose of an activity, and his ability to make decisions in the face of the unexpected. Thus, the adaptability of the organisation is reduced. There can also be an increasing inability to make best use of the skills and experience of the organisation’s members. These factors have a psychological effect on subordinates, causing an increased likelihood of boredom, disinterest, and alienation. This, in turn, decreases the likelihood of informal innovation. So, there are probably optimum levels of specialisation and formalisation at which inefficiencies are least, and they will depend on the subordinate concerned.

Hierarchy, or the number of levels in the command structure, and departmentalisation, or the grouping of specialised tasks under a leader, both increase with organisational size. Together they comprise organisational structure. As the size of an organisation increases, then, by definition, so too does its complexity. We have a limited ability to understand complexity, and so, as an organisation grows, it must be broken down into groups of people and activities that a leader can reasonably understand. Group leaders then simplify matters when communicating with their superior, so that the latter can understand the information provided. Conversely, a group leader must also interpret and add detail to instructions given by his superior. As hierarchy increases then, so too do the number of simplifications and interpretations and, with each, information can be lost or misinterpreted. Distance of intra-organisational communication increases with organisational size, therefore, and along with it, the likelihood of communication errors.

Notably, as an organisation increases in size, leadership distance also increases, i.e., the number of levels in the hierarchy between the highest and lowest status individuals. In democratic systems, the more remote a leader, the more likely it is that he will be selected using System-1. This is an automatic system that operates quickly, with little or no effort, and in which emotion, beliefs, and experience have a part to play. On the other hand, the closer a leader, the more likely it is that System-2 will be used. This is a more formal reasoned response requiring time, attention, focus, and effort. So, in democratic systems, leadership quality will reduce and abuse of position will increase as leadership distance increases.

Peer distance also increases with the size of an organisation, making inter-departmental communication ever more difficult. Social traffic, i.e., irrelevant communications, also increase disproportionately with the size of an organistation. They act as noise and congestion which interfere with relevant communications. Ultimately, communications may deteriorate to a point where decentralisation, i.e., the progressive delegation of power and control is necessary.

Self-maintenance or administration. Opinions differ on whether the proportion of administrative to productive people, increases or decreases with organisational size. It is likely that if the leader is authoritarian and wishes to retain power and control, it will decrease. Otherwise, decentralisation will cause it to increase. The “curvilinear argument” holds that self-maintenance is greater for small and large organisations than for medium sized ones. This is because, as an organisation grows, it initially enjoys economies of size, but as it grows further, increased complexity requires a significant increase in administration for co-ordination and control.

Speed of Decision-making. Increasing leadership distance, peer distance, and administration all result in slower and even an absence of decision-making.

Rate of Growth, i.e., the rate at which the number of members of an organisation increases, has a significant effect on efficiency. This is particularly the case when there is a step change in size due to a merger. Blau and Schoenherr, in their 1971 book, “The Structure of Organizations”, noted that, as organisations upsize, their sheer mass can overwhelm leaders, particularly if growth is rapid or the result of a merger.

In general, the impact of the same increase in size reduces as the organisation becomes larger. Changes in structure are, therefore, more likely when a growing organisation is small. However, rapid growth or mergers can result in a need for Restructuring which, for a time, introduces inefficiencies as people adapt to new roles and paths of communication. Clearly, the more frequently restructuring takes place, the greater the proportion of time during which such inefficiencies exist.

Cultural Entrenchment describes the extent to which the shared values, norms, beliefs, and knowledge of an organisation are established and resistant to change. In a nation, for example, power may move to other arenas, but the paths to it linger on because they have become a part of its culture. Examples in the UK include rural gentry and the use of ancient Greek and Latin. In India, English is often spoken with a received pronunciation inherited from the days of empire. Britain is a Christian culture and China a Confucian culture because religions have guided their cultures over many centuries. Thus, the religions’ norms, values, and beliefs have become entrenched. The original religion may no longer have the influence that it once had, but its norms, values and beliefs propagate through the generations without us being consciously aware of it or knowing the original source.

The likelihood of cultural entrenchment increases with the age of an organisation. Because large organisations are generally older than small ones, they tend to suffer it more. The entrenchment of a culture makes an organisation less adaptable in the face of change, and so increases inefficiency. In very general terms, and with much variation, therefore, entrenchment is an inefficiency which increases with organisational size.

On the other hand, an organisation’s culture becomes more difficult to agree and maintain while it is growing, and a lack of cultural homogeneity leads to inefficiencies. The greater the rate of growth the more difficult the agreement and maintenance of a culture becomes. Katz and Kahn noted that, with growth, the primary group identity is lost and there are increasing difficulties in motivating people to support organisational goals. In particular, mergers of organisations can result in cultural differences which may persist.