chapter 8Organizing

McGraw-Hill/IrwinPrinciples of Management

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Learning Objectives

1. Explain what is meant by organization architecture.

2. Explain the advantages and disadvantages of centralization and decentralization.

3. Discuss the pros and cons of tall versus flat structures.

4. Outline the different kinds of structure a firm can operate within and explain how strategy should determine structure.

5. Describe the different integrating mechanisms managers can use to achieve coordination within a firm, and explain the link between strategy, environment, and integrating mechanisms.

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Organization Architecture

• Organization architecture: The totality of a firm’s organization, including formal organization structure, control systems, incentive systems, organizational culture, and people.

• Organization structure: The location of decision-making responsibilities in the firm, the formal division of the organization into subunits, and the establishment of integrating mechanisms to coordinate the activities of subunits.

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Organization Architecture

• Controls: Metrics used to measure the performance of subunits and to judge how well managers are running those subunits.

• Incentives: Devices used to encourage desired employee behavior.

• Organizational culture: Values and assumptions that are shared among the employees of an organization.

• People: The employees of an organization, the strategy used to recruit, compensate, motivate, and retain those individuals, and the type of people they are in terms of their skills, values, and orientation.

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Organization Architecture

PeopleControls Incentives

Structure

Culture

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Designing Structure

• Vertical differentiation: The location of decision-making responsibilities within a structure.

• Horizontal differentiation: The formal division of the organization into subunits.

• Integrating mechanisms: Mechanisms for coordinating subunits.

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Centralization Versus Decentralization

• Centralization: The concentration of decision-making authority at a high level in a management hierarchy.

• Decentralization: Vesting decision-making authority in lower-level managers or other employees.

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Arguments for Centralization

• Centralization can facilitate coordination.

• Centralization can help ensure that decisions are consistent with organizational objectives.

• Centralization can avoid duplication of activities by various subunits within the organization.

• By concentrating power and authority in one individual or a management team, centralization can give top-level managers the means to bring about needed major organizational changes.

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Arguments for Decentralization

• Top management can become overburdened when decision-making authority is centralized.

• Motivational research favors decentralization.

• Decentralization permits greater flexibility—more rapid response to environmental changes.

• Decentralization can result in better decisions.

• Decentralization can increase control.

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Centralization vs. Decentralization in Purchasing

• Centralize for greater cost control and corporate leverage

• Decentralize for nimbler procurement responsiveness

• Centralize procurement of common products• Decentralize procurement of specialized products• Align purchasing structure with corporate

strategy, structure, and sizeSource: Global Best Practices, Pricewaterhousecoopers

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Question

Decentralization argument works for large businesses. For a small business, it is better to have centralization. Do you agree? Explain.

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Decentralization and Control

Decentralization ofdecisions to a

subunit …

Increases responsibility …

Which increases

accountability

Thereby enhancing

control.

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The Starfish and the Spider

• Ori Brafman and Rod Beckstrom show why businesses need to embrace their own decentralized systems in their book called The Starfish and the Spider.

• The book's central metaphor recognizes that if you cut the leg off of a spider, you have at best a (crippled) spider. But if you cut off the leg of a starfish, the starfish will grow a new leg.

• Traditional centralized organizations are the spiders, and traditional decentralized organizations are the starfish.

Source: Business Week Online, October 17, 2006

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Tall Versus Flat Hierarchies

• Tall hierarchies: Organizations with many layers of management.

• Flat hierarchies: Organizations with few layers of management.

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Flat at IDEO

• IDEO is a product design company comprising 14 studios

• Each studio comprises 15 to 35 people with one head responsible for profit/loss

• Individuals are allowed to be best in what their passion is rather then take up managerial positions

• Concept of Hot Teams is encouraged with autonomy• Mobility from one studio to another is encouraged• Bottom line structure: very flat

Source: Business Week Online, January 11, 2001

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Problems in Tall Hierarchies

• There is a tendency for information to get accidentally distorted as it passes through layers in a hierarchy.

• There is also the problem of deliberate distortion by midlevel managers who are trying to curry favor with their superiors or pursue some agenda of their own.

• They are expensive.

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Types of Structures

• Functional structure: A structure that follows the obvious division of labor within the firm, with different functions focusing on different tasks.

• Multidivisional structure: A structure in which a firm is divided into different divisions, each of which is responsible for a distinct business area.

• Geographic structure: A structure in which a firm is divided into different units on the basis of geography.

• Matrix structure: An organization with two overlapping hierarchies.

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Hybrid Structure at Ranbaxy

Ranbaxy Laboratories – An India-based generic drug maker• The company redesigned the organization in

internationalizing its operations• Developed a hybrid structure: it placed R&D in a global unit

and other functions in several geographic units. • Result: Ranbaxy's managers adopted a global mind-set and

began spending a substantial amount of time in their most important market—the United States.

Source: The McKinsey Quarterly, 2005 Number 2

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Formal Integrating Mechanisms

• Direct contact: This is the simplest integrating mechanism. Managers of the various subunits just contact each other whenever they have a concern.

• Liaison roles: This is a bit more complex than direct contact. As the need for coordination between subunits increase, integration can be improved by assigning a person in each subunit to coordinate with another subunit.

• Teams: When the need for coordination is greater still, firms use temporary or permanent teams composed of individuals from the subunits that need to achieve coordination.

• Matrix structure: When the need for integration is very high, firms may institute a matrix structure, in which all roles are viewed as integrating roles.

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Integrating Mechanisms

High

Low

Nee

d fo

r co

ordi

natio

n

Simple ComplexIntegrating mechanisms

Centralization

Directcontact

Liaisonroles

Teams

MatrixstructureFavored by firms in

rapidly changing andhigh-technology

environments

Favored by firmsin stable and

low-technologyenvironments

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Question

ABC Information, Inc. operates in a rapidly changing high-technology environment. Which of these would represent the most complex integrating mechanism favored by ABC?

a. Liaison roles

b. Teams

c. Direct contacts

d. Centralization

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Informal Integrating Mechanisms: Knowledge Networks

• Knowledge network: A network for transmitting information within an organization based on informal contacts between managers within an enterprise and on distributed information systems.

A

B

C D

F

EG

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Strategy, Coordination, and Integrating Mechanisms

• All enterprises need coordination between subunits, whether those subunits are functions, businesses, or geographic areas.

• There is a high need for coordination in firms that face an uncertain and highly turbulent competitive environment, where rapid adaptation to changing market conditions is required for survival.

• In contrast, if a firm is based in a stable environment characterized by little or no change, and if developing new products is not a central aspect of firm’s business strategy, the need for coordination between functions may be lower.