Chapter 8: Organizing

Organization Architecture, Centralization, Decentralization, Tall & Flat Structures

Organization Architecture

What is Organization Architecture (5 Parts of Organization Architecture)?

The totality of a firm’s organization mechanisms:

  • Organization Structures
  • Vertical Differentiation: Location of decision-making responsibility (centralized or decentralized) & number of layers in a hierarchy (tall or flat).
  • Horizontal Differentiation: Formal division into subunits (such as functions, R&D, national operations, etc).
  • Establishment of integrating mechanisms that coordinate subunits (such as cross-functional teams).
  • Control systems: Metrics used to measure performance of subunits.
  • Incentive systems: Devices used to encourage desired behaviour.
  • Business culture: Values & assumptions.
  • People: Strategies to recruit, compensate, motivate, retain employees & develop human capital.

Designing Structure: Vertical Differentiation

What is Centralization? (4 Arguments for Centralization)

The concentration of decision-making authority at the high level in a management hierarchy.

  • Facilitates Coordination
  • Ensures consistency with organization’s objectives
  • Can avoid duplication of activities
  • Easier for top-managers to make major changes: Often, temporary centralization is used to change

What is Decentralization? (5 Arguments for Decentralization)

Distributing decision-making authority to lower-level managers or other employees.

  • Reduces burden from top management
  • Promotes motivation: If you give employees more responsibility & freedom, they work harder.
  • Greater flexibility: Rapidly respond to environmental changes because very little approval needed to fix issues
  • Better decisions: Lower-level managers are experts in their environment & know more than top-management.
  • Increases control: Managers of autonomous subunits (a unit that has all the resources & decision-making power required to run its operation daily) have fewer excuses for low performance. Thus, greater accountability.

How to Choose Between Centralized and Decentralized Structures?

  • Firm strategy, financial expenditures/goals, legal issues are centralized. Operating decisions (HR, production, R&D, etc) may be centralized or not depending on strategy & external environment.
  • When economies of scale is important, there tends to be greater centralization. Purchasing & manufacturing are often centralized.
  • When local adaptation is important, there tends to be greater decentralization. Marketing & sales decisions are often decentralized.
  • Decentralization is favoured in environments of high uncertainty & rapid change.


Tall & Flat Hierarchies

Size of organization & number of different activities affect how tall an organization is.

  • Span of Control: Number of direct reports (subordinates) a manager has. # of direct reports a manager can handle depends on:
  • Nature of work
  • Visibility of performance
  • Extent of Decentralization
  • Issues in Tall Hierarchies:
  • Accidental distortion of information as it goes up the layers.
  • Deliberate distortion (suppression of bad information, exaggeration of good information). Economics call this influence cost (the loss of efficiency due to deliberate information distortion for personal gain).
  • Expensive. Extra salaries, benefits, etc.
  • Inflexible.
  • Delayering: Reducing the amount of layers in a hierarchy.
  • Firms often expand unnecessarily when times are good, which can cause a need for delayering to cut costs.
  • Can be a way to enact greater decentralization.
  • Not easy. It can cause stress & poor morale if not handled properly.


Designing Structure: Horizontal Differentiation

What are the 4 Different Types of Structures?

  • Functional Structure: Follows the obvious division of labour within the firm, with different functions focusing on different. Like production, R&D, marketing, sales, etc.
  • Often divided into subunits.
  • Works well for businesses in a single line of work. Problematic when companies expand into new areas (geographically & business-wise) because it can reduce coordination & accountability.
  • Multidivisional Structure: Division into different product divisions, each of which is responsible for a distinct business area.
  • Creates an internal environment for high-visibility of performance.
  • If objectives are unrealistic, it can cause managers of each division to cut long-term growth for short-term.
  • Geographic Structure: Firm is divided into different units on the basis of geographic regions.
  • Allows for decentralization & localization.
  • Can fragment the organization.
  • Can cause duplication of efforts & inhibits the realization of economies of scale. This is why R&D, etc, are centralized even in geographic structures.
  • Matrix Structure: Firm has two or more overlapping structures (ex: functional & geographic).
  • Tight coordination.
  • Can be complex, bureaucratic & clumsy. Difficult to manage (requires a lot of meetings to have control).
  • Can reduce accountability.

Designing Strucutre: Integrating Mechanisms

Formal & informal integrating mechanisms coordinate subunits.

What are Some Formal Integrating Mechanisms?

  • Direct Contact: Simplest mechanism.
  • Managers contact each other when there’s a common concern.
  • However, manages sometimes don’t “speak the same language”.
  • Functional Silos, or functional isolation, can develop & reduce respect between each subunit.
  • Liaison roles: A bit more complex than direct contact.
  • A person is assigned in each subunit to coordinate with the liaison person in another.
  • Pros include the liaison people develop a permanent relationship
  • Teams: Temporary/permanent teams with an individual from each subunit.
  • Matrix Structure: A matrix structure where all roles are viewed as integrating roles.
  • Can become bureaucratic tangles that cause inflexibility & conflict.

What are Some Informal Integrating Mechanisms?

  • Knowledge Network: A network for transmitting information within an organization based on informal contacts between managers via distributed information systems.
  • Strength is that it’s not bureaucratic.
  • Can be done via conferences, email, video conferencing, high-bandwidth data systems, social media, etc.
  • Organization must have a strong organizational culture that promotes teamwork, cooperation & respect.

Strategy, Coordination & Integrating Mechanisms

All firms require coordination between subunits, functions, divisions, geographic areas, etc. However, the degree of coordination required & the integrating mechanisms used vary depending on the strategy of the firm. This variance depends on the importance of realizing economies of scale, the uncertainty/competitiveness markets and how many markets a firm is in.


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