Organization Architecture, Centralization, Decentralization, Tall & Flat Structures
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.
- 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.