Centralization and Decentralization

CHAPTER 5 DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL TEACHING OBJECTIVES 1. To examine how the hierarchy emerges and how most companies limit hierarchical levels. (5. 1) 2. To address the problems associated with tall hierarchies: communication, motivation, and bureaucratic costs. (5. 1) 3. To consider Parkinson’s Law and the minimum chain of command principle. (5. 1) 4. To demonstrate how an increased span of control can prevent a hierarchy from becoming too tall. (5. 1) 5. To review the factors that affect the shape of the hierarchy: horizontal differentiation, centralization, and standardization. 5. 2) 6. To examine Max Weber’s six principles for a bureaucratic structure. (5. 3) 7. To consider the advantages and disadvantages of a bureaucracy. (5. 3) 8. To consider the importance of the informal organization. (5. 4) 9. To discuss the trends toward empowerment, self-managed teams, cross-functional teams, and contingent workers. (5. 5) CHAPTER SUMMARY To protect shareholders’ goals, managers must constantly analyze organizational structure. This chapter examines the vertical dimension of structure—the hierarchy of authority created to control an organization’s members.

How and why does vertical differentiation occur? The hierarchy emerges when an organization faces coordination and motivation problems due to increased horizontal differentiation. A hierarchy is tall if it has many levels relative to organizational size and flat if it has few levels relative to size. Most large companies do not exceed 9 or 10 levels and do not increase the number of managers, because tall hierarchies have problems with communication, motivation, and high bureaucratic costs. Parkinson’s Law demonstrates how hierarchies get too tall. The minimum chain of command principle is explained.

Increasing the span of control can substitute for increasing hierarchical levels. Span of control is based on the complexity and interrelatedness of tasks. Simple and less interrelated tasks call for a wider span of control. Factors shape the hierarchy: horizontal differentiation, centralization, standardization, and the informal organization. These design decisions can ensure that a hierarchy remains flat so the organization can control activities. Horizontal differentiation controls employees when an organization cannot increase its hierarchical levels.

Horizontal differentiation keeps the hierarchy flat, as each function has its own hierarchy. Decentralizing authority improves communication and coordination due to less direct supervision, affecting the size of the hierarchy. Standardization reduces direct supervision, because employees follow rules, standard operating procedures (SOPs), and norms. The informal organization can increase control. The chapter outlines Max Weber’s six principles of bureaucratic structures and reviews the advantages of bureaucratic structure. Authority should be based on rational legality, clearly defined roles, competence, and rules.

A bureaucratic structure controls interactions among organizational members, reduces transaction costs, provides stability, and increases core competences. Managers must prevent the hierarchy from becoming too tall and centralized. If the hierarchy is neglected, organizational costs rise, the decision-making process slows, and the company becomes unresponsive to stakeholders. Restructuring and downsizing are a trend to reduce costs. Coupled with this trend is the use of empowerment and self-managed teams. Another cost-saving measure is the use of contingent workers. CHAPTER OUTLINE . 1Authority: How and Why Vertical Differentiation Occurs Determining the level of vertical differentiation is a basic design challenge. Managers must determine the shape of the hierarchy, the number of levels, and the span of control (the number of subordinates a manager oversees). The shape of the hierarchy, plus the balance between centralization and decentralization, establish the extent of vertical differentiation. The Emergence of the Hierarchy As an organization grows, differentiation and the division of labor increase, which lead to coordination and motivation problems.

At this point, the hierarchy emerges to coordinate and motivate members by increasing the number of managers and organizational levels. Managers choose between a flat hierarchy with few levels relative to company size and a tall hierarchy with many levels relative to size. (Fig. 5. 1) Size and Height Limitations Research on size and height of the hierarchy shows that a firm of 1,000 has four levels, one with 3,000 has seven levels, and one with up to 100,000 employees stays at nine or 10 levels. (Fig. 5. 2)

Organizations actively restrict the number of managers and the number of levels as they grow. So, most organizations have a pyramid structure (Fig. 5. 3a), not a bloated structure (Fig. 5. 3b). Notes_______________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ _____________ Problems with Tall Hierarchies Q. Why is the number of hierarchical levels and managers limited? A.

Tall hierarchies face problems. Communication Problems. As the chain of command extends, communication takes longer, which slows decision making. Information is distorted, accidentally or deliberately, as it goes up and down the hierarchy. Q. How can information be distorted? A. A long chain of command leads to misinterpretation of the message. Self-serving managers give selective information to decision makers. Subordinates tell superiors what they want to hear. Distortion leads to poor decisions, because decision makers have incorrect information.

Organizational Insight 5. 1: Pfizer’s New Emerging Hierarchy Through mergers and acquisitions, Pfizer’s hierarchy had become too tall. They cut the number of management layers between top scientists from 14 to seven and drastically reduced the number of committees. Q. How did Pfizer’s structure contribute to its problems? A. When organizations get too tall, they cannot respond as well or as quickly to the marketplace, which is what happened to Pfizer. This was fixed by flattening the structure so that the organization could respond better to the market.

Notes_______________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ _____________ Motivation Problems. The taller the organization, the less managerial authority and responsibility there are. Tall hierarchies decrease motivation because managers, with less authority and responsibility, are less motivated. In a flat structure, managers have more responsibility and are more motivated.

Accountability in a tall structure decreases, making it easy for managers to shirk responsibility. Bureaucratic Costs. Tall hierarchies have high bureaucratic costs; a company pays a middle manager an average of $300,000 a year, so a cut of 1,000 extra managers saves $300 million. Layoffs become necessary if management pays no attention to its hierarchy. A company grows and hires managers without considering long-term costs. When the company matures, growth ceases, and cost reduction becomes necessary. To avoid layoffs, a company must continually evaluate its hierarchy.

The Parkinson’s Law Problem Parkinson observed that from 1914 to 1928, while the British Navy decreased the number of ships by 68 percent, it increased the number of dockyard officials by 40 percent and top managers by 79 percent. Q. Why did this occur? A. Parkinson’s theory is that managers want to increase the number of subordinates, not rivals, so they make work for each other. In other words, “Work expands so as to fill the time available. ” Notes_______________________________________________________ ____________________________________________________________ ___________________________________________________________ ____________________________________________________________ _____________ The Ideal Number of Hierarchical Levels: The Minimum Chain of Command Managers should base hiring decisions on whether the value added exceeds the cost. The minimum chain of command principle states that a company should choose the minimum number of hierarchical levels needed for goal achievement. Span of Control To avoid becoming too tall, an organization can increase the span of control, the number of subordinates a manager directly oversees.

Different companies have different spans of control. A manager’s span of control is limited to the number of subordinates that can be adequately supervised. An increase in subordinates exponentially increases the subordinate relationships to be managed. A manager with two subordinates manages three relationships, but a manager with three subordinates manages six (Figs. 5. 6a–b). If the span of control becomes too wide, a manager loses control over subordinates. Q. What determines an effective span of control? A. Complexity.

For complex, dissimilar tasks, the span of control can be narrow. For routine, similar tasks, the span of control can be wider. A research supervisor has a narrow span of control, but a production supervisor has a wide span of control. Organizational Insight 5. 2: Bob Iger Reshapes Walt Disney Disney was suffering under a structure that was tool tall, and this was hampering innovation. They eliminated a strategic planning office that was seen as causing a bottleneck of new ideas, and this increased the level of innovation. Interrelatedness.

Interrelated tasks require a narrow span of control because horizontal relationships must be managed. Horizontal relationships are less important if tasks are not interrelated. Most organizations have a pyramid-shaped hierarchy, as tasks are complex and interrelated at the top. Notes_______________________________________________________ ____________________________________________________________ ____________________________________________________________ ______________________________________________________ 5. 2Control: Factors Affecting the Shape of the Hierarchy

An effective span of control must be limited, thus organizations use other design challenges to control activities: horizontal differentiation, centralization, standardization, and the informal organization. Horizontal Differentiation When vertical differentiation cannot be increased, an organization maintains control by increasing horizontal differentiation and establishing specialized functions or divisions. Each subunit also has a hierarchy. (Fig. 5. 7) Q. Why does manufacturing have many levels? A. Manufacturing must exercise tight control over subordinates and control costs.

Sales has fewer levels because it relies on standardization, not direct supervision. R&D has fewer levels because complex tasks are difficult to supervise. R&D often uses project teams, a narrow span of control, and informal norms and values to control behavior. (Fig. 5. 8) Horizontal differentiation allows an organization to remain flat because hierarchies are developed in subunits. Q. What problems are caused by horizontal differentiation? A. Horizontal differentiation causes coordination and motivation problems that are controlled through centralization, standardization, and the informal organization. Centralization

The communication and coordination problems of a tall company make a manager’s job one of monitoring and supervising, causing an organization to lose sight of its goals. One solution is to reduce the number of managers by decentralizing decision making to lower levels. Decentralization keeps the organizational structure flat. Standardization Another way to flatten the hierarchy is through standardization. Tasks are controlled through rules, standard operating procedures (SOPs), and norms, so a wide span of control is used; rules eliminate direct supervision, and managers can delegate responsibility because subordinates know the rules.

Notes_______________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ _____________ Managerial Implications: Authority and Control Managers must assure that the hierarchy matches organizational needs and is not too tall or centralized. If the hierarchy provides too little control, managers must maintain adequate supervision over people and resources. Managerial teams should review the hierarchy’s design.

Notes_______________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ 5. 3The Principles of Bureaucracy Max Weber (1864–1920), a German sociologist, developed an organizational structure to improve operations. He developed the bureaucracy, a structure in which people follow rules and are accountable for their actions. Weber’s six principles of bureaucracy distribute responsibilities and authority to maximize a company’s effectiveness.

Principle One: A bureaucracy is founded on the concept of rational-legal authority, a person’s authority is due to position in the organization. Power should be separate from personality. Principle Two: Organizational roles are determined by technical competence, not social status, kinship, or heredity. This principle requires managers to see all potential job candidates objectively. Principle Three: A role’s task responsibility and decision-making authority and its relationship to other roles in the organization should be clearly specified.

A clear pattern of vertical and horizontal differentiation is necessary for effectiveness. Role conflict, conflicting demands on a subordinate, and role ambiguity (fear of responsibility because of unclear tasks) should be eliminated. Principle Four: The organization of roles in a bureaucracy is such that each lower office in the hierarchy is under the control and supervision of a higher office. People know the chain of command. Principle Five: Rules, standard operating procedures, and norms should be used to control the behavior and the relationship between roles in an organization.

Rules are formal written standards of behavior, whereas norms are unwritten. Organizational Insight 5. 3: Never Underestimate the Power of Rules General Mills opened a chain of Chinese restaurants that had early success. In an attempt to open many restaurants quickly, they lost control of the food quality due to the lack of training and standard preparation procedures. Although they did implement procedures, it was too late to save the restaurant, as word had already spread that they had poor quality and poor service.

In addition to illustrating the value of rules and standard operating procedures, this case also serves as an excellent example of the power of the reputation effect. Although they fixed the quality problem, it was too late in this case to save the organization. Principle Six: Administrative acts, decisions, and rules should be formulated and put in writing. When written down, rules become official guidelines that can be used even when people leave. Written documents ensure that people can be held accountable. The Advantages of Bureaucracy A bureaucratic structure exists when an organization implements Weber’s six principles.

Q. What are the advantages of a bureaucratic structure? A. Advantages: 1. Rules for designing the hierarchy 2. Increased accountability and reduced transaction costs 3. Reduced costs of monitoring subordinates 4. Increased integration 5. Decreased costs of performance evaluation and of rule enforcement 6. The position separated from the person 7. Guidelines and skills able to be passed on to successors 8. Stability needed for employees to take long-term perspectives Despite these advantages, bureaucracies have negative connotations. Q. What causes this negative thinking? A. Disadvantages: . Slowed decision making and increased costs due to a tall and centralized hierarchy 2. Failure to meet stakeholders’ needs due to too many rules Management by Objectives This system provides a framework to both evaluate and to monitor progress toward the achievement of organizational goals. It consists of three steps: 1. Specific goals and objectives are established at each level of the organization. 2. Managers and their subordinates together determine the subordinates’ goals. 3. Managers and their subordinates periodically review the subordinates’ progress toward meeting the goals.