chapter

8
Organizing

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

Principles of Management 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
Structure

Controls People Incentives

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 size
Source: 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 of Which Thereby

decisions to a Increases
increases enhancing
subunit … responsibility …
accountability 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 Matrix
Favored by firms in structure
rapidly changing and
high-technology
Need for coordination

environments
Teams

Liaison
roles

Favored by firms
Direct
in stable and
contact
low-technology
environments
Centralization

Low
Simple Complex
Integrating mechanisms
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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.
G
B E

C D

A F
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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.