November 1st, 2013

Chapter 8- Organizing
Primary Management Decision- How to organize work
How do we divide tasks into jobs?
How do we coordinate the work and link jobs?
Division and integration
o More division there is, the more challenge there is with integration (building
different parts of a house example)
How managers can shape the architecture of their organization to successfully implement firms strategy

Organization Architecture

Organization Architecture- The totality of a firms organization, including formal organization

structure, control systems, incentive systems, organizational culture, and people (center around
people)
Organization Structure- has three things:
1. The location of decisions making responsibilities in the firm
2. The formal division of the organization into subunits
3. The establishment of integrating mechanisms to coordinate the activities of
subunits
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 behaviour
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
Challenge for managers: Design an organization architecture that makes sense for the market in
which an enterprise competes and the basic strategies positioning it is trying to achieve

Designing Structure: Vertical

Differentiation

Organization structure can be thought of in terms of three dimensions:

1. Vertical Differentiation- The location of decision making responsibilities within a structure
(centralization/decentralization) and in the number of layers in a hierarchy (tall/flat)
2. Horizontal Differentiation- The formal division of the organization into subunits
3. Integrating Mechanisms- Mechanisms for coordinating subunits

Centralization and Decentralization

Centralization- The concentration of decision making authority at a high level in a management
hierarchy ; arguments for centralization:
Facilitates coordination
Ensures that decisions are consistent with organizational objectives; way of controlling
the organization

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Avoids duplication of activities by various subunits within the organization, attain

economics of scale and lower costs
Gives top level managers the means to bring about needed major organizational
changes
Decentralization- Vesting decision making authority in lower level managers or other
employees; arguments for decentralization:
Top management can become overburdened when decision making authority is
centralized ; decentralization gives top managers time to focus on critical issues by
delegating more routine issues to lower level managers and reducing the amount of
information top managers have to process, making them less vulnerable to cognitive
biases
Motivational research favours decentralization; giving employees more responsibility for
their jobs which increases productivity and reduces costs
Greater flexibility; more rapid response to environmental changes
Result in better decisions; decisions are made closer to individuals who have better
information than managers
Increases control; hold people accountable and have greater degree of control
o Autonomous Subunit- A unit that has all the resources and decision making
power required to run its operation daily
o Decentralization of decisions to a subunit Increases responsibility
increases accountability enhances control
Choice between centralization and decentralization
Firms strategy:
o Centralization decisions: financial expenditures, financial objectives, legal issues
o Decentralization decisions: operating decisions such as production, marketing
Economics of scale:
o Centralization: purchasing and manufacturing decisions to eliminate duplication
and realize scale economies
o Decentralization: Sales decisions since economies of scale are less considerate
Local Adaptation:
o Decentralization: Substantial differences between conditions in local markets,
marketing, and sales decisions
Environments with high uncertainty and rapid change:
o Centralization: slows down decision making; competitive disadvantage (good for
stable and predictable environments such as banking industry)
o Decentralization: favoured since it is more flexible

Tall Versus Flat Hierarchies

Tall Hierarchies- Organizations with many layers of management; to avoid being stretched too
thin and losing control; bigger the organization, the more levels it has
Flat Hierarchies- Organizations with few layers of management
Span of Control
Span of Control- The number of direct reports a manager has which depends on:
1. The nature of the work being supervised
2. How visible the performance of subordinates is
3. Extent of decentralization within the organization
o Good managers can effectively handle 20 direct reports
o Number of levels in a hierarchy:

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Problems in tall hierarchies that may result in lower organizational efficiency and effectiveness
Distorted information
o Information can get accidently distorted as it passes through layers in hierarchy;
decisions may be based on inaccurate information and poor performance may
result
Deliberate Distortion by midlevel managers
Influence Costs- The loss of efficiency caused by deliberate information
distortion for personal gain within an organization
Expensive
Salaries and benefits of multiple layers of midlevel managers can add u p to
significant overhead which increases cost structure of firm and puts it at
competitive disadvantage
Inherent Inertia
More centres of power and influence= more voices arguing against change =
slower to change
Delayering: Reducing the size of a hierarchy
Delayering: Reducing the number of layers in a hierarchy to boost firms performance
Way of enforcing decentralization and reaping the associated efficiency gains
Large firms can function with relatively flat structure if their organization architecture is
designed correctly
Disadvantage of delayering: Causes stress and poor morale among managers if process
is not handled correctly

Designing Structure: Horizontal

Differentiation
Functional Structure
Functional Structure- A structure that follows the obvious division of labour within the firm, with
different functions focusing on different tasks
Typical functional structure:

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Advantage: Works well for firms that are active in single line of business and focuses on a single
geographic area, economies of scale, performance improvements and efficiencies
Disadvantages: Problems of coordination and control arise when different business areas are
managed within the framework of a functional structure
Coordination: when different activities that constitute a business are embedded in
different functions, it is difficult to achieve coordination between functions
Control: No individual/management team is responsible for performance of each
business; lack of accountability within organization

Multidivisional Structure
Multidivisional Structure- A structure in which a firm is divided into different divisions, each of
which is responsible for a distinct business area
Responsibility for operating decisions and business level strategy is decentralized to divisions
who are held accountable for their performance

Advantages:
Creates internal environment that gets divisional managers to focus on efficiency by:
o High responsibility implies that they have few alibis for poor performance
o Desire for capital to grow
o Pay increases and bonuses creases further incentives

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Disadvantages:
Too much pressure to improve performance can result in worst management due to:
o Cutting investments to boost short term performance
Solution: Head office managers need to develop good understanding of
each division, set performance goals that are attainable, and have staff
who can regularly audit accounts and operations of divisions to ensure
that each division is not being managed for short terms results or in a
way that destroys its long term competitiveness

Geographic Structure
Geographic Structure- A structure in which a firm is divided into different units on the basis of
geography

Facilitates responsiveness to local market conditions

Encourages fragmentation of organization into highly autonomous entities, making it difficult to
transfer core skills between areas
Since each region has its own production facilities, duplication inhibits the realization of
economics of scale that could be gained if the firm served the entire world market
Hybrid Geographic Functional Structure:
Functions are centralized at the optimal locations; the world is then divided into
geographic regions for local marketing and sales

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Unilevers Structure:
Head of each geographic area maintains responsibility for profitability in the area under
their control while country managers within each region are given responsibility for local
marketing and sales
Attempt to solve conflicting demands on the organization while maintaining the best
features of multidivisional structure and a geographic structure

Matrix Structure
Matrix Structure- An organization with two overlapping hierarchies; when no single structural
design seems to solve off of firms problems
Need for it is driven by desire for tight coordination between different functions; increase
probability of successful product commercialization and has faster product development

Disadvantages:
Clumsy and bureaucratic
Dual hierarchy structure leads to conflict and perpetual power struggles between
different sides of hierarchy
Difficult to ascertain accountability
Advantages:

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Clear lines of responsibility; primary role and support role
Clear goals help to indicate what is most important

Designing Structure: Integrating

Mechanisms
Formal Integrating Mechanisms
Greater the need for coordination among subunits, more complex formal integrating mechanisms are
needed to be:
Direct contact
Managers in various subunits contact each other whenever they have common concern
May not be effective if managers have different orientations that impede coordination
Liasion roles
Integration can be improved by assigning a person in each subunit to coordinate with
another subunit
Teams
Coordinate product development efforts but can be useful when any aspect of
operations/strategy requires cooperation of multiple subunits
Matrix
Designed to maximize integration among subunits

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
It can be a non-bureaucratic conduit for knowledge flows
within an enterprise
Coordinating is achieved informally through network rather
than by formal integrating mechanisms such as teams/
matrix structure

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Must embrace as many managers as possible

Firms are using distributed computer and telecommunications information systems to provide
the foundation for informal knowledge networks
Firms are also using management development programs to build informal networks
Knowledge networks by themselves may not be sufficient to achieve coordination if subunit
managers pursue sub-goals that are at variance with firm wide goals managers must share a
strong commitment to the same goals
Managers must adhere to common set of norms and values that override differing
subunit orientations; promote teamwork and cooperation

Strategy, Coordination, and Integrating Mechanisms

Degree of coordination required and integrating mechanisms used vary depending on strategy
of the firm
Need for coordination in firms that face uncertain and highly turbulent competitive
environment, where rapid adaptation to changing market conditions is required for survival