© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. chapter Organizing McGraw-Hill/Irwin Principles of Management © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

Learning Objectives Explain what is meant by organization architecture. Explain the advantages and disadvantages of centralization and decentralization. Discuss the pros and cons of tall versus flat structures. Outline the different kinds of structure a firm can operate within and explain how strategy should determine structure. Describe the different integrating mechanisms managers can use to achieve coordination within a firm, and explain the link between strategy, environment, and integrating mechanisms. See Text Page: 180

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. Learning Objective 1: Explain what is meant by organization architecture. See Text Page: 182

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. Learning Objective 1: Explain what is meant by organization architecture. See Text Pages: 182-183

Organization Architecture Structure Controls People Incentives Learning Objective 1: Explain what is meant by organization architecture. See Text Page: 182 Culture

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. Learning Objective 1: Explain what is meant by organization architecture. See Text Page: 184

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. Learning Objective 2: Explain the advantages and disadvantages of centralization and decentralization. See Text Page: 185

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. Learning Objective 2: Explain the advantages and disadvantages of centralization and decentralization. See Text Page: 185

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. Learning Objective 2: Explain the advantages and disadvantages of centralization and decentralization. See Text Pages: 185-186

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 Learning Objective 2: Explain the advantages and disadvantages of centralization and decentralization. Centralization Vs. Decentralization in Purchasing This slide presents the global best practices tips from PriceWaterhouseCoopers in procurement. Ask the students – Looking at he five bullets, what is their assessment with regards to should organizations use centralization or decentralization in purchasing decisions? It is argued that – it should depend on the strategy, structure and size of the organization when it comes to purchasing. Larger organizations have the purchasing power but if the efforts are not coordinated, it does not materialized. Smaller organizations can operate through co=op type of situation to get the volume/size needed. However, it should be moderated with the strategy and structure of the organization. If the structure is centralized, purchasing cannot be decentralized effectively. Furthermore, centralization gives cost control but decentralization offers faster responsiveness. Therefore, again, it depends on the strategy of the firm. Source: Global Best Practices, Pricewaterhousecoopers Source: Global Best Practices, Pricewaterhousecoopers

Question Decentralization argument works for large businesses. For a small business, it is better to have centralization. Do you agree? Explain. See Learning Objective 6: Discuss some of the challenges of managing in a global enterprise. Question Students should be able to argue against this point with examples of entrepreneurial activities and online businesses which can be and are decentralized and very successful. Also, the next two slides, especially the one on Starfish and the Spider support the argument of decentralization for small businesses.

Decentralization and Control Decentralization of decisions to a subunit … Increases responsibility … Which increases accountability Thereby enhancing control. Learning Objective 2: Explain the advantages and disadvantages of centralization and decentralization. See Text Page: 186

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. See Learning Objective 2: Explain the advantages and disadvantages of centralization and decentralization. The Starfish and the Spider This slide presents, very briefly, the lessons from the book: The Starfish and the Spider. Ask the students – so what is the moral of the story? Advice for the small-business leader – Embrace the era of starfish. Build your organization with “company commanders” who understand their mission and make decisions and support their colleagues rather than simply having “good soldiers” who wait for the next order. In other words: Decentralize the decision making Source: Business Week Online, October 17, 2006 Source: Business Week Online, October 17, 2006

Tall Versus Flat Hierarchies Tall hierarchies: Organizations with many layers of management. Flat hierarchies: Organizations with few layers of management. Learning Objective 3: Discuss the pros and cons of tall versus flat structures. See Text Page: 188

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 Learning Objective 3: Discuss the pros and cons of tall versus flat structures. Flat at IDEO This slide presents an example of flat organizational structure at IDEO – a product design company. Ask the students what might be some of the benefits of a flat organizational structure like IDEO’s? (Close to customers, quick decision making, minimizing red tape, etc.) Ask the students – would they like to work in a flat or a tall organizational structured organization? Why? Source: Business Week Online, January 11, 2001

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. Learning Objective 3: Discuss the pros and cons of tall versus flat structures. See Text Pages: 189-190

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. Learning Objective 4: Outline the different kinds of structure a firm can operate within and explain how strategy should determine structure. See Text Pages: 192-196

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. Learning Objective 4: Outline the different kinds of structure a firm can operate within and explain how strategy should determine structure. Hybrid at Ranbaxy This slide presents an example of a hybrid structure at Ranbaxy laboratories based in India but quickly becoming a global giant. Ranbaxy is deliberating the possibility of moving its headquarters from India to the United States. So, having such a structure allows the managers to gain experience and the know-how of the other market places. Ask the students – what other ways the company could structure their operations? Source: The McKinsey Quarterly, 2005 Number 2

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. Learning Objective 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. See Text Pages: 198-199

Integrating Mechanisms Matrix structure High Favored by firms in rapidly changing and high-technology environments Teams Liaison roles Need for coordination Direct contact Favored by firms in stable and low-technology environments Learning Objective 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. See Text Page: 198 Centralization Low Simple Complex Integrating mechanisms

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? Liaison roles Teams Direct contacts Centralization Learning Objective 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. See Text Page: 198 Answer: B

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 Learning Objective 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. See Text Pages: 199-200 C D A F

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. Learning Objective 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. See Text Pages: 201-202