1 Copyright 2004 Prentice Hall FIGURE 5-2 The Relationship between Organizational Size and Number of Hierarchical Levels Number of employees ,0003,0009,00010,000100,000 Number of hierarchical levels 1

2 Organizational Theory Problems with Tall Hierarchies Communication Problems—both timing and distortion Motivation Problems—an increase in levels of management leads to a decrease in responsibility and motivation Bureaucratic Costs—managers cost money

3 Organizational Theory Principle of Minimum Chain of Command An organization should choose the minimum number of management levels consistent with its goals and the environment in which it exists. In other words, keep the organization as flat as possible while maintaining control over activities.

4 Organizational Theory How can an organization avoid becoming too tall? One way is by increasing managers’ span of control—the number of subordinates a manager directly manages. In general, a manager’s span of control is limited by two factors: the complexity and interrelatedness of tasks.

5 Copyright 2004 Prentice Hall FIGURE 5-8 Horizontal Differentiation into Functional Hierarchies Sales EngineeringManufacturingPurchasingResearch and Development

6 Organizational Theory Factors affecting the shape of the hierarchy: Centralization—with decentralization, less direct managerial supervision is needed Standardization—reduces the need for levels of management because rules substitute for direct supervision

7 Organizational Theory Bureaucratic Principal One A bureaucracy is founded on the concept of rational-legal authority. Rational-legal authority is due to the position in an organization, not because of personal qualities such as charisma, wealth, or status.

8 Organizational Theory Bureaucratic Principal Two Organizational roles are held on the basis of technical competence, not because of social status, kinship, or heredity.

9 Organizational Theory Bureaucratic Principal 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 cuts down on role conflict and role ambiguity.

10 Organizational Theory Bureaucratic Principal 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 can recognize the chain of command.

11 Organizational Theory Bureaucratic Principal Five Rules, standard operating procedures, and norms should be used to control behavior and the relationship between roles in an organization.

12 Organizational Theory Bureaucratic Principal Six Administrative acts, decisions, and rules should be formulated and put in writing. This provides history and continuity.

13 Organizational Theory The Problems of Bureaucracy Over time managers fail to properly control the development of the organizational hierarchy. Organizational members come to rely too much on rules and standard operating procedures (SOPs) to make decisions. Such over-reliance makes them unresponsive to the needs of customers and other stakeholders.

14 Organizational Theory Management by Objectives (MBO) a system of evaluating subordinates on their ability to achieve specific organizational goals or performance standards and to meet operating budgets

15 Organizational Theory Management by Objectives (MBO)  Step 1: Specific goals and objectives are established at each level of the organization.  Step 2: Managers and their subordinates together determine the subordinates’ goals.  Step 3: Managers and their subordinates periodically review the subordinates’ progress toward meeting goals.

16 Robert Nardelli appointed CEO December 2000 Nardelli ousted January 2007

“Home Depot Learns to Go Local”  Tricky problem for national retailers – balancing local demand w/ national efficiency  Retailers often go through shift from localization to centralization as they grow bigger  Under Nardelli, Home Depot purchasing system had favored national uniformity at expense of local customer preferences  Consolidated nine regional purchasing offices into one centralized buying operation at Atlanta HQ’s  Nardelli’s top-down mngt style demoralized staff  Co lost the money it saved by not having right products in right quantities at right stores  Co lost market share to Lowe’s, which had gained reputation for more responsive customer service  Co’s strength had been its skilled store ees, but service slipped under Nardelli  To cut costs, Co hired more PT ees and adopted salary cap that drove off senior ees  Mngt focused on measuring all aspects of stores’ productivity (e.g., # pallets removed from truck per hour) but too often ignored customers

“Home Depot Learns to Go Local”  New, more targeted buying has helped lower merchandise costs by reducing unsold goods  Lowe’s has always had centralized buying, but tailors local product assortments according to market surveys  Home Depot built own system to analyze demographic info and customer preferences  Nardelli implemented ‘Six Sigma’ (process mngt technique aimed at increasing efficiency and cutting costs) at Home Depot, but didn’t have intended effect  Source: Wall Street Journal, 10/7/08; 6/5/08; 2/20/07; 1/4/07