2. © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
chapter
Organizing
McGraw-Hill/Irwin
Principles of Management
© The McGraw-Hill Companies, Inc., All Rights Reserved.

3. 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

4. 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

5. 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.
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6. Organization Architecture
Structure
Controls
People
Incentives
Learning Objective 1: Explain what is meant by organization architecture.
See Text Page: 182
Culture

7. 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

8. 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

9. 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

10. 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.
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11. 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

12. 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.

13. 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

14. 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

15. 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

16. 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

17. 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.
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18. 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:

19. 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

20. 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:

21. 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

22. 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

23. 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: C D A F

24. 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: