CHAPTER 5 DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL

TEACHING OBJECTIVES
1. To examine how the hierarchy emerges and how most companies limit hierarchical levels. (5.1) 2. To address the problems associated with tall hierarchies: communication, motivation, and bureaucratic costs. (5.1) 3. To consider Parkinsons Law and the minimum chain of command principle. (5.1) 4. To demonstrate how an increased span of control can prevent a hierarchy from becoming too tall. (5.1) 5. To review the factors that affect the shape of the hierarchy: horizontal differentiation, centralization, and standardization. (5.2) 6. To examine Max Webers six principles for a bureaucratic structure. (5.3) 7. To consider the advantages and disadvantages of a bureaucracy. (5.3) 8. To consider the importance of the informal organization. (5.4) 9. To discuss the trends toward empowerment, self-managed teams, cross-functional teams, and contingent workers. (5.5)

CHAPTER SUMMARY
To protect shareholders goals, managers must constantly analyze organizational structure. This chapter examines the vertical dimension of structurethe hierarchy of authority created to control an organizations members. How and why does vertical differentiation occur? The hierarchy emerges when an organization faces coordination and motivation problems due to increased horizontal differentiation. A hierarchy is tall if it has many levels relative to organizational size and flat if it has few levels relative to size. Most large companies do not exceed 9 or 10 levels and do not increase the number of managers, because tall hierarchies have problems with communication, motivation, and high bureaucratic costs. Parkinsons Law demonstrates how hierarchies get too tall. The minimum chain of command principle is explained. Increasing the span of control can substitute for increasing hierarchical levels. Span of control is based on the complexity and interrelatedness of tasks. Simple and less interrelated tasks call for a wider span of control. Factors shape the hierarchy: horizontal differentiation, centralization, standardization, and the informal organization. These design decisions can ensure that a hierarchy remains flat so the organization can control activities. Horizontal differentiation controls employees when an organization cannot increase its hierarchical levels. Horizontal differentiation keeps the hierarchy flat, as each function has its own hierarchy. Decentralizing authority improves communication and coordination due to less direct supervision, affecting the size of the hierarchy. Standardization reduces direct supervision, because employees follow rules, standard operating procedures (SOPs), and norms. The informal organization can increase control. The chapter outlines Max Webers six principles of bureaucratic structures and reviews the advantages of bureaucratic structure. Authority should be based on rational legality, clearly defined roles, competence, and rules. A bureaucratic structure controls interactions among organizational members, reduces transaction costs, provides stability, and increases core competences. Managers must prevent the hierarchy from becoming too tall and centralized. If the hierarchy is neglected, organizational costs rise, the decision-making process slows, and the company becomes unresponsive to stakeholders.

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Restructuring and downsizing are a trend to reduce costs. Coupled with this trend is the use of empowerment and self-managed teams. Another cost-saving measure is the use of contingent workers.

CHAPTER OUTLINE 5.1 Authority: How and Why Vertical Differentiation Occurs

Determining the level of vertical differentiation is a basic design challenge. Managers must determine the shape of the hierarchy, the number of levels, and the span of control (the number of subordinates a manager oversees). The shape of the hierarchy, plus the balance between centralization and decentralization, establish the extent of vertical differentiation. The Emergence of the Hierarchy As an organization grows, differentiation and the division of labor increase, which lead to coordination and motivation problems. At this point, the hierarchy emerges to coordinate and motivate members by increasing the number of managers and organizational levels. Managers choose between a flat hierarchy with few levels relative to company size and a tall hierarchy with many levels relative to size. (Fig. 5.1) Size and Height Limitations Research on size and height of the hierarchy shows that a firm of 1,000 has four levels, one with 3,000 has seven levels, and one with up to 100,000 employees stays at nine or 10 levels. (Fig. 5.2) Organizations actively restrict the number of managers and the number of levels as they grow. So, most organizations have a pyramid structure (Fig. 5.3a), not a bloated structure (Fig. 5.3b). Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Problems with Tall Hierarchies Q. Why is the number of hierarchical levels and managers limited? A. Tall hierarchies face problems. Communication Problems. As the chain of command extends, communication takes longer, which slows decision making. Information is distorted, accidentally or deliberately, as it goes up and down the hierarchy. Q. How can information be distorted? A. A long chain of command leads to misinterpretation of the message. Self-serving managers give selective information to decision makers. Subordinates tell superiors what they want to hear. Distortion leads to poor decisions, because decision makers have incorrect information.

Organizational Insight 5.1: Pfizers New Emerging Hierarchy

Through mergers and acquisitions, Pfizers hierarchy had become too tall. They cut the number of management layers between top scientists from 14 to seven and drastically reduced the number of committees. Q. How did Pfizers structure contribute to its problems? 47 Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

A. When organizations get too tall, they cannot respond as well or as quickly to the marketplace, which is what happened to Pfizer. This was fixed by flattening the structure so that the organization could respond better to the market. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Motivation Problems. The taller the organization, the less managerial authority and responsibility there are. Tall hierarchies decrease motivation because managers, with less authority and responsibility, are less motivated. In a flat structure, managers have more responsibility and are more motivated. Accountability in a tall structure decreases, making it easy for managers to shirk responsibility. Bureaucratic Costs. Tall hierarchies have high bureaucratic costs; a company pays a middle manager an average of $300,000 a year, so a cut of 1,000 extra managers saves $300 million. Layoffs become necessary if management pays no attention to its hierarchy. A company grows and hires managers without considering long-term costs. When the company matures, growth ceases, and cost reduction becomes necessary. To avoid layoffs, a company must continually evaluate its hierarchy. The Parkinsons Law Problem Parkinson observed that from 1914 to 1928, while the British Navy decreased the number of ships by 68 percent, it increased the number of dockyard officials by 40 percent and top managers by 79 percent. Q. Why did this occur? A. Parkinsons theory is that managers want to increase the number of subordinates, not rivals, so they make work for each other. In other words, Work expands so as to fill the time available. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ The Ideal Number of Hierarchical Levels: The Minimum Chain of Command Managers should base hiring decisions on whether the value added exceeds the cost. The minimum chain of command principle states that a company should choose the minimum number of hierarchical levels needed for goal achievement. Span of Control To avoid becoming too tall, an organization can increase the span of control, the number of subordinates a manager directly oversees. Different companies have different spans of control. A managers span of control is limited to the number of subordinates that can be adequately supervised. An increase in subordinates exponentially increases the subordinate relationships to be managed. A manager with two subordinates manages three relationships, but a manager with three subordinates manages six (Figs. 5.6ab). If the span of control becomes too wide, a manager loses control over subordinates. Q. What determines an effective span of control?

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A. Complexity. For complex, dissimilar tasks, the span of control can be narrow. For routine, similar tasks, the span of control can be wider. A research supervisor has a narrow span of control, but a production supervisor has a wide span of control.

Organizational Insight 5.2: Bob Iger Reshapes Walt Disney

Disney was suffering under a structure that was tool tall, and this was hampering innovation. They eliminated a strategic planning office that was seen as causing a bottleneck of new ideas, and this increased the level of innovation. Interrelatedness. Interrelated tasks require a narrow span of control because horizontal relationships must be managed. Horizontal relationships are less important if tasks are not interrelated. Most organizations have a pyramid-shaped hierarchy, as tasks are complex and interrelated at the top. Notes_________________________________________________________________________

_____________________________________________________________________________ _____________________________________________________________________________ __ 5.2 Control: Factors Affecting the Shape of the Hierarchy

An effective span of control must be limited, thus organizations use other design challenges to control activities: horizontal differentiation, centralization, standardization, and the informal organization. Horizontal Differentiation When vertical differentiation cannot be increased, an organization maintains control by increasing horizontal differentiation and establishing specialized functions or divisions. Each subunit also has a hierarchy. (Fig. 5.7) Q. Why does manufacturing have many levels? A. Manufacturing must exercise tight control over subordinates and control costs. Sales has fewer levels because it relies on standardization, not direct supervision. R&D has fewer levels because complex tasks are difficult to supervise. R&D often uses project teams, a narrow span of control, and informal norms and values to control behavior. (Fig. 5.8) Horizontal differentiation allows an organization to remain flat because hierarchies are developed in subunits. Q. What problems are caused by horizontal differentiation? A. Horizontal differentiation causes coordination and motivation problems that are controlled through centralization, standardization, and the informal organization. Centralization The communication and coordination problems of a tall company make a managers job one of monitoring and supervising, causing an organization to lose sight of its goals. One solution is to reduce the number of managers by decentralizing decision making to lower levels. Decentralization keeps the organizational structure flat.

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Standardization Another way to flatten the hierarchy is through standardization. Tasks are controlled through rules, standard operating procedures (SOPs), and norms, so a wide span of control is used; rules eliminate direct supervision, and managers can delegate responsibility because subordinates know the rules. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Managerial Implications: Authority and Control

Managers must assure that the hierarchy matches organizational needs and is not too tall or centralized. If the hierarchy provides too little control, managers must maintain adequate supervision over people and resources. Managerial teams should review the hierarchys design. Notes_______________________________________________________________________________

_____________________________________________________________________________ _____________________________________________________________________________ __ 5.3 The Principles of Bureaucracy

Max Weber (18641920), a German sociologist, developed an organizational structure to improve operations. He developed the bureaucracy, a structure in which people follow rules and are accountable for their actions. Webers six principles of bureaucracy distribute responsibilities and authority to maximize a companys effectiveness. Principle One: A bureaucracy is founded on the concept of rational-legal authority, a persons authority is due to position in the organization. Power should be separate from personality. Principle Two: Organizational roles are determined by technical competence, not social status, kinship, or heredity. This principle requires managers to see all potential job candidates objectively. Principle Three: A roles 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 is necessary for effectiveness. Role conflict, conflicting demands on a subordinate, and role ambiguity (fear of responsibility because of unclear tasks) should be eliminated. Principle 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 know the chain of command. Principle Five: Rules, standard operating procedures, and norms should be used to control the behavior and the relationship between roles in an organization. Rules are formal written standards of behavior, whereas norms are unwritten.

Organizational Insight 5.3: Never Underestimate the Power of Rules

General Mills opened a chain of Chinese restaurants that had early success. In an attempt to open many restaurants quickly, they lost control of the food quality due to the lack of training and standard preparation procedures. Although they did implement procedures, it was too late to save the restaurant, as word had already spread that they had poor quality and poor service.

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In addition to illustrating the value of rules and standard operating procedures, this case also serves as an excellent example of the power of the reputation effect. Although they fixed the quality problem, it was too late in this case to save the organization. Principle Six: Administrative acts, decisions, and rules should be formulated and put in writing. When written down, rules become official guidelines that can be used even when people leave. Written documents ensure that people can be held accountable. The Advantages of Bureaucracy A bureaucratic structure exists when an organization implements Webers six principles. Q. What are the advantages of a bureaucratic structure? A. Advantages: 1. Rules for designing the hierarchy 2. Increased accountability and reduced transaction costs 3. Reduced costs of monitoring subordinates 4. Increased integration 5. Decreased costs of performance evaluation and of rule enforcement 6. The position separated from the person 7. Guidelines and skills able to be passed on to successors 8. Stability needed for employees to take long-term perspectives Despite these advantages, bureaucracies have negative connotations. Q. What causes this negative thinking? A. Disadvantages: 1. Slowed decision making and increased costs due to a tall and centralized hierarchy 2. Failure to meet stakeholders needs due to too many rules Management by Objectives This system provides a framework to both evaluate and to monitor progress toward the achievement of organizational goals. It consists of three steps: 1. Specific goals and objectives are established at each level of the organization. 2. Managers and their subordinates together determine the subordinates goals. 3. Managers and their subordinates periodically review the subordinates progress toward meeting the goals.

Managerial Implications: Using Bureaucracy to Benefit the Organization

For organizational effectiveness, managers and employees should follow bureaucratic principles. They do not own their positions and must benefit stakeholders. Managers should make hiring, promoting, and rewarding decisions fairly. Reporting relationships should be periodically reviewed to ensure clarity. Managers and employees should adopt a questioning attitude toward the organization. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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5.4

The Influence of the Informal Organization

At all organizational levels, decision making and coordination occur outside formally designed channels. Rules and norms emerge out of the informal organization, the network of personal relationships that develop over time. Q. Why should managers understand the informal organization? A. The informal organization affects the way the formal hierarchy works.

Organizational Insight 5.4: Wildcat Strikes in the Gypsum Plant

Gypsum, a mineral for making wallboard, is mined and processed by the General Gypsum Company.

Workers could take wallboard for personal use and have excessive absenteeism until a new plant manager reactivated rules that had never been enforced. The workers initiated strikes and only went back to work when authority was defined and rules established for settling disputes.
Q. What is the role of the informal organization? A. Managers must consider how the informal organization affects both individual and group behavior when making organizational changes. Altering the formal structure disrupts the informal norms that make the organization work. The informal organization can enhance organizational performance because many accomplishments occur through the informal network in ways not revealed by the formal hierarchy. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Refer to Discussion question 2 here to emphasize how the informal organization affects the shape of the organization. ________________________________________________________________ _________________________________________________________________________________

5.5

IT, Empowerment, and Self-Managed Teams

Information technology is making it much easier for organizations to cost-effectively design a structure based upon empowerment and teams. The trend toward decentralization is largely due to technology that allows this to be done cost effectively, without losing many of the benefits of centralization. Therefore, organizations today are making use of self-managed teams and cross-functional teams as opposed to the traditional bureaucracy. As organizations become flatter, another trend is to employ contingent workers. organizations to both reduce costs and stay flexible. Q. Will decentralization abolish the hierarchy? A. Some suggest that more lateral relations will emerge. Others contend that even a team-based company composed of empowered workers needs a hierarchy and a minimum set of rules and SOPs to control activities. The challenge is to achieve the proper mix of mechanistic and organic structure. Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall 52 This allows

Q. What are the advantages and disadvantages to using contingent workers? A. Contingent workers cost less because they receive no benefits and are only hired as needed. Such employees may have coordination and motivation problems, as there is no promotion or job security. Contingent workers do not help a company develop core competences. Still, an estimated 20 percent of the U.S. workforce is comprised of contingent workers. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

DISCUSSION QUESTIONS AND ANSWERS

1. Choose a small organization in your city, such as a restaurant or school, and draw a chart showing its structure. Do you think the number of levels in its hierarchy and the span of control at each level are appropriate? Why or why not?

Answers will vary. One possibility is a locally-owned restaurant with a four-level hierarchy that includes owner, manager, three assistant managers, and waiters, cooks, and kitchen help. The number of levels is appropriate because four levels is the minimum number for effectiveness. The span of control is appropriate. The manager oversees three assistant managers, who oversee 12 people. The tasks of waiters, cooks, and busboys are simple, so a wide span of control is appropriate. 2. In what ways can the informal organization and the norms and values of its culture affect the shape of an organization?

An organization can use the informal organization, norms, and values to increase control. The informal links can augment the formal authority relationships. Norms and values standardize behavior. The informal organization and norms provide control, so the company can add fewer levels to the hierarchy and hire fewer managers as the company grows. 3. What factors determine the appropriate authority and control structure in (a) a research and development laboratory, (b) a large department store, or (c) a small manufacturing company?

a. An R&D lab has a flat hierarchy and a narrow span of control. This structure is appropriate because complex tasks make it difficult to monitor employees. The lab uses norms and values to control behavior. Teams could facilitate mutual adjustment. b. A large department store has a flat hierarchy, and lower-level managers have a wide span of control: a manager, department heads, assistant managers, and salespeople. The store relies on standardization, rules, and procedures instead of a tall hierarchy. This structure is appropriate because tasks are simple and similar, so lower-level managers have a wide span of control. c. A small manufacturer needs to exert tight controls and monitor employees to control costs. Therefore, it has a taller hierarchy and a smaller span of control. Direct supervision ensures that employees are performing tasks appropriately and that costs are minimized. 4. How can the principles of bureaucracy help managers design the organizational hierarchy?

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The principles of bureaucracy ensure that an organizations structure is effective. It instructs managers on the following: a. The basis of authority. Authority should be based on rational-legal authority, determined by the position, not the person. b. Assigning roles. Roles should be based on competence, not status or kinship. c. Defining tasks. Tasks and decision-making authority should be clearly defined. d. Controlling authority. Each lower office in the hierarchy should report and be responsible to a higher office. e. Controlling behavior. Rules, standard operating procedures, and norms can control behavior. f. Ensuring future effectiveness. Put rules in writing. 5. When does bureaucracy become a problem in an organization? What can managers do to prevent bureaucratic problems from arising?

Bureaucracy becomes a problem when managers fail to control growth, resulting in a tall and centralized hierarchy, which stifles innovation, slows decision making, and increases operating costs. If members rely solely on rules, they become unresponsive to stakeholder needs. Managers can avoid problems by controlling the hierarchy, even during growth. An organization needs the minimum number of levels for achieving goals. To prevent an unnecessary increase in managers, a higher-level officer should approve hiring decisions. If managers follow Webers six bureaucratic principles, problems can be prevented.

ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: How to Design a Hierarchy

Students form small groups of managers assigned to restructure a division by abolishing 25 percent of managerial positions. Students discuss how to cut positions, how to obtain adequate supervision with fewer managers, and how to make downsizing less painful for employees.

The Ethical Dimension #5

Students examine which workers should be terminated during a restructuring of middle managers. This is a difficult exercise, because regardless of the methods used, somebody needs to be terminated when IT replaces the need for workers. This is a good exercise to relate the issue of satisfying stakeholders needs to the ethical processes encountered during a typical restructuring. Ask students for their personal experiences, as many families or individuals have experienced this situation firsthand.

Making the Connection #5

Instruct students to find an example of a company that has recently changed its hierarchy of authority or its top-management team and ask them to explain why changes were made.

ANALYZING THE ORGANIZATION: DESIGN MODULE #5

Students will draw an organizational chart of their companys top management and describe the topmanagement team. They will discuss their companys use of bureaucracy, centralization, standardization, and horizontal differentiation. They must evaluate the hierarchy (tall or flat) and the span of control (narrow or wide).

CASE FOR ANALYSIS

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A Centralized Structure Transforms Home Depot This case illustrates how Home Depot successfully went from an organic structure to a more mechanistic structure. This was in response to competitors like Lowes, who were able to offer similar products at a lower cost. 1. In what ways can (a) decentralizing and (b) centralizing authority help an organization like Home Depot to improve its performance?

Make sure students understand that the structure needs to match the marketplace. Many cases and insights illustrate how companies need to become more organic to be more creative. In the Home Depot case, creativity was not needed. What was needed was a more efficient system. In this case, a more mechanistic structure was the solution. Also note the downsides of both strategies. For example, by centralizing authority, Home Depot certainly gave up the advantages associated with managers having control at the store level. 2. What kinds of factors change the decision to centralize or decentralize authority over time in a competitive environment, such as the home building supply industry?

In this case, it was understanding what the marketplace wanted. Creativity and innovation are not valued nearly as much as low prices, hence, Home Depot needed a structure that allowed this. Other industries may place more value on creativity, innovation, or the need to change quickly, and then a more decentralized, organic structure would be the solution.

TEACHING SUGGESTIONS
1. Use a role-play to illustrate the problems with tall hierarchies. 10 students work for a computer company. Student 1 has an idea for a fax modem and tells a supervisor who checks with a superior. The idea goes through the chain of command. By the tenth person, the idea is distorted. The person is unlikely to suggest other ideas. Another competitor introduces a fax modem, and the company loses out due to the tall hierarchy and unwillingness to promote innovation. Use a role-play to demonstrate how span of control depends on the complexity of the tasks. Three students are research scientists looking for a cure for cancer. These tasks are complex, thus the span of control is narrow. Conversely, have one student supervise 20 production workers. The work is simple, so it is easier to supervise more people. Hierarchies tend to be pyramid shaped because work at top levels is more complex. As an out-of-class assignment, students will look at business publications and find current examples about structural changes: mergers, acquisitions, or downsizing. Invite a CEO from a local company to describe the organizational structure of the company. Ask students to discuss the advantages and disadvantages of working for an organization that implements Webers bureaucracy. Would they enjoy working under this system? Why or why not? Use the principles of management by objectives in the classroom. That is, the instructor is the manager, and the students are subordinates. Role play how this might work based upon their objectives in the classroom. Notice how most of the Organizational Insights and cases in this chapter had a similar theme. Ask students what this theme is, and discuss. This is in reference to many organizations having a structure that inhibits change.

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3. 4. 5. 6. 7.

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