Centralization and Decentralization

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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 Parkinson’s 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 Weber’s 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 structure—the hierarchy of authority created to control an organization’s 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. Parkinson’s 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 Weber’s 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.

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

5.1Authority: 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...
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