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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
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 1000 has 4 levels, one with 3,000 has 7 levels, and one with up to 100,000 employees stays at 9 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?
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.
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.
Organizational Insight 5.2: Using the Hierarchy to Promote Creativity and EMI
EMI is a record company that gradually lost its creativity because it was managed by a top heavy team of executives who did not recognize the entrepreneurial ability of their subordinates.
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 the 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?
Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 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________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________
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
5.4
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.
5.5
Information technology is making it much easier for organizations to cost-effectively design a structure based upon empowerment and teams. The trend towards 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. This allows 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. 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________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________
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.
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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.
Ask students for their personal experiences, as many families or individuals have experienced this situation firsthand.
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She flattened the hierarchy by cutting two layers of management, created cross-functional teams instead of centralized decision making, and she assigned each team to its own sales staff in order to speed the introduction of the products to market. 2. How should Fiorino make use of new kinds of information technologies to help its hierarchy of authority work better?
The key point is that this is a continuous process. She is already taking advantage of technologies by creating teams and flattening the structure. In general, this is possible because of technology.
TEACHING SUGGESTIONS
1. Use a role-play to illustrate the problems with tall hierarchies. Ten students work for a computer company. Student one 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 on the Internet http://www.cnn.fn. 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.
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