Organizational Hierarchy

Hierarchy

No. of level of authority in the organization

Why is hierarchy important ?

1. It affects the decision making capability of the

org.

2. It determines the effectiveness of the

communication system.
Emergence of hierarchy
When managers find it more and more difficult to
Coordinate & Motivate employees effectively.

Eg: if 2 chefs work together to cook a meal , how is each

person’s impact on the quality to be measured and
rewarded.

(when each employee performs a small part of total

task , it is often difficult to determine how much he
actually contributes to task and it becomes difficult
to evaluate ach individual’s performance).
 To improve the ability to control (coordinated and
motivate) its members an org does 2 things-

1. Increase the no of managers it uses to monitor,

evaluate and reward employees.

2. It increases the no of level in the managerial

hierarchy , making the hierarchy of authority taller.

It gives direct face to face control over the members,

managers personally controls their subordinates.
(Direct Supervision)
Example
GE gives high importance to every manager’s
responsibility to develop his subordinate and improve
their chances of being promoted.

Any manager who fails to do so is fired .

Any manager who succeed is rapidly promoted up in

the hierarchy.
Size and Height of Organization

Tall organization- an org in which the hierarchy has

many levels relative to the size of
the org.

Flat organization - an org that has few levels in its

hierarchy
Optimum level of hierarchy ?

As per research, a company with 3000 employees

should have 7 levels of hierarchy.

Less than 7 it is considered as Flat org.

7 or more than 7 levels it is considered as Tall org.
Flat structure Vs Tall structure

1
2
3
1 4
2 5
6
3 7
Types of managerial Hierarchy
Large organizations with size 10,000 or even 1,00,000 do
not increase the no of managers at each level , they follow
pyramid like structure with fewer managers at each
level instead of bloated structure which consists of more
managers at all levels to control the increasing no of
members.
1
2
3
4
5
6
7
Problems with Tall Hierarchy

1. Communication problem (slow decision making ,

distortion, manipulation of information, top level
loses control over the bottom).

Eg:
a. FedEx has only 5 hierarchical levels. They believe
that increase in level will hamper their speed of
communication and decision making.
b. DuPont (develops Nylon and Teflon) eliminated its
top mgmt. and reduced the level from 11 to 5.
2. Motivation problems

Flat org
Managers = more authority & responsibility = high motivation

Tall org
Managers = less authority & responsibility = low motivation
3. Bureaucratic cost
Managers cost money – downsizing and restructuring is done.
Eg:

Ford, in 2005, eliminated 2 levels in its hierarchy

(600 managers) and saved $500 million.

Dell , in 2008, cut 12000 jobs and saved $1 billion/year.

In 2000, other companies like HP, Xerox, Kodak also

eliminated levels in their hierarchy to save billion of
dollars
 The Parkinson’s Law Problem
(Parkinson’s Law - work expands so as to fill the time available)

A former British civil servant, while studying British

Navy’s administrative process discovered –
No of ships in operation decreased by 68%
No of dockyard officials for maintaining the fleet
increased by 40%
No of top level officials increased by 79%
He gave 2 principles –
1. An official wants to multiply its subordinates, not rivals
(large empire, higher status)
2. Officials make work for one another (making the
hierarchy taller, spending more time on monitoring and
controlling the actions of increased subordinates.
 Ideal hierarchy - Minimum chain of command
Value added by manager Vs cost of manager

Solution to Parkinson’s problem :

1. The CEO approves the appointment of new manager or

hierarchical level.

2. Use principle of minimum chain of command

 Minimum Chain of command
Keep Org. Structure as flat as possible

Evaluate top managers ability to monitor and control its

activities with fewest managers possible.

Flat Org structure means – Lesser communication,

motivation and cost problem as compared to tall org
structure.

Use Tall Org Structure when there is great need of

direct control over subordinates.
Eg: nuclear power plants.
Example of Restructuring

Walt Disney
 How org can avoid becoming too tall yet
effectively control its workforce?

Span of control :
No. of subordinates manager directly manages.

Increase in manager’s span of control = increase in no of

employees = NO increase in hierarchical level.
 CEO A CEO B

M M M M M M

e e e e e e
e e e e e e e e

Which is the appropriate Span of Control?

 Limitation of Span of Control

1. Inability to exercise adequate control over the subordinates

as they grow in number.

2. Increase in subordinates = exponential increase in

subordinates relationship that
a manager has to supervise
 If SOC increases then :

Manager 1 Manager 2

X Z X Z V

E E E E E
Y
Y U

W
Manager 1 is managing 3 relationships – X,Y ,Z

Manager 2 is managing 6 relationships – X,Y,Z,U,V,W

just by addition of one extra subordinate.

No. of relationship = n(n-1)

2

If span of control increases manager may lose control

over subordinates and cannot hold them accountable for
the actions.

(Subordinates gets opportunity to follow their own goals)

 Managers ability to control and supervise the
subordinates is dependent on 2 factors:

1. Complexity of subordinate’s task

2. Interrelatedness of subordinate’s task

Complexity & Interrelatedness = Narrow SOC

Complexity & Interrelatedness = Wide SOC

Eg: Mass production – Wide SOC

Research Lab of Biotechnology – Narrow SOC
 SHAPE OF ORGANIZATION

Determined by :

1. Levels in the hierarchy

2. Span of control
1. Horizontal differentiation – development of subunits
/ divisions.
It is used when org wants to control its employees but
cannot increase the level in the hierarchy without
encountering problems discussed earlier.
 Horizontal Differentiation is possible within a division.

Eg: R&D department can have a no of teams that functions

at same hierarchical level.
Horizontal differentiation increases vertical differentiation
2. Centralization

Taller hierarchy = increase in no of managers =

increases in problems of communication and
coordination.

Managers start spending more time on monitoring and

supervising their subordinates and less time in planning and
goal setting.

Solution:
Decentralization of authority to lower level managers reduces
the burden (of monitoring subordinates and lower level
managers) on top manager.
Eg:

1. Union Pacific - one of the biggest U.S railroad

freight carriers .
It was experiencing high demand of freight transportation
but at the same time was experiencing delay in moving
freights. This led to increase in complaints from the
customers and delays were costing the company million of
dollars ($150 million) in penalty payments.

Reason of delay:
Highly centralized management approach. All routing and
scheduling planning was done centrally at its headquarters
office.
Solution by Union Pacific :

Davidson, the CEO decided to reorganize the company.

Now , the regional managers were given the authority to

make operational decisions.

They could now alter scheduling and routing to

accommodate customer requests even if it raised their
cost.
2. Quaker Oats – the breakfast cereal maker was outrun
by competitors like Kraft , Heinz .

Problem : As identified by the CEO Robert Morrison,

organization’s structure put authority in the wrong place.
CEO

Top executives (authority )

Heads of different food divisions (no authority)

Different Food divisions

Solution :
1. Robert Morrison first eliminated the entire upper level of
mgmt. (though it contained many competent executives).
2. He them promoted the next level of managers , the division
heads , who directly reported to him and made. He made the
managers totally responsible for the food products under their
control.
CEO

Managers - Heads of different food divisions (full authority)

Different Food divisions

Thus he flattened the structure and decentralized control at

the same time
 CEO Robert Morrison

NEW
DECENTRALIZED
M1 M2 M3 M4 AND
FLAT STRUCTURE
OF
QUAKER OATS

DIV 1 DIV 2 DIV 3 DIV 4

3. Standardization :

Another way to gain control over employees is to standardize

their behaviour, it makes their action predictable.

Direct supervision is substituted by Rules and SOP

(standard operating procedure)

As these rules and SOP control the subordinates action, less

managerial supervision is required and manager’s span on
control can be increased.
Eg:

Sales people are controlled by the combination of –

1. sales quota &
2. submission (after calling their clients)

Managers do not monitor salespeople directly as they can use

the report and quota to evaluate the performance of the sales
people.

Standardization also allows upper level managers to delegate

authority more confidently when subordinates have clearly
specified procedures to follow.