Organizing
Dr. Ananda Sabil Hussein
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 decisionmaking responsibilities in the firm, the formal
division of the organization into subunits, and the
establishment of integrating mechanisms to
coordinate the activities of subunits.
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.
Organization Architecture
Structure
Controls
People
Culture
Incentives
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.
Centralization Versus
Decentralization
 Centralization: The concentration of decisionmaking authority at a high level in a
management hierarchy.
 Decentralization: Vesting decision-making
authority in lower-level managers or other
employees.
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.
Arguments for
Decentralization
 Top management can become overburdened when decisionmaking 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.
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
Source: Global Best Practices, Pricewaterhousecoopers
Question
Decentralization
argument works for
large businesses. For a
small business, it is
better to have
centralization. Do you
agree? Explain.
Decentralization
and Control
Decentralization of
decisions to a
subunit …
Increases
responsibility …
Which
increases
accountability
Thereby
enhancing
control.
Tall Versus
Flat Hierarchies
 Tall hierarchies: Organizations with many
layers of management.
 Flat hierarchies: Organizations with few
layers of management.
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.
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.
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.
Source: The McKinsey Quarterly, 2005 Number 2
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.
Integrating Mechanisms
High
Favored by firms in
rapidly changing and
high-technology
environments
Matrix
structure
Teams
Need for
coordination
Liaison
roles
Favored by firms
in stable and
low-technology
environments
Direct
contact
Centralization
Lo
w
Simple
Integrating
mechanisms
Complex
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
C
A
E
D
F
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.