Management of the Enterprise
Chapter 9: Adapting Organizations to Today’s Markets
Organization from the Bottom Up
- The principles of management are much the same, no matter the size of the business.
- One of the first steps is to organize your business; organizing or structuring begins with determining what work
needs to be down and then dividing up tasks among the three of you. This is called a, Division of labour.
- Job Specialization dividing tasks into smaller jobs.
- Departmentalization the process of setting up individual departments to do specialized tasks.
- Structuring an organization consists of:
Devising a division of labour
Setting up teams or departments to do specific tasks.
Assigning responsibility and authority to people.
Assigning specific tasks
Establishing procedures for accomplishing the organizational objectives.
The Changing Organization
- Much of the change in the business has changed due to the dynamic business environment, including more
global competition and faster technological change.
- Customers today expect high-quality products and fast, friendly service at a reasonable cost.
- Managing change has been a critical managerial function that sometimes include changing the whole
The development of Organizational Design
- Business growth led to economies of scale.
- Economies of Scale the situation in which companies can reduce their production costs if they can purchase
raw materials in bulk and develop specialized labour, resulting in the average cost of goods going down as
production levels increase.
Examples: Car production in mass numbers.
- Economies of Scope efficiencies associated with the demand side of a business where more products are
promoted or a broader media is used to increase the potential customers reached with each dollar spent.
Fayol’s Principles of Organization
- Unity of Command
Each worker is to report one, and only one boss.
Benefits are obvious
What happens if 2 bosses give you 2 different assignments? Which one should you follow? Reporting to only one manager prevents such confusion.
- Hierarchy of Authority
All workers should know to whom they should report.
Managers should have the right to give orders and expect others to follow.
- Division of Labour
Functions are to be divided into areas of specialization such as production, marketing and
- Subordination of Individual Interests to the general interest
Workers are to think of themselves as a coordinated team.
The goals of the team are more important than the goals of individual workers.
Managers have the right to give orders and the power to enforce obedience.
Authority and responsibility are related: whenever authority is exercised, responsibility arises.
The principle is also being modified as managers are beginning to empower employees.
- Degree of Centralization
The amount of decision-making power vested in top management should vary by circumstances.
It is possible to centralize all decision-making power in the top manager. (small organization)
Some decision-making power should be delegated to lower-level managers and employees on
both major and minor issues (large organization).
- Clear Communication Channels
All workers should be able to reach others in the firm quickly and easily.
Materials and people should be placed and maintained in the proper location.
A manager should treat employees and peers with respect and justice.
- Esprit de Corps
A spirit of pride and loyalty should be created among people in the firm.
Max Weber and Organizational Theory
- Sociologist Max Weber was writing about organization theory in Germany around the same time Fayol was
writing his books in France.
- Book was: The Theory of Social and Economic Organizations.
- Studied the hierarchy of many significant historical organizations (ex. Roman Empire).
- Promoted the period-shaped organization structure that became so popular in large firms.
- Putted great trust in managers and felt that firms would do well if employees simply did what they were told.
- Doesn’t work now-a-days because there are rarely relatively uneducated and untrained workers.
- Weber’s principles of organization emphasizes:
Written rules, decision guidelines, and detailed records.
Consistent procedures, regulations, and policies.
Staffing and Promotion based on qualifications
- Believed that large organizations demanded clearly established rules and guidelines that were to be followed
- In favour of bureaucracy. Turning Principles into Organizational Design
- Hierarchy a system in which one person is at the top of the organization and there is a ranked or sequential
ordering from the top down of managers who are responsible to that person.
- The Chain of command the line of authority that moves from the top of a hierarchy to the lowest level.
- If employees want to introduce work changes, they ask a supervisor (the first level of management), who asks
their managers, who asks a manager at the next level up, and so on.
- Max Weber used the word “bureaucrat” to describe a middle manager whos function was to implement top
- Bureaucracy an organization with many layers of managers who set rules and regulations and oversee all
- When employees have to ask their managers for permission to make a change, the process many take so long
that customers become annoyed.
- To make customers happy, some companies are reorganizing to give employees power to make more decisions
on their own.
- Empowerment Giving employees such authority and responsibility to make decisions and please customers.
- Well-run bureaucratic organizations can be extremely effective in certain contexts – when there is little
innovation in the marketplace, consistency in demand, low-skilled workers, and a lot of time to weigh the
consequences of decisions.
Issues Involved in Structuring Organizations
- Henry Mintzberg supports the current view that there is no single structure that will lead to success for all
- “Structure should reflect the organization’s situation – for example, its age, size, type of production system, and
the extent to which its environment is complex and dynamic. Small businesses with up to 5 employees do not
need to spend time on how to structure themselves. However, the effectiveness of larger organizations or those
expecting significant change is impacted by the structure. As well, a firm’s design decisions (such as span of
control, centralization versus decentralization and matrix structures) need to be chosen so they can work within
the chosen structure and design”.
- Your systems should serve your customers or those producing, delivering, or supporting your products.
- Current trends are toward smaller, more flexible structures that let companies react more quickly to today’s
fast-changing, technologically competitive business climate.
- When designing responsive organizations, firms have had to deal with several organizational issues:
Centralization versus decentralization.
Span of Control
Tall versus flat organization structures
- Change management the strategic approach by preparing for the change, then managing the change, and
concludes with re-enforcing the change.
Centralization Versus Decentralization of Authority
- When a company needs radical changes, centralized decision making is often necessary, at least for a while. - Centralized Authority An organization structure in which decision-making authority is maintained at the top
level of management at the company’s headquarters.
- Decentralized Authority An organization structure in which decision-making authority is delegated to lower-
level managers more familiar with local conditions than headquarters management could be.
- To give store managers in various citiies the authority to buy, price, and promote merchandise appropriate for
each area. Such delegation of authority is an example of decentralized management.
- McDonald’s feels that purchasing, promoting and other such decisions are best handled centrally, so therefore
would lean toward centralized authority.
Choosing the Appropriate Span of Control
- Span of Control the optimum number of subordinates a manager supervises or should supervise.
- At lower levels, where work is standardized, its possible to implement a wide span of control (15 to 40workers).
- Variables in span of control include the following:
Capabilities of the manager.
o The more experienced and capable a manager, the broader the span of control
Capabilities of the subordinates
o The more the subordinates needs supervision, the narrower the span of control
o Employee turnover at fast-food restaurants, for example, is often so high that
managers must constantly be training new people and thus need a narrow span
o The more concentrated the work area is, the broader the span of control can be.
o The more similar the functions are, the broader the span of control can be.
Need for coordination
o The greater the need for coordination, the narrower the span of control might
Planning demands o The more involved the plan, the narrower the span of control might be.
o The more complex the functions are, the narrower the span of control might be.
- Other factors to consider include the professionalism of superiors and subordinates and the number of new
problems that occur in a day.
- The number of people reporting to a company president may range from 1 to 80 or more.
- The trend is to expand the span of control as organizations reduce the number of middle managers and hire
more educated and talented lower-level employees.
- Its possible to increase the span of control as employees become more professional, as information technology
makes it possible for managers to handle more information, and as employees take on more responsibility for
Tall Versus Flat Organization Strucutres
- A tall organization structure an organization structure in which the pyramidal organization chart would be
quite tall because of the various levels of management.
- Some organizations had as many as 14 levels, and the span of control was small (that is, there were few people
reporting to each manager).
- The cost of keeping all of these managers and support people was quite high, the paperwork generated was
enormous, and the inefficiencies in communication and decision making often became intolerable.
- A Flat Organization structure an organization structure that has few layers of management and a broad span
- Can be highly responsive to customer demands because authority and responsibility for making decisions may
be given to lower-level employees and managers can be spared certain day-to-day tasks. Advantages and Disadvantages of Departmentalization
- Departmentalization dividing an organization into separate units.
- Functional structure is the grouping of workers into departments based on similar skills, expertise, or resource
- Enables employees to specialize and work together efficiently.
- Other advantages include:
o Employees can develop skills in depth and can progress within a department as they master those skills.
o The company can achieve economies of scale in that it can centralize similar resources in one area.
o There’s good coordination within the function, and top management can easily direct and control
various department’s activities.
- Disadvantages of departmentalization by function:
There may be a lack of communication among the different departments. Example: production
may be so isolated from marketing that the people making the product do not understand
Individual employees may begin to identify with their department and its goals rather than with
the goals of the organization as a whole. Example: the purchasing department may find a good
value somewhere and buy a huge volume of goods that have to be stored at a high cost to the
firm and may become obsolete or spoil, if not used in a timely manner. May make the
purchasing department look good, but it hurts the overall profitability of the firm.
The company’s response to external changes may be too narrow.
People may not be trained to take broad-based senior managerial responsibilities; rather, they
tend to become narrow specialists.