Chapter 8 - organizaing
• organization architecture - refers to the totality of a firm's organization, including formal organization
structure, control systems, incentive systems, organizational culture and people.
• organization structure - 3 things - the location of decision making responsibilities in the firm (centralized
or decentralized); the formal division of the organization into subunits such as functions, product
divisions, and national operations; and the establishment of integrating mechanisms to coordinate the
activities of subunits
• controls are the metrics used to measure the perofrmance of subunits and judge how well managers
are running those subunits. Incentives are the devices used to encourage desired employee behaviour.
Incentives are closely tied to performance metrics.
• organizational culture refers to the values and assumptions that are shared by the employees of an
• people - the strategy to recruit, compensate, motivate and retain those individuals and the type of
people they are in terms of their skills, values, and orientation. The human capital.
• organization structure can be thorugh of in terms of three dimensions:
o vertical differentiation - refers to the location of decision-making responsibilities within a
structure (centralization or decentralization) and also to the number of layers in a hierarchy
(whether the structure is tall or flat)
o horizontal differentiation - refers to the formal division of the organization into subunits
o the establishment of intergrating mechanisms - are mechanisms for coordinating subunits.
Centralization and decentralization
• centralization is the concentration of decision-making authority at a high level in a management
• Decentralization vests decision-making authority in lower level managers or other employees.
• there are four main arguements for centralization.
1. centralization can facilitate coordination. Example: firms that manufactures and performs final
assembly. These activities need to be coordinated to ensure a smooth flow of components to
the assembly operation. This is achieved by centralizing production scheduling at the firm's
2. centralization can help ensure that decisions are consistent with organizaational objectives.
major strategic decisions are often centralized to make sure the entire organization is pulling in
the same direction. Centralization is a way of controlling the organization.
3. Centralization can avoid duplication of activities by various subunits within the organization.
4. 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. • arguements for decentralization
1. top management can become overburdened when decision making authority is centralized.
Becuase it increases the amount of information senior managers are required to process. as a
result of information overload, managers might suffer the constraints imposed by bounded
rationality. Decentralizationg would give top management time to focus on critical issued by
delegating more routine issues to lower-level managers and redcing the amont of information
top managers have to process, making them less vulnerable to cognitive biases.
2. motivational research favours decentralization. the idea behind employee empowerment is that
if you give employees more responsibility for their jobs they will work harder, which increases
prodctivity and reduces costs.
3. decentralization permits flexibility. a more rapid response to environmental changes. In a
centralized firm, the need to refer decisions up to the hierarchy for approval can slow devision
making and inhibit the ability of the firm to adapt to rapid changes
4. can result in better decisions. In decentralized structure, decisions ar emade closer to the spot
by individuals who have better information than managers several levels up a hierarchy.
5. decentralization can increase control. Decentralization can establish relatively autonomous, self-
contained subunits within an organization. an autonomous subunit has all the resources and
decision-making power required to run its operation daily. Managers of autonomous subunits
can be hheld accountable for subunit performace. Thus by giving store managers the ability to
set prices and make stocking decisions, top managers can hold local store managers
accountable for the performance of their stores, and this increases the ability of top managers to
control the orgnation.
• overall firm strategy, major financial expenditures, financial objectives, and legal issues are centralized
at the senior management level in most organizations.
• when the realization of economies of scale is an important factor, there tends to be greater
centralization. purchasing and manufacturing decisions are often centralized in an attempt to eliminate
duplication and realize scale economies.
• sales decisions tend to be more decentralized because economies of scale are less of a consideration
• When local adaptation is important, decentralization is typically favoured
• centralize decisions about manufacturing and purchasing to realize scale economies, but decentralize
marketing and sales decisions to local brand managers in different countries because competitive
conditions differ from country to country.
• decentralization is favoured in environments that are characterized by hi