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8th Lecture (1st chapter) - Organizing

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Dave Swanston

Chapter 8Organizing page 174197 Lecture 8 Organization ArchitectureThe term organization architecture refers to the totality of a firms organization including formal organization structure control systems incentive systems organizational culture and people By organization structure we mean three things the location of decisionmaking 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 such as crossfunctional teamsControls are the metrics used to measure the performance of subunits and judge how well managers are running those subunits Incentives are the devices used to encourage desired employee behavior Incentives are closely tied to performance metrics For ex ample the incentives of a manager and his or her employees in General Electrics lighting business might be linked to the performance of that division Organizational culture refers to the values and assumptions that are shared by the employees of an organization Organizations are societies of individuals who come together to perform collective tasks They have their own distinctive patterns of culture and subculture Organizational culture can have a profound impact on how a firm performs Lastly by people we mean not just the employees of the organization but also 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 in other words their human capitalThe various components of organization architecture are not independent of each other Each component shapesothers theAn obvious example is the strategy regarding people This can be used proactively to hire individuals whose internal values are consistent with those the firm wishes to emphasize in its organizational culture The people component of architecture can be used to reinforce and maintain the prevailing culture of the organizationIf a business enterprise is going to attain a competitive advantage and maximize its performance it must pay close attention to achieving internal consistency among the various components of its architecture and the architecture must support the strategy and operations of the firmPayforperformance systems and high levels of decentralization are not for everybody If managers realize that selfreliant goaloriented individuals do best in their organization then their human resource professionals try to hire individuals that have this particular profileA crucial task of managers is to design an organization architecture that makes sense for the market in which an enterprise competes and the basic strategic positioning it is trying to achieve The start of this process is to design the appropriate organization structureDesigning Structure vertical differentiationOrganization structure can be thought of in terms of three dimensions1 Vertical differentiation which refers to the location of decisionmaking responsibilities within a structure that is centralization or decentralization and also to the number of layers in a hierarchy that is whether the organizational structure is tall or flat2 Horizontal differentiation which refers to the formal division of the organization into subunits3 The establishment of integrating mechanisms which are mechanisms for coordinating subunits We discuss these dimensions next1Centralization and DecentralizationA firms vertical differentiation determines where in its hierarchy the decisionmaking power is concentrated Are production and marketing decisions centralized in the offices of upperlevel managers or are they decentralized to lowerlevel managers Where does the responsibility for RD decisions lie Are important strategic and financial decisions pushed down to operating units or are they concentrated in the hands of top managers There are arguments for both centralization and decentralization Centralization is the concentration of decisionmaking authority at a high level in a management hierarchy Decentralization vests decisionmaking authority in lower level managers or other employeesArguments for CentralizationThere are four main arguments for centralization aCentralization can facilitate coordination Activities may need to be coordinated to ensure a smooth flow of components to the assembly operation This might be achieved by centralizing production scheduling at the firms head office bCentralization can help ensure that decisions are consistent with organizational objectives When decisions are decentralized to lowerlevel managers they may make decisions at variance with top managers goals Centralization of important decisions minimizes the chance of this occurring Major strategic decisions for example are often centralized to make sure the entire organization is pulling in the same direction In this sense centralization is a way of controlling the organizationcCentralization can avoid duplication of activities by various subunits within the organization For example many firms centralize their RD functions at one or two locations Similarly production activities may be centralized at key locations to eliminate duplication attain economies of scale and lower costs dCentralization can give toplevel managers the means to bring about needed major organizational changes Often firms seeking to centralize place power and authority in a key individual or group who then sets the new strategic direction for the firm and redraws organization architecture Once the new strategy and architecture have been decided on however greater decentralization of decision making normally follows Put differently temporary centralization of decisionmaking power is often an important step in organizational changeArguments for DecentralizationThere are five main arguments for decentralization aTop management can become overburdened when decisionmaking authority is centralized Centralization 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 In addition they can rely on simple heuristics to make complex decisions Decentralization gives top management time to focus on critical issues by delegating more routine issues to lowerlevel managersbMotivational research favors decentralization Behavioral scientists have long argued that people are willing to give more to their jobs when they have a greater degree of individual freedom and control over their work The idea behind employee empowerment is that if you give employees more responsibility for their jobs they will work harder which increases productivity and reduces costs
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