The Choice between Decentralization and Centralization The choice between centralization and decentralization is not absolute. What’s more, because of multiple layers of powers, it will take more time to respond to a problem or implementing decisions. Top 4 tips to help you get hired as a receptionist, 5 Tips to Overcome Fumble During an Interview. Easy Org Chart Creator – Powerful & Economic Choice for Your Business, Org Chart Template: Essential Ones for Your Work, Org Chart Software: The Ultimate Guide for You, Dropbox Business Org Chart: Check the Magic Figures. An autonomous subunit has all the resources and decision-making power required to run its operation daily. At this point he hired help—a factory manager to supervise employees and plan production, a sales manager and three other salespeople to seek business, an accounts manager to manage the books, and a purchasing manager to buy lumber. Centralization is the concentration of decision-making authority at a high level in a management hierarchy. First, decisions regarding overall firm strategy, major financial expenditures, financial objectives, and legal issues are centralized at the senior management level in most organizations. Third, centralization can avoid duplication of activities by various subunits within the organization. Fourth, decentralization can result in better decisions. The same may also be true of purchasing decisions. Delayering is based on the assumption that when times are good, firms tend to expand their management hierarchies beyond the point of efficiency. The width and height of the hierarchy. Arguments for Decentralization There are five main arguments for decentralization. Arguments for Centralization There are four main arguments for centralization. Horizontal Differentiation in Organizational Structure. Similarly, Jeffery Immelt, the head of GE’s medical systems business under Welch, had 21 direct reports (Immelt replaced Welch as CEO). Due to the lack of autonomy, employees from the bottom may have lots of limitations to share their constructive ideas or creative proposals. Horizontal differentiation: The degree of task specialization across the hierarchy. (Thomas, 2014) Based on this information I created a matrix organizational structure that incorporates holacracy in several departments. Decentralization can establish relatively autonomous, self-contained subunits within an organization. Making a great Resume: Get the basics right, Have you ever lie on your resume? A business owner is typically at the top of a vertical chain of command. With more businesses to manage the CEO found that he was once again stretched, so he created four divisions: the wood products factory, the home builder, the brick factory, and the equipment rental company. Discuss the roles of vertical and horizontal differentiation as they relate to organizational structure. In addition, as organizations grow they often start to undertake more activities— expanding their product lines, diversifying into adjacent activities, vertically integrating, or expanding into new regional or national markets. The examples structure is based an oil and gas refinery, which is quite similar to chemical plant. Tall hierarchies have many layers of management; flat hierarchies have few layers. 10 The argument was that a manager responsible for more than six subordinates would soon lose track of what was going on. First, there is a tendency for information to get accidentally distorted as it passes through layers in a hierarchy. Such decentralization of strategy making would not be found in firms operating in a more stable and predictable environment, such as the automobile industry. 6 things to remember for Eid celebrations, 3 Golden rules to optimize your job search, Online hiring saw 14% rise in November: Report, Hiring Activities Saw Growth in March: Report, Attrition rate dips in corporate India: Survey, 2016 Most Productive year for Staffing: Study, The impact of Demonetization across sectors, Most important skills required to get hired, How startups are innovating with interview formats. This is about horizontal and vertical differentiation or creating units in different geographies. 2: Locate your organization on the figure. The disadvantage lies in its rigidity and the length of time needed for information to flow through the organ… Vertically structured organizations have clear lines of authority, with quicker decision making and better designation of tasks to employees. (like from … A third problem with tall hierarchies is that they are expensive. Horizontal differentiation, which refers to the formal division of the organization into subunits. In tall hierarchies there is more turf (more centers of power and influence) and thus more voices arguing against change. Adding more levels in the hierarchy is a response to the problems of control that mount when a manager has too much work. In a centralized firm the need to refer decisions up the hierarchy for approval can significantly slow decision making and inhibit the ability of the firm to adapt to rapid environmental changes. Vertical Differentiation Vertical differentiation, which refers to the location of decision-making 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 flat). Most healthcare institutions utilize a functional organizational structure (Understanding Healthcare Management, n.d.). At one time it was thought that the optimal span of control was only about six subordinates. A firm's _____ determines where in its hierarchy the decision-making power is concentrated. Managers deal with this by decentralizing decisions to lower levels within the organization. Operating decisions, such as those relating to production, marketing, R&D, and human resource management, may or may not be centralized depending on the firm’s strategy and conditions in the external environment. Thus when there are substantial differences between conditions in local markets, marketing and sales decisions are often decentralized to local marketing and sales managers. When competitive conditions in a firm’s market are changing rapidly, with new technologies and competitors emerging and conditions changing in ways that are difficult to anticipate, centralization, because it slows down decision making, can put the firm at a competitive disadvantage. At this point the CEO performed multiple functions—managing employees, planning production, going on sales calls, doing the books, purchasing lumber, and so on. This structure is normally adapted in large and highly renowned companies , because being massive organizations with large numbers of employees and multiple tasks, objectives and functions, their system must be much more complete than any other company with fewer functions. As at Nucor, achieving a flat hierarchy requires decentralization of responsibility for many decisions to lower-level managers who run autonomous self- contained units (in Nucor’s case, individual steel plants). First, centralization can facilitate coordination. Decentralization gives top management time to focus on critical issues by delegating more routine issues to lower-level managers and reducing the amount of information top managers have to process, making them less vulnerable to cognitive biases. One cause of inertia in organization is that to protect their turf and perhaps their jobs, managers often argue for the maintenance of the status quo. Welch believed that GE had become too top-heavy during the tenure of his successors. Initially the factory had just one manager, who was also the CEO (the author’s father), and 10 employees. The balance between vertical and horizontal differentiation represents one of the main challenges for organizational design, which defines mechanisms of control, decision-making and activity coordination that are essential for organizational goal achievement (Jones, 2009). Centralization of important decisions minimizes the chance of this occurring. For example, a company could have a group working in information technology, another in marketing and another in finance.Each department has a manager or director who answers to an executive a level up in the hierarchy who may … C. control systems and incentives in place. If you’ve had a job, you likely worked in a functional organizational structure.The functional structure is based on an organization being divided up into smaller groups with specific tasks or roles. The phenomenon is familiar to anyone who has played the game “telephone.” In this game players sit in a circle; somebody whispers a message to the next person, who then whispers the message to the next person, and so on around the circle. Horizontal differentiation is high. 15 signs your job interview is going horribly, Time to Expand NBFCs: Rise in Demand for Talent, Designing Structure: Vertical Differentiation - Principles of Management. Finally, decentralization is favored in environments that are characterized by high uncertainty and rapid change. Vertical differentiation •levels of formal power in an organisation •Span of control refers to the number of subordinates (staff) a supervisor can effectively control. Examples of simple structures are relatively small corporations, new government departments, medium-sized retail stores, and small elementary school districts. Organizational structure within an organization clarifies employee roles, facilitates communication and establishes a chain of responsibility to help determine strengths and weaknesses. The vertical and horizontal differentiation of task management in the firm. The Dow chemical company is located is the second quadrant titled Symmetric. A second aspect of vertical differentiation refers to the number of levels in an organization’s hierarchy. 1. 8 At Google, for example, lower-level employees are givenexplicit permission to develop new business ideas and the right to lobby top managers for the funds to develop those ideas. Symmetric (typology) RDS’s global matrix structure is high in both vertical and horizontal differentiation which indicates the organizational … If disruptions within the supply chain occur, then the entire operation is put at-risk until the supply chain can be restored. The thousands of State Farm Insurance Company agents' offices scattered throughout the United States are an example of: A)vertical differentiation B)spatial differentiation C)a tall structure with narrow spans of control D)departmentation by product With a chain of command well defined, decisions usually move from the top down through layer by layer, and people at the bottom have the least autonomy. As a result of information overload, managers might suffer the constraints imposed by bounded rationality. A final problem concerns the inherent inertia associated with a tall hierarchy. This is significant because we know that although adding layers to an organization can reduce the workload of higher-level managers and attenuate control loss, tall hierarchies have their own problems. This cost the agency crucial hours in the early part of the disaster, which significantly slowed its response and meant that the relief effort was less effective than it might have been. It might make little sense for the CEO of Procter & Gamble to make marketing decisions for the detergent business in Germany because he or she is unlikely to have the relevant expertise and information. Major strategic decisions, for example, are often centralized to make sure the entire organization is pulling in the same direction. In other words, as an organization gets larger it tends to become taller. There’s an executive at the top of the heap, people responsible for each area (the director tier is for bigger businesses), and teams of people who do the work in each department.The advantage of this type of organizational structure lies in its simplicity. Are important strategic and financial decisions pushed down to operating units, or are they concentrated in the hands of top managers? The number of direct reports a manager can handle depends on the nature of the work being supervised, how visible the performance of subordinates is, and the extent of decentralization within the organization. Second, motivational research favors decentralization. There are advantages and disadvantages to a vertical structure. Before you determine whether your organizational structure should be vertical or horizontal, you need to understand the differences between the two frameworks. Problems in Tall Hierarchies Several problems can occur in tall hierarchies that may result in lower organizational efficiency and effectiveness. https://www.upcounsel.com/functional-organizational-structure In this sense centralization is a way of controlling the organization. For example, consider the history of a business founded by the father of this chapter’s author. Vertical differentiation occurs when the company develops a chain of command. 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In your opinion, which of these concepts is most important for an effective organizational structure? Nucor, for example, has 25 divisions. Often firms seeking to transform their organizations centralize power and authority in a key individual (or group) who then sets the new strategic direction for the firm and redraws organization architecture. For several days while thousands of homeless people huddled in the New Orleans Superdome, lacking food and adequate sanitary facilities, FEMA was nowhere to be seen. Human beings are not good at transmitting information; they tend to embellish or miss data, which distorts the information. Fourth, 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. What is the structure or Vertical differentiation in a company? To achieve vertical differentiation, _____. This is the degree to which a decision making authority in the organization is centralized. In effect, the CEO added another layer to the management hierarchy to cope with growth. In a decentralized structure, decisions are made closer to the spot by individuals who (presumably) have better information than managers several levels up a hierarchy. In contrast, sales decisions tend to be more decentralized because economies of scale are less of a consideration here. In general, a multinational organization (MNO) is an enterprise that owns several production units in different countries. During the last 15 years or so, delayering to reduce the number of levels in a management hierarchy has become a standard component of many attempts to boost firms’ performance. Second, when the realization of economies of scale is an important factor, there tends to be greater centralization. Similarly, production activities may be centralized at key locations to eliminate duplication, attain economies of scale, and lower costs. Staffs in a vertical structure have well-defined roles and responsibilities, which reduces duty ambiguity and encourages high production efficiency. All of the computers in the line would come with the same basic features and design, but the higher-end computers would have more … Over time the CEO decided to enter other businesses that were related to the wood products industry, including home building, a brickmaking business, and a construction equipment rental company. An organization's structure is one of the most impactful choices that a startup can make. Second, centralization can help ensure that decisions are consistent with organizational objectives. Formalization is about rules and processes that prescribe people's behaviour. Note that managers can influence the visibility of subunit performance and the extent of decentralization through organization design, thereby limiting the impact of organization size and diversity on the size of a management hierarchy. This enables store managers to respond quickly to changes in their local environment, such as a drop in local demand or actions by a local competitor. Org Chart Creator provides the best org charting service. Delayering, and simultaneously widening spans of control, is also seen as a way of enforcing greater decentralization within an organization and reaping the associated efficiency gains. Now we recognize that the relationship is not this simple. They do it because they are committed to what is best for the organization (Quinn, Letters to Garrett: pg. Microsoft felt that having six divisions in the company led to confused sales, marketing, and product development efforts and that greater centralization was required to harmonize efforts. See handouts page for more information on organizational structure. This is the most traditional of the organizational structures that businesses use. The organization consists of the top manager and a 2. It's your ultimate org chart tool which is advanced, easy and affordable. New, emerging organizational structures differ from the traditional ones. With a chain of command well defined, decisions usually move from the top down through layer by layer, and people at … Just as centralization is one way of maintaining control in an organization, decentralization is another. 5. What are avoidable questions in an Interview? The disadvantage of vertical integration is that it reduces the amount of diversification that an organization can access. 24. This freed the CEO to concentrate on bigger strategic issues. To run each division he appointed a general manager. The firm was soon successful and business grew, so the CEO hired more employees. A property or characteristic of the organizational structure. Put differently, temporary centralization of decision-making power is often an important step in organizational change. Structure and Design •Typically two areas of formal structure ” –Vertical differentiation •Based on levels of authority or positions holding formal power within the organization –Horizontal differentiation •Usually based on activity •Common grouping of activities include –Clientele –juvenile, gang … The general manager of each reports directly to the CEO, which implies that the CEO has a very wide span of control (probably close to 30 if other corporate executives such as the COO are included). This structure offers both advantages and disadvantages. The process did not stop here. Differentiation is normal and it causes conflict. When stores arrange their products in order from lowest to highest quality, they are practicing vertical differentiation. The process of delayering was a standard feature of Jack Welch’s tenure at General Electric, during which he laid off 150,000 people, reduced the number of layers in the hierarchy from nine to five, and simultaneously increased General Electric’s profits and revenues. Those changes are for example complex multinational relationships, an increasing variety of information, capital and material flows as well as price pressure and increasing competition due to the elimination of national boundaries. For example, the manager of a division might suppress bad information and exaggerate good information in an attempt to window-dress the performance of his or her unit to higher-level managers and win their approval. The differences between a horizontal structure and a vertical organization are considerable, … Third, decentralization permits greater flexibility—more rapid response to environmental changes. Does chemistry workout in job interviews? The establlishment of integrating mechanisms, which are mechanisms for coordinating subunits. Span of Control The term span of control refers to the number of direct reports a manager has. A key element of his strategy was to transform General Electric into a leaner and faster-moving organization—which required delayering. It then passes on those savings to consumers in the form of lower prices, which lets the company grow its market share and profits. Once the new strategy and architecture have been decided on, however, greater decentralization of decision making normally follows. The business was a small factory that made wood products for the construction industry, such as doors, window frames, and stairs. Thus at Wal-Mart, although purchasing decisions are centralized so the firm can realize economies of scale in purchasing, routine pricing and stocking decisions are decentralized to individual store managers, who set prices and choose the products to stock depending on local conditions. The vertical organizational structure is a strict hierarchical structure with power emanating from the top to the bottom. Many multinational consumer products firms, such as Unilever, 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 and local adaptation is required. The objective here is to understand why organizations have the structure that they do. In positive organizations leaders do the work necessary to integrate differentiated systems.
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