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Learning Objectives
1. Explain what is meant by organization architecture. 2. Explain the advantages and disadvantages of centralization and decentralization. 3. Discuss the pros and cons of tall versus flat structures. 4. Outline the different kinds of structure a firm can operate within and explain how strategy should determine structure. 5. Describe the different integrating mechanisms managers can use to achieve coordination within a firm, and explain the link between strategy, environment, and integrating mechanisms.

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Organization Architecture
Organization architecture: The totality of a firms
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.

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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.

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Organization Architecture
Structure

Controls

People

Incentives

Culture

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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.

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Decentralization: Vesting decision-making

authority in lower-level managers or other employees.

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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.

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Arguments for Decentralization

Top management can become overburdened when decision-making authority is centralized.
Motivational research favors decentralization.

Decentralization permits greater flexibilitymore rapid response to environmental changes.

Decentralization can result in better decisions. Decentralization can increase control.

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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

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Question
Decentralization argument works for large businesses. For a small business, it is better to have centralization. Do you agree? Explain.

Decentralization and Control

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Decentralization of decisions to a subunit

Increases responsibility

Which increases accountability

Thereby enhancing control.

The Starfish and the Spider

Ori Brafman and Rod Beckstrom show why businesses need to embrace their own decentralized systems in their book called The Starfish and the Spider.
The book's central metaphor recognizes that if you cut the leg off of a spider, you have at best a (crippled) spider. But if you cut off the leg of a starfish, the starfish will grow a new leg. Traditional centralized organizations are the spiders, and traditional decentralized organizations are the starfish.

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Source: Business Week Online, October 17, 2006

Tall Versus Flat Hierarchies

Tall hierarchies: Organizations with many layers
of management.

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Flat hierarchies: Organizations with few layers of

management.