Third, when local adaptation is important, decentralization is typically favored. the context of a fundamental change in organizational structure which is currently taking place in the way companies view their organizations and the inherent requirements and results. Delayering is based on the assumption that when times are good, firms tend to expand their management hierarchies beyond the point of efficiency. An autonomous subunit has all the resources and decision-making power required to run its operation daily. They do it because they are committed to what is best for the organization (Quinn, Letters to Garrett: pg. In contrast, sales decisions tend to be more decentralized because economies of scale are less of a consideration here. FEMA, the federal agency responsible for disaster response, was widely criticized for being very slow to help the hundreds of thousands of mostly poor people who had been made homeless. 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. Employees are motivated to work hard to achieve a higher level. Thus by giving store managers the ability to set prices and make stocking decisions, Wal-Mart’s 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 organization. Copyright OrgCharting 2004-2016; All Rights Reserved. The disadvantage lies in its rigidity and the length of time needed for information to flow through the organ… TRUE Vertical differentiation refers to the location of decision-making responsibilities within a structure. The disadvantage of vertical integration is that it reduces the amount of diversification that an organization can access. Horizontal differentiation, which refers to the formal division of the organization into subunits. Third, decentralization permits greater flexibility—more rapid response to environmental changes. When stores arrange their products in order from lowest to highest quality, they are practicing vertical differentiation. Centralization is the concentration of decision-making authority at a high level in a management hierarchy. A third problem with tall hierarchies is that they are expensive. Horizontal differentiation is high. 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. 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. 24. This structure offers both advantages and disadvantages. Staffs in a vertical structure have well-defined roles and responsibilities, which reduces duty ambiguity and encourages high production efficiency. These activities may need to be coordinated to ensure a smooth flow of components to the assembly operation. The simple structure has as its key part the strategic apex, uses direct supervision, and employs vertical and horizontal centralization. Typology and Configuration. Soon he was too busy to perform all the tasks he had been doing. 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. https://www.upcounsel.com/functional-organizational-structure The vertical organizational structure is a strict hierarchical structure with power emanating from the top to the bottom. Similarly, production activities may be centralized at key locations to eliminate duplication, attain economies of scale, and lower costs. Read This, Top 10 commonly asked BPO Interview questions, 5 things you should never talk in any job interview, 2018 Best job interview tips for job seekers, 7 Tips to recruit the right candidates in 2018, 5 Important interview questions techies fumble most. 10 The argument was that a manager responsible for more than six subordinates would soon lose track of what was going on. 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. This is why many high-technology firms operate with a greater degree of decentralization than firms operating in more stable and predictable environments. Managers of autonomous subunits can be held accountable for subunit performance. Wal-Mart, for example, has centralized all purchasing decisions at its headquarters in Arkansas. Structure defines how power is held and exercised within a company. Organizational structure within an organization clarifies employee roles, facilitates communication and establishes a chain of responsibility to help determine strengths and weaknesses. Now we recognize that the relationship is not this simple. A firm's _____ determines where in its hierarchy the decision-making power is concentrated. By "structure" I mean things like degree and type of horizontal differentiation, vertical differentiation, mechanisms of coordination and control, formalization, and centralization of power. Put differently, temporary centralization of decision-making power is often an important step in organizational change. 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. In tall hierarchies there is more turf (more centers of power and influence) and thus more voices arguing against change. Vertical Differentiation The business was a small factory that made wood products for the construction industry, such as doors, window frames, and stairs. Due to the lack of autonomy, employees from the bottom may have lots of limitations to share their constructive ideas or creative proposals. This freed the CEO to concentrate on bigger strategic issues. Welch believed that GE had become too top-heavy during the tenure of his successors. Centralization. Where does the responsibility for R&D decisions lie? What is a Vertical Organizational Structure. 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. How tall depends on the span of control that is feasible, which in turn depends on the nature of the work, the visibility of subordinate performance, and the extent of decentralization within the organization. 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. 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. How the firm’s configuration is broken down into its several subunits. If these units are managed on an arm’s-length basis, with topmanagement intervening in subunit operations only when performance goals are not met, the top managers can handle a wide span of control, which makes a flat organization feasible. In another example, Microsoft recently reduced the number of divisions in its organization from six to three, thereby centralizing decision making in fewer senior managers, in an attempt at greater coordination. 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. What’s more, because of multiple layers of powers, it will take more time to respond to a problem or implementing decisions. 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. Although performance benefits are often associated with moving to a flat structure, the process of delayering is not an easy one; and research shows that delayering can cause significant stress and poor morale among managers if the process is not handled correctly. There are advantages and disadvantages to a vertical structure. Vertical integration is often closely associated with vertical expansion which, in economics, is the growth of a business enterprise through the acquisition of companies that produce the intermediate goods needed by the business or help market and distribute its product. The salaries and benefits of multiple layers of midlevel managers can add up to significant overhead, which can increase the cost structure of the firm; unless there is a commensurate benefit, a tall hierarchy can put a firm at a competitive disadvantage. It then passes on those savings to consumers in the form of lower prices, which lets the company grow its market share and profits. Differentiation is normal and it causes conflict. The process did not stop here. What is the structure or Vertical differentiation in a company? 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). In other words, as an organization gets larger it tends to become taller. Differentiation: Differentiation is the process by which an organization allocates people and resources to organizational tasks and establishes the tasks and authority relationships that allow the organization to achieve its goals. 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. By wielding its enormous bargaining power, purchasing managers at the head office can drive down the costs Wal-Mart pays for the goods it sells in its stores. As a result of information overload, managers might suffer the constraints imposed by bounded rationality. In effect the CEO added a third layer to the management hierarchy.To better manage growth and diversification of the firm, he made the hierarchy taller. 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. 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. How Can Freshers Keep Their Job Search Going? 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). Reflection Human beings are not good at transmitting information; they tend to embellish or miss data, which distorts the information. So decisions may be based on inaccurate information, and poor performance may result. 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). 1. Initially the factory had just one manager, who was also the CEO (the author’s father), and 10 employees. The Dow chemical company is located is the second quadrant titled Symmetric. 2: Locate your organization on the figure. The objective here is to understand why organizations have the structure that they do. At one time it was thought that the optimal span of control was only about six subordinates. Are production and marketing decisions centralized in the offices of upper-level managers, or are they decentralized to lower-level managers? In effect, the CEO added another layer to the management hierarchy to cope with growth. Thus when there are substantial differences between conditions in local markets, marketing and sales decisions are often decentralized to local marketing and sales managers. Horizontal differentiation: The degree of task specialization across the hierarchy. It also specifies who and how performs different tasks. (Thomas, 2014) Based on this information I created a matrix organizational structure that incorporates holacracy in several departments. When looking at the composite structure of the organization, it appears to have high vertical differentiation. Managers deal with this by decentralizing decisions to lower levels within the organization. By doing so the manager may get access to more resources, earn performance bonuses, or avoid sanctions for poor performance. 3. 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 Economists refer to the loss of efficiency that arises from deliberate information distortion for personal gain within an organization as influence costs, and they argue that influence costs can be a major source of low productivity. Discuss the roles of vertical and horizontal differentiation as they relate to organizational structure. First, top management can become overburdened when decision-making authority is centralized. 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. 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. Examples of simple structures are relatively small corporations, new government departments, medium-sized retail stores, and small elementary school districts. A key element of his strategy was to transform General Electric into a leaner and faster-moving organization—which required delayering. Instead those decisions are decentralized to local marketing managers, who are more in tune with the German market. The organization consists of the top manager and a 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 … General Introduction to Vertical Organizational Structure. Vertical Organization Structure. 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. At this point the CEO performed multiple functions—managing employees, planning production, going on sales calls, doing the books, purchasing lumber, and so on. When decisions are decentralized to lower-level managers, those managers may make decisions at variance with top managers’ goals. Decentralization vests decision-making authority in lower-level managers or other employees. The differences between a horizontal structure and a vertical organization are considerable, … Delayering: Reducing the Size of a Hierarchy Given the disadvantages associated with tall hierarchies, many firms attempt to limit the size of the management hierarchy. Most firms start out small, often with only one or at most two layers in the hierarchy. Just as centralization is one way of maintaining control in an organization, decentralization is another. Problems in Tall Hierarchies Several problems can occur in tall hierarchies that may result in lower organizational efficiency and effectiveness. Tall hierarchies have many layers of management; flat hierarchies have few layers. With a chain of command well defined, decisions usually move from the top down through layer by layer, and people at … A final problem concerns the inherent inertia associated with a tall hierarchy. Vertical structure is likely to be rigid, which might hamper the company from accepting innovative concepts and trap a company in outdated techniques. Organizational structures may be inherently weak or chief executives may create personality-organization constellations that adversely affect employees. Third, centralization can avoid duplication of activities by various subunits within the organization. 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. It is often painful 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. The firm was soon successful and business grew, so the CEO hired more employees. It's your ultimate org chart tool which is advanced, easy and affordable. By centralizing decision making, a firm can avoid the duplication of activities that occurs when similar activities are carried on by various subunits within the organization. Vertical differentiation •levels of formal power in an organisation •Span of control refers to the number of subordinates (staff) a supervisor can effectively control. 1. First, decisions regarding overall firm strategy, major financial expenditures, financial objectives, and legal issues are centralized at the senior management level in most organizations. 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. 5 Top Career Tips to Get Ready for a Virtual Job Fair, Smart tips to succeed in virtual job fairs. For employees who are seeking for a job promotion, there is a clear path to career planning. Horizontal Differentiation. A second aspect of vertical differentiation refers to the number of levels in an organization’s hierarchy. Vertical differentiation The location of Centralization decision making responsibilities with in the structure of organization Decentralization IM@ 2011 Conflict turns many organizations negative. FEMA officials apparently felt that they had to discuss relief efforts with their superiors before proceeding. Before you determine whether your organizational structure should be vertical or horizontal, you need to understand the differences between the two frameworks. The more responsibility subunit managers have for decisions that impact subunit performance, the fewer excuses they have for poor performance and the more accountable they are. Jack Welch believed that the key to successful delayering is to move fast (thereby eliminating lingering uncertainty among managers concerning their job security) and to reward and promote managers who thrive within the new structure, thereby indicating the management style that will be favored, Principles Of Management Interview Questions, All rights reserved © 2020 Wisdom IT Services India Pvt. A. organizational architecture B. vertical differentiation C. organizational structure D. horizontal differentiation 25. How wide is the subject of some debate, but it seems that good managers can effectively handle as many as 20 direct reports if the circumstances are right.In sum, as organizations grow and undertake more activities, the management hierarchy tends to become taller. This change has involved a shift in perspective from the commonly adopted vertical organizational structure to flat type of organizational structure. C. control systems and incentives in place. Major strategic decisions, for example, are often centralized to make sure the entire organization is pulling in the same direction. In your opinion, which of these concepts is most important for an effective organizational structure? As this example illustrates, growth in the number of layers in a hierarchy is driven by the size of an organization and the number of different activities it undertakes. This might be achieved by centralizing production scheduling at the firm’s head office. See handouts page for more information on organizational structure. Fourth, decentralization can result in better decisions. Does chemistry workout in job interviews? Finally, decentralization is favored in environments that are characterized by high uncertainty and rapid change. Centralization of important decisions minimizes the chance of this occurring. Ltd. Wisdomjobs.com is one of the best job search sites in India. Larger community hospital staff and services are laid out in tall vertical differentiations to display a clear cut chain of command for the range of services provided. This is the most traditional of the organizational structures that businesses use. 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. There is also the problem of deliberate distortion by midlevel managers who are trying to curry favor with their superiors or pursue some agenda of their own. In the context of Mintzberg's organizational structures, Reutiko Inc. is an example of a(n) _____. Arguments for Centralization There are four main arguments for centralization. Span of Control The term span of control refers to the number of direct reports a manager has. 5. As you can see from the above referenced organization chart there are 18 departments within Airbnb’s company. 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. 4. Top 10 facts why you need a cover letter? Other things being equal, the more layers there are in a hierarchy, the more opportunities there are for people to deliberately distort information. Thus purchasing and manufacturing decisions are often centralized in an attempt to eliminate duplication and realize scale economies. First, there is a tendency for information to get accidentally distorted as it passes through layers in a hierarchy. To run each division he appointed a general manager. Such decentralization of strategy making would not be found in firms operating in a more stable and predictable environment, such as the automobile industry. Second, motivational research favors decentralization. There are arguments for both centralization and decentralization. Due to the development of globalization, a lot of changes and challenges, but also benefits arise. In contrast, horizontal differentiation is concerned with how to divide the organization into subunits. The vertical organizational structure also has lots of disadvantages. This is the degree to which a decision making authority in the organization is centralized. 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. 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. Vertical differentiation occurs when the company develops a chain of command. Please use an example. In this sense centralization is a way of controlling the organization. Second, centralization can help ensure that decisions are consistent with organizational objectives. Robbins (1990), who summarizes structure into complexity, cen-trality, and formality. There are additional advantages and disadvantages to consider with vertical integration as well. The width and height of the hierarchy. Frequently it makes sense to centralize some decisions and decentralize others, depending on the type of decision and the firm’s strategy. Vertically structured organizations have clear lines of authority, with quicker decision making and better designation of tasks to employees. We return to this issue in Chapter 9 when we discuss control systems. The vertical organizational structure is a strict hierarchical structure with power emanating from the top to the bottom. 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. Adding more levels in the hierarchy is a response to the problems of control that mount when a manager has too much work. In the structure, each person is supervised by the one directly above him. Formalization is about rules and processes that prescribe people's behaviour. 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