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Copyright 2004 Prentice Hall

FIGURE 5-2

The Relationship between Organizational Size and Number of Hierarchical Levels

Number of employees

10

9

8

7

6

5

4

3

2

1

0 1,000 3,000 9,000 10,000 100,000

Num

ber

of

hie

rarc

hica

l lev

els

1

22

Organizational Theory

Problems with Tall Hierarchies

Communication Problems—both timing and distortion

Motivation Problems—an increase in levels ofmanagement leads to a decrease in responsibility and motivation

Bureaucratic Costs—managers cost money

33

Organizational Theory

Principle of Minimum Chain of Command An organization should choose the minimum number of management levels consistent with its goals and the environment in which it exists.

In other words, keep the organization as flat as possible while maintaining control over activities.

44

Organizational Theory

How can an organization avoid becoming too tall?

One way is by increasing managers’ span of control—the number of subordinates a manager directly manages.

In general, a manager’s span of control islimited by two factors: the complexity andinterrelatedness of tasks.

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Copyright 2004 Prentice Hall

FIGURE 5-8 Horizontal Differentiation into Functional Hierarchies

Sales Engineering Manufacturing Purchasing Research and Development

6

5

4

3

2

1

7

1 1

2 2

3 3

5

66

Organizational Theory

Factors affecting the shape of the hierarchy:

Centralization—with decentralization, lessdirect managerial supervision is needed

Standardization—reduces the need for levels of management because rules substitute for direct supervision

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Organizational Theory

Bureaucratic Principal One

A bureaucracy is founded on the concept ofrational-legal authority.

Rational-legal authority is due to the position in an organization, not because of personal qualities such as charisma, wealth, or status.

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Organizational Theory

Bureaucratic Principal Two

Organizational roles are held on the basis of technical competence, not because ofsocial status, kinship, or heredity.

99

Organizational Theory

Bureaucratic Principal Three

A role’s task responsibility and decision-makingauthority and its relationship to other roles in the organization should be clearly specified.

A clear pattern of vertical and horizontal differentiation cuts down on role conflictand role ambiguity.

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Organizational Theory

Bureaucratic Principal Four

The organization of roles in a bureaucracyis such that each lower office in the hierarchy is under the control and supervision of a higher office.

People can recognize the chain of command.

1111

Organizational Theory

Bureaucratic Principal Five

Rules, standard operating procedures, andnorms should be used to control behaviorand the relationship between roles in an organization.

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Organizational Theory

Bureaucratic Principal Six

Administrative acts, decisions, and rulesshould be formulated and put in writing.

This provides history and continuity.

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Organizational Theory

The Problems of BureaucracyThe Problems of Bureaucracy

Over time managers fail to properly control the Over time managers fail to properly control the development of the organizational hierarchy.development of the organizational hierarchy.

Organizational members come to rely too much on Organizational members come to rely too much on rules and standard operating procedures (SOPs) rules and standard operating procedures (SOPs) to make decisions.to make decisions.

Such over-reliance makes them unresponsive to Such over-reliance makes them unresponsive to the needs of customers and other stakeholders.the needs of customers and other stakeholders.

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Organizational Theory

Management by Objectives (MBO)Management by Objectives (MBO)

a system of evaluating subordinates on their a system of evaluating subordinates on their ability to achieve specific organizational ability to achieve specific organizational goals or performance standards and to goals or performance standards and to meet operating budgetsmeet operating budgets

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Organizational Theory

Management by Objectives (MBO)Management by Objectives (MBO) Step 1Step 1: Specific goals and objectives are : Specific goals and objectives are

established at each level of the organization.established at each level of the organization. Step 2Step 2: Managers and their subordinates : Managers and their subordinates

together determine the subordinates’ goals.together determine the subordinates’ goals. Step 3Step 3: Managers and their subordinates : Managers and their subordinates

periodically review the subordinates’ progress periodically review the subordinates’ progress toward meeting goals.toward meeting goals.

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Robert Nardelli appointedCEO December 2000

Nardelli ousted January 2007

““Home Depot Learns to Go Home Depot Learns to Go Local”Local”

Tricky problem for national retailers – balancing local demand Tricky problem for national retailers – balancing local demand w/ national efficiencyw/ national efficiency Retailers often go through shift from localization to centralization Retailers often go through shift from localization to centralization

as they grow biggeras they grow bigger Under Nardelli, Home Depot purchasing system had favored Under Nardelli, Home Depot purchasing system had favored

national uniformity at expense of local customer preferencesnational uniformity at expense of local customer preferences Consolidated nine regional purchasing offices into one centralized Consolidated nine regional purchasing offices into one centralized

buying operation at Atlanta HQ’sbuying operation at Atlanta HQ’s Nardelli’s top-down mngt style demoralized staffNardelli’s top-down mngt style demoralized staff Co lost the money it saved by not having right products in right quantities at right Co lost the money it saved by not having right products in right quantities at right

storesstores Co lost market share to Lowe’s, which had gained reputation for more responsive Co lost market share to Lowe’s, which had gained reputation for more responsive

customer servicecustomer service Co’s strength had been its skilled store ees, but service slipped under Co’s strength had been its skilled store ees, but service slipped under

NardelliNardelli To cut costs, Co hired more PT ees and adopted salary cap that drove off To cut costs, Co hired more PT ees and adopted salary cap that drove off

senior eessenior ees Mngt focused on measuring all aspects of stores’ productivity (e.g., # Mngt focused on measuring all aspects of stores’ productivity (e.g., #

pallets removed from truck per hour) but too often ignored customerspallets removed from truck per hour) but too often ignored customers

““Home Depot Learns to Go Home Depot Learns to Go Local”Local”