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TitleORGANIZATIONAL THEORY, DESIGN, AND CHANGE - Chapter 05
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CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE:

AUTHORITY AND CONTROL

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hierarchy from becoming too tall and centralized. If the hierarchy is neglected, organizational costs rise,
the decision-making process slows, and the company becomes unresponsive to stakeholders.

Restructuring and downsizing are a trend to reduce costs. Coupled with this trend is the use of

empowerment and self-managed teams. Another cost-saving measure is the use of contingent workers.



CHAPTER OUTLINE


5.1 Authority: How and Why Vertical Differentiation Occurs

Determining the level of vertical differentiation is a basic design challenge. Managers must determine the
shape of the hierarchy, the number of levels, and the span of control (the number of subordinates a
manager oversees). The shape of the hierarchy, plus the balance between centralization and
decentralization, establish the extent of vertical differentiation.


The Emergence of the Hierarchy

As an organization grows, differentiation and the division of labor increase, which lead to coordination
and motivation problems. At this point the hierarchy emerges to coordinate and motivate members by
increasing the number of managers and organizational levels.

Managers choose between a flat hierarchy with few levels relative to company size and a tall hierarchy
with many levels relative to size. (Fig. 5.1)


Size and Height Limitations

Research on size and height of the hierarchy shows that a firm of 1000 has 4 levels, one with 3,000 has 7
levels, and one with up to 100,000 employees stays at 9 or 10 levels. (Fig. 5.2)
Organizations actively restrict the number of managers and the number of levels as they grow.
So, most organizations have a pyramid structure (Fig. 5.3a), not a bloated structure (Fig. 5.3b).

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Problems with Tall Hierarchies


Q. Why is the number of hierarchical levels and managers limited?

A. Tall hierarchies face problems.


Communication Problems. As the chain of command extends, communication takes longer, which
slows decision-making. Information is distorted, accidentally or deliberately, as it goes up and down the
hierarchy.

Q. How can information be distorted?

A. A long chain of command leads to misinterpretation of the message. Self-serving managers give
selective information to decision-makers. Subordinates tell superiors what they want to hear. Distortion
leads to poor decisions, because decision-makers have incorrect information.

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CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE:

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Despite these advantages, bureaucracies have negative connotations.



Q. What causes this negative thinking?

A. Disadvantages:
1. Slowed decision-making and increased costs due to a tall and centralized hierarchy
2. Failure to meet stakeholders’ needs due to too many rules



Management by Objectives

This system provides a framework to both evaluate and to monitor progress towards the achievement of
organizational goals. It consists of three steps:


1. Specific goals and objectives are established at each level of the organization.

2. Managers and their subordinates together determine the subordinates’ goals.

3. Managers and their subordinates periodically review the subordinates’ progress towards
meeting the goals.



Managerial Implications: Using Bureaucracy to Benefit the Organization
For organizational effectiveness, managers and employees should follow bureaucratic principles. They
do not own their positions and must benefit stakeholders. Managers should make hiring, promoting, and
rewarding decisions fairly. Reporting relationships should be periodically reviewed to ensure clarity.
Managers and employees should adopt a “questioning attitude” toward the organization.

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5.4 The Influence of the Informal Organization

At all organizational levels, decision-making and coordination occur outside formally designed channels.
Rules and norms emerge out of the informal organization, the network of personal relationships that
develop over time.

Q. Why should managers understand the informal organization?

A. The informal organization affects the way the “formal” hierarchy works.


Organizational Insight 5.5: Wildcat Strikes in the Gypsum Plant
Gypsum, a mineral for making wallboard, is mined and processed by the General Gypsum Company.
Workers could take wallboard for personal use and have excessive absenteeism until a new plant
manager reactivated rules that had never been enforced. The workers initiated strikes and only went back
to work when authority was defined and rules established for settling disputes.


Q. What is the role of the informal organization?

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