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The article basically focuses on the structure of the organizations and explains why the different companies adopt different kind of organizational structures. Many different studies in the past regarding the organizational structure explain that the selection of a structure depends upon two basic factors i.e. economies of scale and coordination of different functional activities. As a whole the divisional structure allows better coordination among different functions while the functional structure results in the better exploitation of the economies of scale. So basically the selecting an organizational structure is a tradeoff between these advantages.
Authors have used a model based on coordination of interactions across various activities to address the issues relating to organization design. The model allows us to predict whether to use matrix or hierarchal structure, the extent of decentralization and the choice of functional vs. divisional hierarchy.
Authors model firm consist of activities i.e. manufacturing products, marketing products etc. these activities are originated and managed by the "product managers" . There are
benefits when above activities interacts. To gain the benefits from coordination of among activities, there is a need for a manager with correct expertise (project manager does not possess such expertise). So there comes the roll of "middle managers" who are capable of coordinating specific pair of interactions. "Middle Managers" only provide pair wise interactions as they have limited area of expertise. Company will have incremental benefits if these pair wise interactions are coordinated on a company wide basis. Now the CEO is the one who can coordinate at companywide level .
The further explanation reveals that the cost can be segregated into two major types i.e. the salary and the opportunity costs. Characteristics of activities and managerial course lead companies to choose various structures when the salary of middle managers is high, the structure of the company would be a "flat organization" (consisting CEO and project managers only). When salaries of middle managers are low the structure would be "matrix structure". When the salaries for middle managers are average the optimal resulting structure would be "hierarchy". When the opportunity cost of the CEO is high, there are more middle managers leading to reducing the involvement of CEO in coordinating activities, resulting decentralization of decision making. In model middle managers perform two functions 1.) coordinate pair of project. 2.) general useful information for the CEO of the company.
The writer also argues that the organizations follow some sort of a life cycle. When the organization moves from being less complex and small size to more complex and greater size it generally moves from a flat and highly centralized structure initially to divisional structure, then to the functional and finally to a matrix or decentralized form. Most of the
literature review also advocates a positive relationship between the size of the company and its decentralization.
The in depth analysis also reveals that the opportunity cost of the middle level managers can be ignored. Another important aspect is the transfer of the information between different departments which we previously named as the coordination between departments. The writer suggests that there should be proper incentives for truthfully transferring the information among the managers in an organization and centralized decisions may prove to be more costly in these situations. The production of useful information in providing incentives in a divisional structure is more evident than in a matrix organization because in a matrix organization reporting to multiple managers may lead to conflicting incentives.
RELEVANCE TO THE COURSE:
The structure of an organization is directly related with the management as they have a significant impact on all of its functions. Like in the decentralized organizations the decision making is decentralized to a higher extent which in turn leads to participative decision making that finally leads to more acceptance and productivity. On the other hand the decentralization may also lead to improper decisions because the middle level managers may not have the vision that the top management possess. On the other hand centralized decision making also has certain advantages and disadvantages.
So a manager must consider all of these horizons and he must have the basic idea that in what conditions and circumstances different structures i.e. the matrix, the divisional and the functional are suitable.
Especially this article provides a better understanding about the tradeoff between the coordination of different activities and the expertise of the managers, this makes it a key element for the managers to consider for the decision making. As a whole it provides useful information to the managers about the advantages and disadvantages of various organization structures and helps to make crucial decisions suitable to the organization.
What I found interesting in the article, is the finding of the researcher that middle managers have no opportunity cost of coordinating interactions. and thus their salaries determine the structure of the organization. I didn't find this in any other article.
Support as well as criticism has been made.
Several articles are read to analyze the findings of the author. Other writers have support the following results.
1) Optimal Design:
Optimal design trades off the costs and benefits of various configurations of managers in organizations. See Jenner- gren (1981 for a survey) present a similar approach i.e. Divisional Structures have advantage, it allows better coordination among functions and provide local responsiveness. And the functional structure provides the better exploitation of the economies of scale, location economies and learning experiences. Trading off these benefits, determines whether to adopt a divisional hierarchy or to adopt a functional hierarchy.
2) Optimal Organization of Conglomerates:
As conglomerates are highly diversified firms. For these firms most likely interactions are across functions within the project i.e. these firms don't have the matrix form. These firms will exhibit hierarchy between divisional and functional hierarchies that is along product line. Yossi Spiegel(2009) Has also present his considerations, a firm's choice between a "functional structure" and a "divisional structure" . it also shows that an increase in No of projects create managerial overload, which factors the divisional structure. Hence each project is assigned to a single person.
3) Relationship between the size of the firm and the extent of decentralization:
As the size and complexity of organization increases, the number of other activities (like strategic planning) to which the CEO of the company may contribute increases. So the new, small and young firms have "Centralized flat structure" and hence CEO is highly involve in coordinating activities and as these young firms will grow and become large the frequency of referring projects to the CEO decreases.
Milnea C Mddoveanu and Robert M Baner (2004) also relate the complexity of the functions of the organizations structure themselves. Andrew, MarcRoss (2001) also concluded that decentralized firms are tending to be larger.
Child (1973) also finds the positive relationship between the vertical span (number of levels) of hierarchy and the size.
4) Evolution of a firm's organization structures over it's life cycle:
Young firms have "flat organizational structures" with a high degree of CEO involvement in coordinating activities, as firms grow they tend to choose one of the following three basic directions.
When the salary of middle managers is high, the structure of the company would be a "flat organization" (consisting CEO and project managers only).
When salaries of middle manager are low the structure would be first "matrix structure" then to a "decentralized hierarchy" ( that exploits the most likely interactions).
When the salaries for middle manager are average the optimal resulting structure would be "hierarchy".
The writer suggests that there should be proper incentives for truthfully transferring the information among the managers in an organization and centralized decisions may prove to be more costly in these situations. The production of useful information in providing incentives in a divisional structure is more evident than in a matrix organization because in a matrix organization reporting to multiple managers may lead to conflicting incentives.
Yossi Spiegel(2009) contributed that an increase in managerial overload favors "divisional Structure" as it induces the CEO to rely more on the middle managers decisions and this increases the middle manager's incentives so that they provide useful information to the CEO.
Assumption i.e. p>r is Questionable:
We cannot say that interactions between activities in "functional hierarchy" are less likely interactions. Because it depends on the products a company is offering. Sometimes it happens that companies face high cost pressures, to maximize costs companies try to realize economies of scale by combining production activities and from combining marketing activities than interactions across functions would be more likely and provides high benefits.
Model does not meet the incentive problems:
Managers need incentives to transfer information truthfully across managers within the organization structure. When the cost for incentives of middle managers are high the Organizations design would be flatter and the decision making would be centralize.