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Organizational Considerations: Structures and Hierarchies

Organizational Considerations: Structures and Hierarchies

Author: James Howard

This lesson is an explanation of the major types of organizational structures.

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Hello, and welcome to this tutorial on Organizational Considerations Within a Company, also known as Structures and Hierarchies. Now let me ask you a couple of questions to begin with. How does the way we organize affect the way we perform, or does it do that? And what does it say about the company that organizes in a particular way, if anything at all? Hmm. Interesting things to ponder.

Well, during this lesson, what we're going to be talking about are some organizational considerations that companies have to consider. We'll discuss organization types as well as take a look at tall organizational structures and flat organizational structures.

Now the key terms for this lesson are going to be centralized organization and decentralized organization. Let's go ahead and start out by talking about organizational considerations. And understand, companies have a number of organizational choices. And there's really no magic bullet. There's no one size fits all when it comes to organization for a company.

Companies can be tall and wide and reaching for the sky like some of the buildings we see in this picture, or they can be flat and wide and meandering like the river that exists in front of it. Let's go ahead and define a couple of our key terms here. A centralized organization is an organization that is arranged by a rigid architecture of employee command where the top of the organization makes the decisions. An example of this might be McDonald's, for instance. Every menu item that goes on the menu at McDonald's is controlled and dictated by the central authority at the top of the centralized organization that is McDonald's. Big Macs don't differ no matter where you go in the country.

Now a decentralized organization-- that's an organization that is arranged by a flexible architecture of employee command where different managers throughout the organization make the decisions. And an example of this is Arthur Andersen if you remember that accounting firm we talked about in ethics that was working with Enron Corporation. Now with Arthur Andersen, this type of organization didn't work out very well as it suffered from the Enron scandal. But another one might be Johnson & Johnson Corporation moving toward this model.

Now flat organizational structures-- what's unique about these is they have very, very few or no levels of management. They're trying to keep it as flat as possible. So there's not a lot of structure between the people at the very, very top and the people at the very, very bottom of that chain of command or that organizational chart.

Now flat organizations have much more in common with small businesses. And in fact, you'll see this a lot in small businesses if for no other reason than there's not that many people to go around in a small business. So what you'll find with this flat organizational structure, especially in a small business, is people at different levels of that structure will have lots and lots of different jobs. So they'll be wearing lots and lots of different hats as they go about their day.

They're generally going to be decentralized. There's not going to be a whole lot of central command going on there. It's going to be up to the individuals within that chain to be responsible for a lot of the organization's process. And each individual is going to have a pretty wide span of control. So they're going to have a lot of people out there reporting to them, because there's not that tall structure that we might think of within a chain of command.

And this also provides a structure to utilize reduced management costs and is also going to help with employee empowerment. Because there's not a lot of managers, I'm not spending a lot of money on management. And because the employees at those different levels of management and even among the lowest level are going to be making a lot of the decisions in this decentralized or flat organizational structure, there's going to be a lot of employee empowerment. We're going to have to trust our employees to do the right thing as far as the company is concerned.

Now the downsides of this-- well, there's a potential for confusion and a lack of specialization. Remember what we talked about before-- you're going to be wearing a lot of different hats at different levels of this. You're going to have to focus on a lot of different things at once. So there's a lack of specialization there as regards to one specific job.

So you may not be doing that one specific function quite as well as you probably could have if you had a few more people in the chain. And the potential for confusion because you have a lot of different voices, instead of that one voice at the top dictating down what's going on. So McDonald's hamburgers may look a little different in different cities around the country.

Example of this is Google. Now, it's moving toward this. And for them, it's a great business model, because they're not focused necessarily on one particular thing. They see their organization as focusing on a wide range of things. And their goals tend to be pretty, pretty broad. So in that way, a flat organizational structure works for them, because then they can focus on a lot of different things, and at the top, being overwhelmed by all these different areas of focus.

Now tall organizational structures, on the other hand-- there's a lot of different layers here and a lot of different management and reporting that goes on. And they have a lot more in common with large businesses. In fact, you'll find that a larger a business gets, they'll start finding they have a need for more and more spots within this organizational structure. So it'll build and grow like that building we saw before in the show.

Now each individual in this chain, because it's a lot more centralized, is going to have a clear chain of command. It's also going to have a very, very narrow span of control-- one, two, or three people that are actually going be reporting to somebody else. So that span of control is going to be very narrow for that one person overseeing those two, or three, or four individuals within the chain.

What you're also going to be seeing with this structure is, they're able to utilize that chain of command a lot better. So it's going to be positive in that way. The commands on the top are going to be very, very clear. There's not going to be a lot of confusion as far as listening to all these different voices within the organization.

Some of the problems with this is because information has to get through each of those levels, along the way to the top, the taller the organizational structure gets, the longer that delay can be. And it can be quite substantial along the way. And if you ever played a game called telephone where you whisper something in one person's ear, and then they try to whisper it to the next person, whisper it to the next person, whisper it to the next person, you find that at the very end, that message has changed.

The same thing can happen in a tall organizational structure where there's not only that delay in information getting to the top, there's also bias along the way that gets fed into the message. And it can end up, by the time it reaches the top, looking very different than the information that came in at the bottom.

An example of this would be the military. It has a very tall structure-- also, well, any government agency or government body. The US government, for instance, is extremely tall. And we see this clear chain of command within those organizations and also this delay back and forth along the chain of command. Commands get it from the top to bottom and the bottom to the top.

So what did we talk about today? Well, we looked at those organizational considerations a business has to look at when it goes to get organized and those different organization types, such as centralized or decentralized, and which one is going to work better for my particular organization. We also looked at tall and flat organizational structures, some of the pros and cons of both of those types of structures as far as business is concerned. As always, I want to thank you for spending some time with me today. I hope you had a good time. And I'll talk to you later.

Terms to Know
Centralized Organization

An organization that is arranged by a rigid architecture of employee command where the top of the organization makes the decisions.

Decentralized Organization

An organization that is arranged by a flexible architecture of employee command where different managers throughout the organization makes the decisions.