The term organization architecture refers to the totality of a firm’s organization, including formal organization structure, control systems, incentive systems, organizational culture, and people. By organization structure we mean three things: the location of decision-making responsibilities in the firm (centralized or decentralized); the formal division of the organization into subunits such as functions, product divisions, and national operations; and the establishment of integrating mechanisms to coordinate the activities of subunits (such as cross-functional teams).
Controls are the metrics used to measure the performance of subunits and judge how well managers are running those subunits. Incentives are the devices used to encourage desired employee behavior. Incentives are closely tied to performance metrics. For example, the incentives of a manager in charge of General Electric’s lighting business might be linked to the performance of that division. Organizational culture refers to the values and assumptions that are shared among the employees of an organization. Just as societies have cultures, so do organizations. Organizations are societies of individuals who come together to perform collective tasks. They have their own distinctive patterns of culture and subculture. As we see organizational culture can have a profound impact on how a firm performs.
Finally, by people we mean not just the employees of the organization, but also the strategy used to recruit, compensate, motivate, and retain those individuals and the type of people they are in terms of their skills, values, and orientation—in other words, their human capital. The various components of organization architecture are not independent of each other: each component shapes the others. An obvious example is the strategy regarding people. This can be used proactively to hire individuals whose internal values are consistent with those the firm wishes to emphasize in its organizational culture. The people component of architecture can be used to reinforce the prevailing culture of the organization.
If a business enterprise to going to attain a competitive advantage and maximize its performance, it must pay close attention to achieving internal consistency between the various components of its architecture, and the architecture must support the strategy and operations of the firm.
For illustration, let’s return to the example of Nucor Corporation. As noted earlier, Nucor operates in a very tough industry that has been characterized by decades of sluggish demand, excess capacity, and price competition. Whereas many U.S. steelmakers have gone bankrupt in the last decade, Nucor’s performance has been exemplary. Between 1994 and 2005 sales revenues grew from $2.9 billion to $12.7 billion; earnings per share increased from $1.30 to $8.26; and the company’s profitability, measured by ROIC (return on invested capital), has averaged around 13.5 percent.
How did Nucor achieve this strong performance in such a hostile environment? The short answer is that Nucor has the lowest operating costs in the industry due to the successful implementation of a low-cost strategy. What is particularly interesting is how its organization architecture helped Nucor attain this position.
Nucor is a mini-mill which has some 25 steelmaking plants, each of which is organized as a stand-alone division. There are only three management layers in each plant—a divisional general manager, a department manager, and a supervisor. The divisional general manager reports directly to Nucor’s small head office. The workforce in each plant is organized into 20–30 person self-managing teams that are responsible for an entire work process and that can schedule work and develop process improvements. Each plant has about 300 employees. Thus Nucor has a very flat organization, which lowers costs, and a high level of decentralization. From a control perspective, each plant is assigned a profitability target, and each work group a productivity goal. Due to the decentralized nature of the organization, the plant managers and work groups are responsible for their own performance, which is quite visible. This makes accountability and control relatively easy. Senior managers monitor performance against goals, intervening only when goals are not met. These control systems are linked to aggressive performance-based incentive pay systems. Nucor’s philosophy is to tie pay closely to performance. Employees in the work groups are paid weekly performance bonuses based on their ability to meet and exceed productivity goals. Although Nucor’s base pay is lower than the steel industry average, the bonuses can total 80–150 percent of an employee’s base pay, making take-home pay significantly above the average. To get bonuses, however, employees have to work productively, which lowers Nucor’s costs and helps make the firm competitive. Similar incentive plans are in place for department managers and general managers. The bonus pay of general managers is linked to that of Nucor as a whole.
Nucor’s pay-for-performance systems and high levels of decentralization are not for everybody. Nucor’s managers realize that self-reliant, goal-oriented individuals will do best in its organization, so its human resource professionals try to hire individuals that have this particular profile.
Nucor’s culture is focused on cost minimization, commitment to employees, and an egalitarian ethos. The culture of the organization was largely shaped by the former CEO, Ken Iverson. Iverson drove an old car, had a low base salary (much of his pay was performance linked), answered his own phone, flew in coach class, stayed in inexpensive hotels when traveling, and would walk rather than take a taxi if that was possible. At the head office there are no assigned parking spaces and no executive dining room. Nucor operates with an “open book” philosophy, so all employees know how their work groups, divisions, and the company are doing.
Nucor has had a long-standing commitment to all employees that when demand turns down in this cyclical industry, no one will be laid off. Instead employees work fewer hours, and managers take cuts in their base pay! The culture shaped by these actions creates an atmosphere within which employees recognize the importance of cost containment and are motivated to reduce costs because the organization is committed to its employees.
As the Nucor example illustrates, organization architecture is the bedrock upon which efficient operations and effective strategy implementation are built. However, the organization that works for Nucor might not make sense for a business that is pursuing a different strategy in a different industry. A retail business like Nordstrom, for example, which competes through differentiation, may need a different type of organization architecture. A crucial task of managers, therefore, is to design an organization architecture that makes sense for the market in which an enterprise competes and the basic strategic positioning it is trying to achieve. The start of this process is to design the correct organization structure.
Principles of Management
by Charles W.L.Hill and Steven L. McShane
II. Fill in the gaps with suitable words:
1. Decentralization and i… p… are the main characteristics of Nucor organization architecture.
2. The efficient structure of organization architecture helped the company to record s… p… while its rivals struggle.
3. The term organization architecture refers to formal organization structure, c… s…, incentive systems, organizational culture, and p… .
4. Supervisor came to the plant to make necessary c… r… as to measure the p… of its managers.
5. There are many strategies that have been proven to increase e… p… in wellness programs. However, the use of incentives has proved to be more e… than other methods.
6. While e… l… play a large role in defining organizational culture by their actions and leadership, all employees c… to it.
7. Each component of the organization architecture shapes the others and is not an i… p… .
8. The people component of architecture can be used to r… the prevailing culture of the organization.
9. If a business enterprise is going to attain a c… a… and maximize its performance the architecture must support the strategy and operations of the firm.
10. Between 1994 and 2005 the company’s profitability, measured by R…, has averaged around 13.5 percent.
III. Match the expressions to their meanings:
1. cost containment
2. base pay
3. head office
4. coach class
5. pay-for-performance system
6. self-managed team
7. stand-alone division
8. low-cost strategy
9. earnings per share
10. small-scale technology
a. command which activities moved by inherent power
b. autonomic group
c. independent department
d. money paid apart from bonuses and incentives
e. non-extended production
f. policy of a relatively low price to stimulate demand or gain a market share
g. the act of keeping expenditures from spreading
h. the headquarter
i. the lowest travel class of seating
j. total earnings divided by the number of shares outstanding
IV. Say if the statements are true or false. Correct the false ones.
1. Nucor Steel believes that the competitive advantage of the company is rooted in the hierarchical structure and pay for performance systems.
2. Nucor has made good money and grown its sales and profits steadily for over 20 years.
3. Nucor was an early investor in a small-scale steelmaking technology that uses electric arc furnaces to smelt scrap steel.
4. Minimill technology implies using a wide variety of heavy equipment, large staff and huge plants.
5. The organization that works for Nucor definitely will make sense for each business that is pursuing a different strategy in a different industry.
V. Answer the questions:
1. Why does Nucor Corporation choose flat decentralized structure?
2. What does pay for performance system mean?
3. What does Nucor Corporation specialize in?
4. Why did Nucor’s rivals fail?
5. How do you understand the notions “control” and “incentives”? Give examples.
6. How does organization culture can influence the firm’s performance?
7. How did Nucor achieve its strong performance in flat hostile environment?
8. Can you describe Nucor’s plant organization?
9. What can you say about Nucor’s former CEO, Ken Iverson?
10. How can you explain the term “open book” philosophy?
VI . Render the given article according to the suggested plan (see Appendix 1)
1). Explain the advantages and disadvantages of centralization and decentralization.
2). How the process of delayering can solve the hierarchical problems?
Read through the article and do the exercises that follow.