A second aspect of vertical differentiation refers to the number of levels in an organization’s hierarchy.
Tall hierarchies have many layers of management; flat hierarchies have few layers. Most firms start out small, often with only one or at most two layers in the hierarchy. As they grow, however, managers find that there is a limit to the amount of information they can process and the control they can exert over daily operations. To avoid being stretched too thin and losing control, they tend to add layers to the management hierarchy, hiring more managers and delegating some decision-making authority to them. In other words, as an organization gets larger it tends to become taller. In addition, as organizations grow they often start to undertake more activities— expanding their product lines, diversifying into adjacent activities, vertically integrating, or expanding into new regional or national markets. This too creates problems of coordination and control, and once again these are often solved by adding layers to the management hierarchy.
For example a given business was a small factory that made wood products for the construction industry, such as doors, window frames, and stairs. Initially the factory had just one manager, who was also the CEO, and 10 employees. At this point the CEO performed multiple functions—managing employees, planning production, going on sales calls, doing the books, purchasing lumber, and so on. The firm was soon successful and business grew, so the CEO hired more employees. Soon he was too busy to perform all the tasks he had been doing. At this point he hired help—a factory manager to supervise employees and plan production, a sales manager and three other salespeople to seek business, an accounts manager to manage the books, and a purchasing manager to buy lumber. This freed the CEO to concentrate on bigger strategic issues. In effect, the CEO added another layer to the management hierarchy to cope with growth.
The process did not stop here. Over time the CEO decided to enter other businesses that were related to the wood products industry, including home building, a brick making business, and a construction equipment rental company. With more businesses to manage the CEO found that he was once again stretched, so he created four divisions: the wood products factory, the home builder, the brick factory, and the equipment rental company. To run each division he appointed a general manager. The CEO then managed the general managers and focused his attention on issues that cut across businesses, while the general managers manage people within their businesses. In effect the CEO added a third layer to the management hierarchy.
To better manage growth and diversification of the firm, he made the hierarchy taller. As this example illustrates, growth in the number of layers in a hierarchy is driven by the size of an organization and the number of different activities it undertakes. Adding more levels in the hierarchy is a response to the problems of control that mount when a manager has too much work. How many layers are added is also partly determined by the span of control managers can effectively handle.
Problems in Tall Hierarchies Several problems can occur in tall hierarchies that may result in lower organizational efficiency and effectiveness.
First, there is a tendency for information to get accidentally distorted as it passes through layers in a hierarchy. The phenomenon is familiar to anyone who has played the game “telephone.” Human beings are not good at transmitting information; they tend to embellish or miss data, which distorts the information.
In a management context, if crucial information has to pass through many layers in a tall hierarchy before it reaches decision makers, it may get distorted in the process. So decisions may be based on inaccurate information, and poor performance may result. There is also the problem of deliberate distortion by midlevel managers who are trying to curry favor with their superiors or pursue some agenda of their own.
For example, the manager of a division might suppress bad information and exaggerate good information in an attempt to window-dress the performance of his or her unit to higher-level managers and win their approval. By doing so the manager may get access to more resources, earn performance bonuses, or avoid sanctions for poor performance. Other things being equal, the more layers there are in a hierarchy, the more opportunities there are for people to deliberately distort information. To the extent that information is distorted, senior managers will make decisions on the basis of inaccurate information, which can result in poor performance.
Economists refer to the loss of efficiency that arises from deliberate information distortion for personal gain within an organization as influence costs, and they argue that influence costs can be a major source of low productivity.
A third problem with tall hierarchies is that they are expensive. The salaries and benefits of multiple layers of midlevel managers can add up to significant overhead, which can increase the cost structure of the firm; unless there is a commensurate benefit, a tall hierarchy can put a firm at a competitive disadvantage. A final problem concerns the inherent inertia associated with a tall hierarchy. One cause of inertia in organization is that to protect their throw away and perhaps their jobs, managers often argue for the maintenance of the status quo. Thus tall hierarchies tend to be slower to change.
Delayering: Reducing the Size of a Hierarchy. Given the disadvantages associated with tall hierarchies, many firms attempt to limit the size of the management hierarchy. During the last 15 years or so, delayering to reduce the number of levels in a management hierarchy has become a standard component of many attempts to boost firms’ performance. Delayering is based on the assumption that when times are good, firms tend to expand their management hierarchies beyond the point of efficiency.
Delayering, and simultaneously widening spans of control, is also seen as a way of enforcing greater decentralization within an organization and reaping the associated efficiency gains. The process of delayering was a standard feature of Jack Welch’s tenure at General Electric, during which he laid off 150,000 people, reduced the number of layers in the hierarchy from nine to five, and simultaneously increased General Electric’s profits and revenues. Welch believed that GE had become too top-heavy during the tenure of his successors. A key element of his strategy was to transform General Electric into a leaner and faster-moving organization—which required delayering. Welch himself had a wide span of control, with some 20 subordinates reporting directly to him, including the heads of GE’s 15 top businesses. Similarly, Jeffery Immelt, the head of GE’s medical systems business under Welch, had 21 direct reports (Immelt replaced Welch as CEO). Delayering has also been prompted by the realization that large firms can function with relatively flat structures if their organization architecture is designed correctly.
Nucor, for example, has only four layers in its hierarchy, yet it is the largest steelmaker in the United States. As at Nucor, achieving a flat hierarchy requires decentralization of responsibility for many decisions to lower-level managers who run autonomous self-contained units (in Nucor’s case, individual steel plants). If these units are managed on an arm’s-length basis, with top management intervening in subunit operations only when performance goals are not met, the top managers can handle a wide span of control, which makes a flat organization feasible. Nucor, for example, has 25 divisions. The general manager of each reports directly to the CEO, which implies that the CEO has a very wide span of control (probably close to 30 if other corporate executives such as the COO are included). Although performance benefits are often associated with moving to a flat structure, the process of delayering is not an easy one; and research shows that delayering can cause significant stress and poor morale among managers if the process is not handled correctly. 14 Jack Welch believed that the key to successful delayering is to move fast (thereby eliminating lingering uncertainty among managers concerning their job security) and to reward and promote managers who thrive within the new structure, thereby indicating the management style that will be favored.
Principles of Management
by Charles W.L.Hill and Steven L. McShane
I. Find in the text the English equivalents for the following:
II. Fill in the gaps with suitable words:
1). Consider for example Microsoft. It recently reduced the n… of d… in its organization from six to three.
2). Top management can b… o… when decision-making authority is centralized.
3). Decentralization can establish relatively autonomous, s…-c… s… within an organization.
4). Wal-Mart’s top managers can hold local store managers accountable for the performance of their stores, and this increases the a… of top managers to c… the organization.
5). Although the choice between centralization and decentralization depends on the c… being considered, a few important generalizations can be made.
6). Lower-level employees are given e… p… to develop new business ideas and the right to lobby top managers for the funds to develop those ideas.
7). Later analysis revealed that one reason for FEMA’s slow response was that the once autonomous agency had been placed under the d… s… of the Department of Homeland Security after September 11, 2001.
8). To avoid being stretched too thin and losing control, they tend to a… l… to the management hierarchy.
9). In effect the CEO added a t… l… to the management hierarchy.
10). The s… and b… of multiple layers of midlevel managers can add up to significant overhead, which can increase the cost structure of the firm.
III. Match the expressions to their meanings:
1. Reduce costs
2. Key individual
4. Bargaining power
5. Bounded rationality
6. Local conditions
7. General manager
8. To lobby
9. Competitive conditions
10. The process of delayering
a. To lower expenditures
b. The important participant of the project
c. One of the parts or groupings into which a whole is divided
d. To use advantage in strength for business
e. Restricted choice
f. Particular circumstances
h. To put pressure
i. Rival environment
j. To reduce members of staff and many functions were outsourced
IV. Say if the statements are true or false. Correct the false ones.
1). The manager of a division must suppress bad information and exaggerate good information to window-dress the performance of his or her.
2). Economists argue that influence costs can be a major source of low productivity.
3). Delayering is based on the assumption that when times are good, firms tend to shrink their management hierarchies beyond the point of efficiency. 4). Jeffery Immelt, the head of GE’s medical systems business under Welch, had 43 direct reports.
5). Decentralization is favored in environments that are characterized by high uncertainty and rapid change.
V. Answer the questions:
1). What does vertical differentiation refer to?
2). What arguments for decentralization do the authors of the article give?
3). Which structure is better for decision-making process in the reality of your country? Give your reasons.
4). How to make the choice between centralization and decentralization?
5). Which type of hierarchy tends to lose control more “tall” or “flat”?
6). What problems can occur in “tall” hierarchies?
7). What is the difference between efficiency and effectiveness?
8). What is the key to successful delayering as to Lack Welch?
9). How the process of delayering was held in General Electric under the control of Jack Welch?
10). How the influence costs can affect productivity?
11). How can you describe horizontal differentiation?
VI . Render the given article according to the suggested plan
1). Define the entity of a global company and its common features. Give examples of the successful global companies.
2). How do you think, what challenges can global company face?
Read through the article and do the exercises that follow.