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Nardelli’s changes initially saved the company a lot of money. For example, for a
company of that size, centralizing purchasing operations led to big cost savings
because the company could negotiate important discounts from suppliers. At the
same time, many analysts think that the centralization went too far, leading to the loss
[4]
of the service-oriented culture at the stores. Nardelli was ousted after seven years.
Formalization
Formalization is the extent to which an organization’s policies, procedures, job
descriptions, and rules are written and explicitly articulated. Formalized structures are
those in which there are many written rules and regulations. These structures control
employee behavior using written rules, so that employees have little autonomy to
decide on a case-by-case basis. An advantage of formalization is that it makes
employee behavior more predictable. Whenever a problem at work arises, employees
know to turn to a handbook or a procedure guideline. Therefore, employees respond
to problems in a similar way across the organization; this leads to consistency of
behavior.
While formalization reduces ambiguity and provides direction to employees, it
is not without disadvantages. A high degree of formalization may actually lead to
reduced innovativeness because employees are used to behaving in a certain manner.
In fact, strategic decision making in such organizations often occurs only when there
is a crisis. A formalized structure is associated with reduced motivation and job
[5]
satisfaction as well as a slower pace of decision making. The service industry is
particularly susceptible to problems associated with high levels of formalization.
Sometimes employees who are listening to a customer’s problems may need to take
action, but the answer may not be specified in any procedural guidelines or rulebook.
For example, while a handful of airlines such as Southwest do a good job of
empowering their employees to handle complaints, in many airlines, lower-level
employees have limited power to resolve a customer problem and are constrained by
stringent rules that outline a limited number of acceptable responses.
Hierarchical Levels
Another important element of a company’s structure is the number of levels it
has in its hierarchy. Keeping the size of the organization constant, tall structures have
several layers of management between frontline employees and the top level,
while flat structures consist of only a few layers. In tall structures, the number of
employees reporting to each manager tends to be smaller, resulting in greater
opportunities for managers to supervise and monitor employee activities. In contrast,
flat structures involve a larger number of employees reporting to each manager. In
such a structure, managers will be relatively unable to provide close supervision,
leading to greater levels of freedom of action for each employee.
Research indicates that flat organizations provide greater need satisfaction for
[6]
employees and greater levels of self-actualization. At the same time, there may be
some challenges associated with flat structures. Research shows that when managers
supervise a large number of employees, which is more likely to happen in flat
structures, employees experience greater levels of role ambiguity—the confusion that
[7]
results from being unsure of what is expected of a worker on the job. This is
especially a disadvantage for employees who need closer guidance from their

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