read 2 chapters complete 12 questions
part 4 Organizing and Controlling
LO10-1 Identify the factors that influence managers’ choice of an organizational structure.
LO10-2 Explain how managers group tasks into jobs that are motivating and satisfying for employees.
LO10-3 Describe the types of organizational structures managers can design, and explain why they choose one structure over another.
LO10-4 Explain why managers must coordinate jobs, functions, and divisions using the hierarchy of authority and integrating mechanisms.
LO10-5 List the four sources of organizational culture, and explain why and how a company’s culture can lead to competitive advantage.
Managing Organizational
Structure and Culture
CHAPTER 10
Learning Objectives
After studying this chapter, you should be able to:
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Ed Catmull, co-found of Pixar followed a different strategy when Disney and Pixar merged. Instead of consolidating, Catmull was adamant that the two not be integrated, that each studio retain its own unique culture. He is following the same policy with another acquisition, Marvel Studios.
How can organizational structure influence employee creativity? What do Snow White, Buzz Lightyear, and Iron
Man have in common? The studios that
produced their movies are all owned by the
Walt Disney Company. Disney owns several
organizations, including Walt Disney Anima-
tion Studios, Pixar Animation Studios, and
Marvel Studios.
While these three studios are owned by the
same company and all do roughly the same
thing (produce movies), they have different
stories and different organization cultures.
Walt Disney Animation Studios is the oldest
of the three, established by Walt and Roy Dis-
ney under the name Disney Brothers Cartoon
Studio in 1923. Its first feature film was Snow
White and the Seven Dwarfs in 1937. In 2013 it
released its 53rd animated film, Frozen, which
became the No. 1 animated film of all time. 1
Marvel was founded in 1939 as Timely
Publications. In 1941 it introduced the comic
book Captain America with a cover picture
of the hero punching Adolf Hitler. 2 In 1991
Marvel Studios was established as a film
production unit. 3 Marvel has more than
8,000 characters, including the Avengers,
Green Goblin, Iron Man, Spider-Man, and
the X-Men. Most of these characters live in
the Marvel universe, in fictional cities similar
to New York and Los Angeles. The Walt Dis-
ney Company bought Marvel in 2009.
In 2002 investor and then-owner of Marvel
Ronald Perelman said, “It is a mini-Disney
in terms of intellectual property. Disney’s
got much more highly recognized char-
acters and softer characters, whereas our
characters are termed action heroes. But
at Marvel we are now in the business of the
creation and marketing of characters.” 4
Pixar Animation Studios was founded in
1979 as Graphics Group. It was originally the
computer division of Lucasfilm, and became
A MANAGER’S CHALLENGE
Three Studios, Three Cultures, One Company
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its own corporation in 1986 with funding from
Apple cofounder Steve Jobs. Its first feature
film was Toy Story in 1995, which eventually
was nominated for awards by the Academy of
Motion Pictures Arts and Sciences. 5 The Walt
Disney Company bought Pixar in 2006.
However, while Toy Story was a success,
Pixar cofounder Ed Catmull found there were
structural issues within the company. Pixar
had insisted that communication happen
through proper hierarchical channels. This
led to hard feelings between the creative and
production departments. While working on A
Bug’s Life, the film that followed Toy Story,
Pixar created a rule that anyone could talk to
anyone else, regardless of level. The result-
ing communication structure helped Pixar
foster a more creative culture. 6
In his recently published book Creativity,
Inc.: Overcoming the Unseen Forces That
Stand in the Way of True Inspiration, Catmull,
now president of Walt Disney Animation
Studios and Pixar, discussed the merger
of Disney and Pixar. He said that when two
organizations merge, there is typically a
push to consolidate workflows and to reduce
redundancies. However, when Disney and
Pixar came together, they did something
different.
“We took the exact opposite approach,
which was to say to each studio, ‘You may
look at the tools that the other has, you
may use them if you want, but the choice is
entirely yours.’ They each have a develop-
ment group that’s coming up with different
ideas, but because we said, ‘You don’t have
to take ideas from anybody else,’ they felt
freer to talk with each other.” 7
Yet some lessons from Pixar were applied
at Disney, according to Catmull. When Pixar
joined Disney in 2006, Disney employees
were demoralized by a few lackluster film
projects, including Chicken Little and Home
on the Range. Pixar practices, such as creat-
ing an environment where workers can be
candid and where innovative ideas can move
forward, were applied at Disney. After the
ideas took hold, the studio produced several
big hits, including Tangled and Frozen. 8
“The one thing we were really adamant
about was that the two studios not be inte-
grated together. We established an absolute
rule, which we still adhere to, that neither
studio can do any production work for the
other. For me, the local ownership is really
important. We put in place mechanisms to
keep each studio’s culture unique,” Catmull
said. “It’s a model that Bob’s using at Mar-
vel. Marvel has a completely different cul-
ture than Pixar does, or Disney Animation,
and he lets them run it their way. You want
to have mechanisms to bridge between
them, but you don’t interfere with that local
culture.” 9
As the examples of Disney Animation, Pixar, and Marvel Studios sug-
gest, organizational culture is a powerful influence on how employees
work. How an organization’s structure is designed also affects employ-
ees’ behavior and how well an organization operates, so in a quickly changing global environ-
ment it is important for managers to identify the best way to organize people and resources to
increase efficiency and effectiveness.
In Part 4 of this book, we examine how managers can organize and control human and
other resources to create high-performing organizations. To organize and control (two of the
four tasks of management identified in Chapter 1), managers must design an organizational
Overview
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Managing Organizational Structure and Culture 279
architecture that makes the best use of resources to produce the goods and services customers
want. Organizational architecture is the combination of organizational structure, culture, control systems, and human resource management (HRM) systems that together determine
how efficiently and effectively organizational resources are used.
By the end of this chapter, you will be familiar not only with various forms of organiza-
tional structures and cultures but also with various factors that determine the organizational
design choices that managers make. Then, in Chapters 11 and 12, we examine issues sur-
rounding the design of an organization’s control systems and HRM systems.
O rganizing is the process by which managers establish the structure
of working relationships among employees to allow them to achieve
an organization’s goals efficiently and effectively. Organizational structure is the formal system of task and job reporting relationships that determines how employees use resources to achieve an organization’s
goals. 10
Organizational culture, discussed in Chapter 3, is the shared set of beliefs, values, and norms that influence how people and groups work
together to achieve an organization’s goals. Organizational design is the process by which managers create a specific type of organizational structure and culture so a company can oper-
ate in the most efficient and effective way. 11
Once a company decides what kind of work attitudes and behaviors it wants from its
employees, managers create a particular arrangement of task and authority relationships, and
promote specific cultural values and norms, to obtain these desired attitudes and behaviors.
The challenge facing all companies is to design a structure and a culture that (1) motivate managers and employees to work hard and to develop supportive job behaviors and attitudes
and (2) coordinate the actions of employees, groups, functions, and divisions to ensure they work together efficiently and effectively.
As noted in Chapter 2, according to contingency theory, managers design organizational
structures to fit the factors or circumstances that are affecting the company the most and caus-
ing the most uncertainty. 12
Thus there is no one best way to design an organization: Design
reflects each organization’s specific situation, and researchers have argued that in some situa-
tions stable, mechanistic structures may be most appropriate while in others flexible, organic
structures might be the most effective. Four factors are important determinants of the type of
organizational structure or culture managers select: the nature of the organizational environ-
ment, the type of strategy the organization pursues, the technology (and particularly informa-
tion technology) the organization uses, and the characteristics of the organization’s human
resources (see Figure 10.1 ). 13
The Organizational Environment In general, the more quickly the external environment is changing and the greater the
uncertainty within it, the greater are the problems managers face in trying to gain access
to scarce resources. In this situation, to speed decision making and communication and
make it easier to obtain resources, managers typically make organizing choices that result
in more flexible structures and entrepreneurial cultures. 14
They are likely to decentral-
ize authority, empower lower-level employees to make important operating decisions, and
encourage values and norms that emphasize change and innovation—a more organic form
of organizing.
In contrast, if the external environment is stable, resources are readily available, and
uncertainty is low, then less coordination and communication among people and functions are
needed to obtain resources. Managers can make organizing choices that bring more stability
or formality to the organizational structure and can establish values and norms that empha-
size obedience and being a team player. Managers in this situation prefer to make decisions
within a clearly defined hierarchy of authority and to use detailed rules, standard operating
procedures (SOPs), and restrictive norms to guide and govern employees’ activities—a more
mechanistic form of organizing.
organizational architecture The organizational structure,
control systems, culture, and
human resource management
systems that together
determine how efficiently
and effectively organizational
resources are used.
Designing Organizational
Structure
organizational structure A formal system of task and
reporting relationships that
coordinates and motivates
organizational members so
they work together to achieve
an organization’s goals.
LO10-1 Identify the factors that
influence managers’
choice of an organizational
structure.
organizational design The process by which managers
make specific organizing
choices that result in a par-
ticular kind of organizational
structure.
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Figure 10.1 Factors Affecting Organizational Structure
Determine the design of organizational
structure
Organizational environment
Strategy Human resources
Technology
280 Chapter Ten
As we discussed in Chapter 6, change is rapid in today’s marketplace, and increasing com-
petition both at home and abroad is putting greater pressure on managers to attract customers
and increase efficiency and effectiveness. Consequently, interest in finding ways to structure
organizations—such as through empowerment and self-managed teams—to allow people and
departments to behave flexibly has been increasing.
Strategy Chapter 8 suggests that once managers decide on a strategy, they must choose the right means
to implement it. Different strategies often call for the use of different organizational struc-
tures and cultures. For example, a differentiation strategy aimed at increasing the value cus-
tomers perceive in an organization’s goods and services usually succeeds best in a flexible
structure with a culture that values innovation; flexibility facilitates a differentiation strategy
because managers can develop new or innovative products quickly—an activity that requires
extensive cooperation among functions or departments. In contrast, a low-cost strategy that
is aimed at driving down costs in all functions usually fares best in a more formal structure
with more conservative norms, which gives managers greater control over the activities of an
organization’s various departments. 15
In addition, at the corporate level, when managers decide to expand the scope of organiza-
tional activities by vertical integration or diversification, for example, they need to design a
flexible structure to provide sufficient coordination among the different business divisions. 16
As discussed in Chapter 8, many companies have been divesting businesses because man-
agers have been unable to create a competitive advantage to keep them up to speed in fast-
changing industries. By moving to a more flexible structure, managers gain more control over
their different businesses. Finally, expanding internationally and operating in many different
countries challenges managers to create organizational structures that allow organizations to
be flexible on a global level. 17
As we discuss later, managers can group their departments or
divisions in several ways to allow them to effectively pursue an international strategy.
Technology Recall that technology is the combination of skills, knowledge, machines, and computers
that are used to design, make, and distribute goods and services. As a rule, the more compli-
cated the technology that an organization uses, the more difficult it is to regulate or control
it because more unexpected events can arise. Thus the more complicated the technology,
the greater is the need for a flexible structure and progressive culture to enhance managers’
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Managing Organizational Structure and Culture 281
ability to respond to unexpected situations—and give them the freedom and desire to work
out new solutions to the problems they encounter. In contrast, the more routine the technol-
ogy, the more appropriate is a formal structure because tasks are simple and the steps needed
to produce goods and services have been worked out in advance.
What makes a technology routine or complicated? One researcher who investigated this
issue, Charles Perrow, argued that two factors determine how complicated or nonroutine
technology is: task variety and task analyzability. 18
Task variety is the number of new or unexpected problems or situations that a person or function encounters in performing tasks or
jobs. Task analyzability is the degree to which programmed solutions are available to people or functions to solve the problems they encounter. Nonroutine or complicated technologies
are characterized by high task variety and low task analyzability; this means many varied
problems occur and solving these problems requires significant nonprogrammed decision
making. In contrast, routine technologies are characterized by low task variety and high task
analyzability; this means the problems encountered do not vary much and are easily resolved
through programmed decision making.
Examples of nonroutine technology are found in the work of scientists in an R&D labo-
ratory who develop new products or discover new drugs, and they are seen in the planning
exercises an organization’s top management team uses to chart future strategy. Examples
of routine technology include typical mass production or assembly operations, where work-
ers perform the same task repeatedly and where managers have already identified the pro-
grammed solutions necessary to perform a task efficiently. Similarly, in service organizations
such as fast-food restaurants, the tasks that crew members perform in making and serving fast
food are routine.
Human Resources A final important factor affecting an organization’s choice of structure and culture is the char-
acteristics of the human resources it employs. In general, the more highly skilled its workforce,
and the greater the number of employees who work together in groups or teams, the more likely
an organization is to use a flexible, decentralized structure and a professional culture based on
values and norms that foster employee autonomy and self-control. Highly skilled employees,
or employees who have internalized strong professional values and norms of behavior as part
of their training, usually desire greater freedom and autonomy and dislike close supervision.
Flexible structures, characterized by decentralized authority and empowered employees,
are well suited to the needs of highly skilled people. Similarly, when people work in teams,
they must be allowed to interact freely and develop norms to guide their own work inter-
actions, which also is possible in a flexible organizational structure. Thus, when designing
organizational structure and culture, managers must pay close attention to the needs of the
workforce and to the complexity and kind of work employees perform.
In summary, an organization’s external environment, strategy, technology, and human
resources are the factors to be considered by managers seeking to design the best structure and
culture for an organization. The greater the level of uncertainty in the organization’s environ-
ment, the more complex its strategy and technologies, and the more highly qualified and skilled
its workforce, the more likely managers are to design a structure and a culture that are flexible,
can change quickly, and allow employees to be innovative in their responses to problems, cus-
tomer needs, and so on. The more stable the organization’s environment, the less complex and
more well understood its strategy or technology, and the less skilled its workforce, the more
likely managers are to design an organizational structure that is formal and controlling and a
culture whose values and norms prescribe how employees should act in particular situations.
Later in the chapter we discuss how managers can create different kinds of organizational
cultures. First, however, we discuss how managers can design flexible or formal organi-
zational structures. The way an organization’s structure works depends on the organizing
choices managers make about three issues:
• How to group tasks into individual jobs.
• How to group jobs into functions and divisions.
• How to allocate authority and coordinate or integrate functions and divisions.
LO10-2 Explain how managers
group tasks into jobs
that are motivating and
satisfying for employees.
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At Subway, the roles of chef and server are combined
into one, making the job “larger” than the jobs of
McDonald’s more specialized food servers. The idea
behind job enlargement is that increasing the range of
tasks performed by the worker will reduce boredom.
282 Chapter Ten
The first step in organizational design is job design , the process by which managers decide how to divide into specific jobs the tasks that
have to be performed to provide customers with goods and services.
Managers at McDonald’s, for example, have decided how best to divide
the tasks required to provide customers with fast, cheap food in each
McDonald’s restaurant. After experimenting with different job arrange-
ments, McDonald’s managers decided on a basic division of labor among
chefs and food servers. Managers allocated all the tasks involved in actually cooking the food
(putting oil in the fat fryers, opening packages of frozen french fries, putting beef patties on
the grill, making salads, and so on) to the job of chef. They allocated all the tasks involved in
giving the food to customers (such as greeting customers, taking orders, putting fries and
burgers into bags, adding salt, pepper, and napkins, and taking money) to food servers. In
addition, they created other jobs—the job of dealing with drive-through customers, the job of
keeping the restaurant clean, and the job of overseeing employees and responding to unex-
pected events. The result of the job design process is a division of labor among employees, one that McDonald’s managers have discovered through experience is most efficient.
Establishing an appropriate division of labor among employ-
ees is a critical part of the organizing process, one that is vital to
increasing efficiency and effectiveness. At McDonald’s, the tasks
associated with chef and food server were split into different jobs
because managers found that, for the kind of food McDonald’s
serves, this approach was most efficient. It is efficient because
when each employee is given fewer tasks to perform (so that each
job becomes more specialized), employees become more produc-
tive at performing the tasks that constitute each job.
At Subway sandwich shops, however, managers chose a different
kind of job design. At Subway there is no division of labor among
the people who make the sandwiches, wrap the sandwiches, give
them to customers, and take the money. The roles of chef and food
server are combined into one. This different division of tasks and
jobs is efficient for Subway and not for McDonald’s because Subway
serves a limited menu of mostly submarine-style sandwiches that are
prepared to order. Subway’s production system is far simpler than
McDonald’s; McDonald’s menu is much more varied, and its chefs
must cook many different kinds of foods. In 2014 Subway changed its
children’s menu to promote healthful options and trained its employ-
ees to encourage children to choose apples as part of their meals. 19
Managers of every organization must analyze the range of tasks to be performed and then
create jobs that best allow the organization to give customers the goods and services they
want. In deciding how to assign tasks to individual jobs, however, managers must be care-
ful not to take job simplification , the process of reducing the number of tasks that each worker performs, too far.
20 Too much job simplification may reduce efficiency rather than
increase it if workers find their simplified jobs boring and monotonous, become demotivated
and unhappy, and, as a result, perform at a low level.
Job Enlargement and Job Enrichment In an attempt to create a division of labor and design individual jobs to encourage workers to per-
form at a higher level and be more satisfied with their work, several researchers have proposed
ways other than job simplification to group tasks into jobs: job enlargement and job enrichment.
Job enlargement is increasing the number of different tasks in a given job by changing the division of labor.
21 For example, because Subway food servers make the food as well as serve it,
their jobs are “larger” than the jobs of McDonald’s food servers. The idea behind job enlargement
is that increasing the range of tasks performed by a worker will reduce boredom and fatigue and
may increase motivation to perform at a high level—increasing both the quantity and the qual-
ity of goods and services provided. The accompanying “Management Insight” feature describes
how one Wendy’s franchise tried to improve service by enlarging jobs through training.
Grouping Tasks into Jobs: Job
Design job design The process by which managers decide how
to divide tasks into specific
jobs.
job simplification The pro- cess of reducing the number
of tasks that each worker
performs.
job enlargement Increas- ing the number of different
tasks in a given job by chang-
ing the division of labor.
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Giving Wendy’s a New Image Wendy’s is changing its image. It has redesigned its corporate logo and chosen a new
look for its restaurants that includes new employee uniforms, WiFi, and flat-screen tele-
visions. It also added lounge areas with fireplaces and faux leather chairs. 22
What is the idea behind having a living room area at a fast food restaurant? “The hearth at
home is a gathering place,” said Tré Musco, who is the chief executive of Tesser, the design
firm hired to oversee Wendy’s remodeling efforts. “It’s warm, it’s comfortable, it says stay
and relax, as opposed to, this is fast food, get in and get out as quickly as possible.” 23
Customers who dine in tend to spend a little more money, so having a welcoming
environment can increase sales. Wendy’s reported a 25 percent jump in sales at the reno-
vated restaurants. 24
The company plans to remodel over 600 of its restaurants in the more modern design
by the end of 2015. The company also has a schedule for when franchise-owned restau-
rants will be updated. But at least one franchise owner is innovating in a way that has a
similar effect, without the remodel.
Meritage Hospitality Group, which owns 121 Wendy’s locations, 25
is improving cus-
tomer service through training. First, the company committed to bringing on board 10
well-trained workers to each of its 48 stores in Michigan. That’s almost 500 new work-
ers. The company held a job fair and looked for friendly, caring people. Then the com-
pany provided extensive training for all employees. In fact, they hired the new position
of corporate trainer to do one-on-one training with cashiers. 26
Employees are encour-
aged to look for ways to initiate a conversation with customers and create a personal
connection. They also are encouraged to have a regular customer’s order prepared before
the customer asks. Finally, the franchise group instituted contests among the staff in the
restaurants. One contest between the day shift and the night shift was to see who could
get the most customer names in a given day.
As a result of the effort, sales went up, customer complaints went down, and customer
compliments went up. “Our biggest tip is to invest the time in training,” said Al Pruitt,
president of Wendy’s for Meritage. “If you spend time on your people, you will always
get a return on your investment.” 27
Management Insight
283
Job enrichment is increasing the degree of responsibility a worker has over a job by, for example, (1) empowering workers to experiment to find new or better ways of doing the job, (2)
encouraging workers to develop new skills, (3) allowing workers to decide how to do the work
and giving them the responsibility for deciding how to respond to unexpected situations, and (4)
allowing workers to monitor and measure their own performance. 28
The idea behind job enrich-
ment is that increasing workers’ responsibility increases their involvement in their jobs and thus
improves their interest in the quality of the goods they make or the services they provide.
In general, managers who make design choices that increase job enrichment and job
enlargement are likely to increase the degree to which people behave flexibly rather than
rigidly or mechanically. Narrow, specialized jobs are likely to lead people to behave in pre-
dictable ways; workers who perform a variety of tasks and who are allowed and encouraged
to discover new and better ways to perform their jobs are likely to act flexibly and creatively.
Thus managers who enlarge and enrich jobs create a flexible organizational structure, and
those who simplify jobs create a more formal structure. If workers are grouped into self-
managed work teams, the organization is likely to be flexible because team members provide
support for each other and can learn from one another.
The Job Characteristics Model J. R. Hackman and G. R. Oldham’s job characteristics model is an influential model of job
design that explains in detail how managers can make jobs more interesting and motivating. 29
job enrichment Increasing the degree of responsibility
a worker has over his or her
job.
LO10-3 Describe the types of
organizational structures
managers can design, and
explain why they choose
one structure over another.
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Figure 10.2 The Job Characteristics Model
OutcomesPsychological states
Skill variety Task identity
Task significance
Job characteristics
High motivation High performance High satisfaction
Autonomy
Feedback
Experienced meaningfulness
of work
Knowledge of results of work
Experienced responsibility for work outcomes
Source: From J. Richard Hackman and Greg R. Oldham, Work Redesign, 1st. Copyright © 1980. Reproduced by
permission of Pearson Education, Inc., Upper Saddle River, New Jersey.
284 Chapter Ten
Hackman and Oldham’s model (see Figure 10.2 ) also describes the likely personal and orga-
nizational outcomes that will result from enriched and enlarged jobs.
According to Hackman and Oldham, every job has five characteristics that determine how
motivating the job is. These characteristics determine how employees react to their work and
lead to outcomes such as high performance and satisfaction and low absenteeism and turnover:
• Skill variety: The extent to which a job requires that an employee use a wide range of different skills, abilities, or knowledge. Example: The skill variety required by the job of
a research scientist is higher than that called for by the job of a McDonald’s food server.
• Task identity: The extent to which a job requires that a worker perform all the tasks necessary to complete the job, from the beginning to the end of the production process.
Example: A craftsworker who takes a piece of wood and transforms it into a custom-
made desk has higher task identity than does a worker who performs only one of the
numerous operations required to assemble a flat-screen TV.
• Task significance: The degree to which a worker feels his or her job is meaningful because of its effect on people inside the organization, such as coworkers, or on people outside
the organization, such as customers. Example: A teacher who sees the effect of his or her
efforts in a well-educated and well-adjusted student enjoys high task significance com-
pared to a dishwasher who monotonously washes dishes as they come to the kitchen.
• Autonomy: The degree to which a job gives an employee the freedom and discretion needed to schedule different tasks and decide how to carry them out. Example: Sales-
people who have to plan their schedules and decide how to allocate their time among
different customers have relatively high autonomy compared to assembly-line workers,
whose actions are determined by the speed of the production line.
• Feedback: The extent to which actually doing a job provides a worker with clear and direct information about how well he or she has performed the job. Example: An air
traffic controller whose mistakes may result in a midair collision receives immediate
feedback on job performance; a person who compiles statistics for a business magazine
often has little idea of when he or she makes a mistake or does a particularly good job.
Hackman and Oldham argue that these five job characteristics affect an employee’s moti-
vation because they affect three critical psychological states (see Figure 10.2 ). The more
employees feel that their work is meaningful and that they are responsible for work outcomes and responsible for knowing how those outcomes affect others, the more motivating work becomes and the more likely employees are to be satisfied and to perform at a high level.
Moreover, employees who have jobs that are highly motivating are called on to use their
skills more and to perform more tasks, and they are given more responsibility for doing the
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Figure 10.3 The Functional Structure of Pier 1 Imports
Alexander Smith President and CEO
Charles H. Turner Senior executive
vice president and CFO
Michael R. Benkel Executive
vice president: planning
and allocations
Catherine David, Executive vice
president: merchandising
Gregory S. Humenesky
Executive vice president:
human resources
Eric W. Hunter Executive vice
president: marketing
Sharon M. Leite
Executive vice president: sales and customer
experience
Michael A. Carter Senior vice president:
compliance, and general counsel
secretary
Laura A. Coffey Senior vice president: planning
Michael Ferrari Chairman
Managing Organizational Structure and Culture 285
job. All of the foregoing are characteristic of jobs and employees in flexible structures where
authority is decentralized and where employees commonly work with others and must learn
new skills to complete the range of tasks for which their group is responsible.
O nce managers have decided which tasks to allocate to which jobs, they
face the next organizing decision: how to group jobs together to best
match the needs of the organization’s environment, strategy, technology,
and human resources. Typically managers first decide to group jobs into
departments and then design a functional structure to use organizational resources effectively. As an organization grows and becomes more dif-
ficult to control, managers must choose a more complex organizational
design, such as a divisional structure or a matrix or product team struc-
ture. The different ways in which managers can design organizational
structure are discussed next. Selecting and designing an organizational
structure to increase efficiency and effectiveness is a significant chal-
lenge. As noted in Chapter 8, managers reap the rewards of a well-
thought-out strategy only if they choose the right type of structure to
implement the strategy. The ability to make the right kinds of organizing
choices is often what differentiates effective from ineffective managers and creates a high-
performing organization.
Functional Structure A function is a group of people, working together, who possess similar skills or use the same kind of knowledge, tools, or techniques to perform their jobs. Manufacturing, sales,
and research and development are often organized into functional departments. A functional structure is an organizational structure composed of all the departments that an organization requires to produce its goods or services. Figure 10.3 shows the functional structure that Pier
1 Imports, the home furnishings company, uses to supply its customers with a range of goods
from around the world to satisfy their desires for new and innovative products.
Pier 1’s main functions are finance and administration, merchandising (purchasing the
goods), sales and customer experience (managing the retail outlets), marketing, planning and
allocations (managing credit and product distribution), and human resources. Each job inside
a function exists because it helps the function perform the activities necessary for high orga-
nizational performance. Thus within the marketing function are all the jobs necessary to effi-
ciently advertise Pier 1’s products to increase their appeal to customers (such as promotion,
photography, and visual communication).
Grouping Jobs into Functions and Divisions:
Designing Organizational
Structure
functional structure An organizational structure com-
posed of all the departments
that an organization requires
to produce its goods or
services.
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Pier 1 organizes its operations by function, which means that employees can more easily learn
from one another and improve the service they provide to its customers.
286 Chapter Ten
There are several advantages to grouping jobs according to function. First, when people
who perform similar jobs are grouped together, they can learn from observing one another and
thus become more specialized and can perform at a higher level. The tasks associated with
one job often are related to the tasks associated with another job, which encourages coop-
eration within a function. In Pier 1’s marketing department, for example, the person design-
ing the photography program for an ad campaign works closely with the person responsible
for designing store layouts and with visual communication experts. As a result, Pier 1 can
develop a strong, focused marketing campaign to differentiate its products.
Second, when people who perform similar jobs are grouped together, it is easier for man-
agers to monitor and evaluate their performance. 30
Imagine if marketing experts, purchasing
experts, and real estate experts were grouped together in one function and supervised by
a manager from merchandising. Obviously the merchandising manager would not have the
expertise to evaluate all these different people appropriately. A functional structure allows
workers to evaluate how well co-workers are performing their jobs, and if some workers are
performing poorly, more experienced workers can help them develop new skills.
Finally, managers appreciate functional structure because it lets them create the set of
functions they need to scan and monitor the competitive environment and obtain information
about how it is changing. 31
With the right set of functions in place, managers are in a good
position to develop a strategy that allows the organization to respond to its changing situation.
Employees in the marketing group can specialize in monitoring new marketing developments
that will allow Pier 1 to better target its customers. Employees in merchandising can monitor
all potential suppliers of home furnishings both at home and abroad to find the goods most
likely to appeal to Pier 1’s customers and manage Pier 1’s global supply chain.
As an organization grows, and particularly as its task environment and strategy change
because it is beginning to produce a wider range of goods and services for different kinds of
customers, several problems can make a functional structure less efficient and effective. 32
First, managers in different functions may find it more difficult to communicate and coor-
dinate with one another when they are responsible for several different kinds of products,
especially as the organization grows both domestically and internationally. Second, func-
tional managers may become so preoccupied with supervising their own specific departments
and achieving their departmental goals that they lose sight of the organization’s goals. If that
happens, organizational effectiveness will suffer because managers will be viewing issues
and problems facing the organization only from their own, relatively narrow, departmental
perspectives. 33
Both of these problems can reduce efficiency and effectiveness.
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Figure 10.4 Product, Market, and Geographic Structures
B. GEOGRAPHIC STRUCTURE
Geographic divisions
Functions
Corporate managers
Western region Southern region
Product divisions
Functions
A. PRODUCT STRUCTURE
C. MARKET STRUCTURE
Market divisions
Functions
Corporate managers
CEO
CEO
CEO
Corporate managers
Lighting division
Northern region
Washing machine and dryer division
Television and stereo division
Small business customers
Large business customers
Educational institutions
Individual customers
Eastern region
Managing Organizational Structure and Culture 287
Divisional Structures: Product, Market, and Geographic As the problems associated with growth and diversification increase over time, managers must
search for new ways to organize their activities to overcome the problems associated with a func-
tional structure. Most managers of large organizations choose a divisional structure and create a series of business units to produce a specific kind of product for a specific kind of customer.
Each division is a collection of functions or departments that work together to produce the prod- uct. The goal behind the change to a divisional structure is to create smaller, more manageable
units within the organization. There are three forms of divisional structure (see Figure 10.4 ). 34
When managers organize divisions according to the type of good or service they provide, they adopt a product structure. When managers organize divisions according to the area of the coun- try or world they operate in, they adopt a geographic structure. When managers organize divi- sions according to the type of customer they focus on, they adopt a market structure.
PRODUCT STRUCTURE Imagine the problems that managers at Pier 1 would encounter if they decided to diversify into producing and selling cars, fast food, and health
insurance—in addition to home furnishings—and tried to use their existing set of functional
managers to oversee the production of all four kinds of products. No manager would have the
divisional structure An organizational structure com-
posed of separate business
units within which are the
functions that work together
to produce a specific product
for a specific customer.
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288 Chapter Ten
necessary skills or abilities to oversee those four products. No individual marketing manager,
for example, could effectively market cars, fast food, health insurance, and home furnishings
at the same time. To perform a functional activity successfully, managers must have experi-
ence in specific markets or industries. Consequently, if managers decide to diversify into new
industries or to expand their range of products, they commonly design a product structure to
organize their operations (see Figure 10.4 a).
Using a product structure , managers place each distinct product line or business in its own self-contained division and give divisional managers the responsibility for devising an
appropriate business-level strategy to allow the division to compete effectively in its industry
or market. 35
Each division is self-contained because it has a complete set of all the functions—
marketing, R&D, finance, and so on—that it needs to produce or provide goods or services
efficiently and effectively. Functional managers report to divisional managers, and divisional
managers report to top or corporate managers.
Grouping functions into divisions focused on particular products has several advantages
for managers at all levels in the organization. First, a product structure allows functional man-
agers to specialize in only one product area, so they can build expertise and fine-tune their
skills in this particular area. Second, each division’s managers can become experts in their
industry; this expertise helps them choose and develop a business-level strategy to differenti-
ate their products or lower their costs while meeting the needs of customers. Third, a product
structure frees corporate managers from the need to supervise directly each division’s day-to-
day operations; this latitude lets corporate managers create the best corporate-level strategy
to maximize the organization’s future growth and ability to create value. Corporate manag-
ers are likely to make fewer mistakes about which businesses to diversify into or how to
best expand internationally, for example, because they can take an organizationwide view. 36
Corporate managers also are likely to evaluate better how well divisional managers are doing,
and they can intervene and take corrective action as needed.
The extra layer of management, the divisional management layer, can improve the use of
organizational resources. Moreover, a product structure puts divisional managers close to their
customers and lets them respond quickly and appropriately to the changing task environment.
One pharmaceutical company that successfully adopted a new product structure to better orga-
nize its activities is GlaxoSmithKline. The need to innovate new kinds of prescription drugs to
boost performance is a contivnual battle for pharmaceutical companies. In the 2000s many of
these companies have been merging to try to increase their research productivity, and one of
them, GlaxoSmithKline, was created from the merger between Glaxo Wellcome and Smith-
Kline Beecham. 37
Prior to the merger, both companies experienced a steep decline in the number
of new prescription drugs their scientists were able to invent. The problem facing the new com-
pany’s top managers was how to best use and combine the talents of the scientists and research-
ers from both of the former companies to allow them to quickly innovate exciting new drugs.
Top managers realized that after the merger there would be enormous problems associated
with coordinating the activities of the thousands of research scientists who were working on hun-
dreds of different drug research programs. Understanding the problems associated with large size,
the top managers decided to group the researchers into eight product divisions to allow them to
focus on particular clusters of diseases such as heart disease or viral infections. The members of
each product division were told they would be rewarded based on the number of new prescription
drugs they were able to invent and the speed with which they could bring these new drugs to the
market. GlaxoSmithKline’s new product structure worked well; its research productivity doubled
after the reorganization, and a record number of new drugs moved into clinical trials. 38
However,
the need to innovate remains, and GlaxoSmithKline plans more restructuring before 2016. 39
GEOGRAPHIC STRUCTURE When organizations expand rapidly both at home and abroad, functional structures can create special problems because managers in one central
location may find it increasingly difficult to deal with the different problems and issues that
may arise in each region of a country or area of the world. In these cases, a geographic structure , in which divisions are broken down by geographic location, is often chosen (see Figure 10.4 b). To achieve the corporate mission of providing next-day mail service, Fred
Smith, CEO of FedEx, chose a geographic structure and divided up operations by creating a
division in each region. Large retailers such as Macy’s, Neiman Marcus, and Brooks Brothers
product structure An organizational structure in
which each product line or
business is handled by a self-
contained division.
geographic structure An organizational structure in
which each region of a coun-
try or area of the world is
served by a self-contained
division.
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Managing Globally
Engineering across the World The Michael Baker Corporation has worked on some high-profile engineering proj-
ects. The company had a role in building the 789-mile Trans-Alaska Pipeline in
North America, the 135-mile KHMR-American Friendship Highway in Cambodia,
the New River Gorge Bridge in West Virginia, the Midfield Terminal Complex at
the Pittsburgh International Airport, and a 2,600-mile fiber optic telecommunications
network in Mexico. 40
More recently the company was selected to rehabilitate the
Pulaski Skyway, the bridge that connects Newark and Jersey City in New Jersey. 41
As the need for engineering, construction management, and other services expands
nationally and internationally, the company launched a national and global expansion
program. 42
Michael Baker Corporation merged with Integrated Mission Solutions in
2013 to create Michael Baker International.
The purpose statement of the organization reads, “Creating value by delivering
innovative and sustainable solutions for infrastructure and the environment.” 43
Its ser-
vices include architectural, environmental, construction, planning, and program man-
agement. The company has worked with U.S. and foreign allied governments and
with commercial customers.
The engineering and consulting firm has more than 6,000 employees in 90 national
and international offices. In 2014 it decided to reor-
ganize into an operations-centric structure in seven
regions. In its announcement of the reorganization, the
company suggested that its new structure would allow it
to offer more services to customers in each region. The
reorganization also would allow more local leadership
of projects.
“This reorganization is a result of extensive review,
market analysis, client demand, and discussion with per-
sonnel at all levels of the company identifying and high-
lighting opportunities for building a balanced business in
each of our regions,” stated Kurt Bergman, chief execu-
tive officer. “The new organization promotes empowered
business leaders at the office and regional levels, sup-
ported by national market and practice leads, to build
and manage well-balanced portfolios reflective of the
complete continuum of services provided by the Michael
Baker International enterprise.” 44
The renovation of the Pulaski Skyway in New Jersey is one of
Michael Baker International’s projects. The engineering and
consulting firm has recently reorganized its operation to offer
more services and allow for more local project leadership.
Managing Organizational Structure and Culture 289
also use a geographic structure. Because the needs of retail customers differ by region—for
example, shorts in California and down parkas in the Midwest—a geographic structure gives
retail regional managers the flexibility they need to choose the range of products that best
meets the needs of regional customers.
In adopting a global geographic structure, such as shown in Figure 10.5 a, managers locate different divisions in each of the world regions where the organization operates. Managers are
most likely to do this when they pursue a multidomestic strategy because customer needs vary
widely by country or world region. If products that appeal to U.S. customers do not sell in
Europe, the Pacific Rim, or South America, managers must customize the products to meet the
needs of customers in those different world regions; a global geographic structure with global
divisions will allow them to do this. For example, food and beverage companies need to cus-
tomize the taste of their products to closely match the desires of customers in different countries
and world regions. The accompanying “Managing Globally” feature describes how one com-
pany reorganized itself to be able to offer more services to customers in each region it serves.
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Figure 10.5 Global Geographic and Global Product Structures
A.A. GLOBAL GEOGRAPHIC STRUCTURE
Functions
B.B. GLOBAL PRODUCT STRUCTURE
Corporate managers
Foreign subsidiary European region
Foreign subsidiary South American region
Foreign subsidiary Pacific region
CEO
Pacific region
South American region
European region
North American region
Product division
Product division
Product division
Product division
Corporate managers
CEO
290 Chapter Ten
In contrast, to the degree that customers abroad are willing to buy the same kind of prod-
uct or slight variations thereof, managers are more likely to pursue a global strategy. In this
case they are more likely to use a global product structure. In a global product structure, each product division, not the country and regional managers, takes responsibility for decid-
ing where to manufacture its products and how to market them in countries worldwide (see
Figure 10.5 b). Product division managers manage their own global value chains and decide
where to establish foreign subsidiaries to distribute and sell their products to customers in
foreign countries.
MARKET STRUCTURE Sometimes the pressing issue facing managers is to group functions according to the type of customer buying the product in order to tailor the products
the organization offers to each customer’s unique demands. A PC maker such as Dell, for
example, has several kinds of customers, including large businesses (which might demand
networks of computers linked to a mainframe computer), small companies (which may need
just a few PCs linked together), educational users in schools and universities (which might
want thousands of independent PCs for their students), and individual users (who may want a
high-quality multimedia PC so they can play the latest video games).
To satisfy the needs of diverse customers, a company might adopt a market structure , which groups divisions according to the particular kinds of customers they serve (see
Figure 10.4 c). A market structure lets managers respond to the needs of their customers and
allows them to act flexibly in making decisions in response to customers’ changing needs.
To spearhead its turnaround, for example, Dell created four streamlined market divisions that
each focus on being responsive to one particular type of customer: individual consumers,
small businesses, large companies, and government and state agencies. Organizations need
to continually evaluate their structures and make sure that operations are working according
to plan. The accompanying “Management Insight” feature provides an example of what can
happen in an organization when leaders do not know what is happening.
market structure An organizational structure in
which each kind of customer
is served by a self-contained
division; also called customer
structure.
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The Miami Dolphins’ Team-First Culture In the middle of the 2013 professional football season, Miami Dolphins offensive line-
man Jonathan Martin abruptly quit and entered a hospital to get psychiatric help. 45
He
said he had been bullied by three of his teammates.
The National Football League investigated the team and found Martin had been sub-
jected to daily harassment by Richie Incognito, a guard for the Miami Dolphins, as well
as John Jerry and Mike Pouncey, both offensive linemen who also played for the Miami
Dolphins. The harassment included racial slurs about Martin being African American,
sexual taunts about his mother and sister, and jokes that Martin was gay.
The owner of the Miami Dolphins, Stephen Ross, said, “When we asked the NFL to
conduct this independent review, we felt it was important to take a step back and thor-
oughly research these serious allegations. As an organization, we are committed to a
culture of team-first accountability and respect for one another.” 46
The investigation and subsequent report identified Incognito as the main instigator
of the harassment. 47
After the report was released, Jim Turner, who was the coach of
the offensive line, was fired for not stopping the harassment and for taking part in some
taunting. Additionally, Kevin O’Neill, who was the head athletic trainer at the time, was
fired for not cooperating with the investigation. 48
However, the investigation concluded
that Joe Philbin, the coach for the Miami Dolphins, did not take part in or know of the
harassment that Martin was subjugated to.
“After interviewing Coach Philbin at length, we were impressed with his commitment
to promoting integrity and accountability throughout the Dolphins organization—a point
echoed by many players,” the report said. “We are convinced that had Coach Philbin
learned of the underlying misconduct, he would have intervened promptly to ensure that
Martin and others were treated with dignity.” 49
Philbin said that the information contained in the report about vulgar language and
behavior was disappointing and violated the team’s fundamental values. He also indicated
that he would be responsible for making sure such events do not happen again. “That
ultimately rests on my shoulders,” he said. “And I will be accountable moving forward
for making sure that we emphasize a team-first culture of respect toward one another.” 50
Management Insight
Managing Organizational Structure and Culture 291
Matrix and Product Team Designs Moving to a product, market, or geographic divisional structure allows managers to respond
more quickly and flexibly to the particular circumstances they confront. However, when
information technology or customer needs are changing rapidly and the environment is uncer-
tain, even a divisional structure may not give managers enough flexibility to respond to the
environment quickly. To operate effectively under these conditions, managers must design
the most flexible kind of organizational structure available: a matrix structure or a product
team structure (see Figure 10.6 ).
MATRIX STRUCTURE In a matrix structure , managers group people and resources in two ways simultaneously: by function and by product.
51 Employees are grouped by functions
to allow them to learn from one another and become more skilled and productive. In addition,
employees are grouped into product teams in which members of different functions work together to develop a specific product. The result is a complex network of reporting relation-
ships among product teams and functions that makes the matrix structure very flexible (see
Figure 10.6 a). Each person in a product team reports to two managers: (1) a functional boss,
who assigns individuals to a team and evaluates their performance from a functional per-
spective, and (2) the boss of the product team, who evaluates their performance on the team.
Thus team members are known as two-boss employees. The functional employees assigned to product teams change over time as the specific skills that the team needs change. At the
matrix structure An orga- nizational structure that simul-
taneously groups people and
resources by function and by
product.
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Figure 10.6 Matrix and Product Team Structures
A. MATRIX STRUCTURE
B. PRODUCT TEAM STRUCTURE
Manufacturing unit
Product team manager Team members
ManufacturingResearch & development
Product design
Sales & marketing
Engineering
Product team A
Product team B
Product team Two-boss employee
Product team C
Product team D
Manufacturing unit
CEO
CEO
Manufacturing unit
P ro
d u ct
t e a m
m a n a g e rs
Functional managers
Sales & marketing
Engineering Research & development
Product design
292 Chapter Ten
beginning of the product development process, for example, engineers and R&D specialists
are assigned to a product team because their skills are needed to develop new products. When
a provisional design has been established, marketing experts are assigned to the team to gauge
how customers will respond to the new product. Manufacturing personnel join when it is time
to find the most efficient way to produce the product. As their specific jobs are completed,
team members leave and are reassigned to new teams. In this way the matrix structure makes
the most use of human resources.
To keep the matrix structure flexible, product teams are empowered and team members are
responsible for making most of the important decisions involved in product development. 52
The product team manager acts as a facilitator, controlling the financial resources and trying
to keep the project on time and within budget. The functional managers try to ensure that the
product is the best it can be to maximize its differentiated appeal.
High-tech companies that operate in environments where new product development takes
place monthly or yearly have used matrix structures successfully for many years, and the need
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Managing Organizational Structure and Culture 293
to innovate quickly is vital to the organization’s survival. The flexibility afforded by a matrix
structure lets managers keep pace with a changing and increasingly complex environment. 53
PRODUCT TEAM STRUCTURE The dual reporting relationships that are at the heart of a matrix structure have always been difficult for managers and employees to deal with.
Often the functional boss and the product boss make conflicting demands on team members,
who do not know which boss to satisfy first. Also, functional and product team bosses may
come into conflict over precisely who is in charge of which team members and for how long.
To avoid these problems, managers have devised a way of organizing people and resources
that still allows an organization to be flexible but makes its structure easier to operate: a prod-
uct team structure.
The product team structure differs from a matrix structure in two ways: (1) It does away with dual reporting relationships and two-boss employees, and (2) functional employees are
permanently assigned to a cross-functional team that is empowered to bring a new or rede-
signed product to market. A cross-functional team is a group of managers brought together from different departments to perform organizational tasks. When managers are grouped into
cross-functional teams, the artificial boundaries between departments disappear, and a narrow
focus on departmental goals is replaced with a general interest in working together to achieve
the organization’s goals. For example, when mattress company Sealy saw its sales slipping,
it pulled together a cross-functional team that was allowed to work outside the organization’s
hierarchy and quickly design a new mattress. With everyone focused on the goal, team mem-
bers created a mattress that broke previous sales records. 54
Members of a cross-functional team report only to the product team manager or to one
of his or her direct subordinates. The heads of the functions have only an informal advisory
relationship with members of the product teams—the role of functional managers is only to
counsel and help team members, share knowledge among teams, and provide new technologi-
cal developments that can help improve each team’s performance (see Figure 10.6 b). 55
Increasingly, organizations are making empowered cross-functional teams an essential
part of their organizational architecture to help them gain a competitive advantage in fast-
changing organizational environments. For example, Newell Rubbermaid, the well-known
maker of more than 5,000 household products, moved to a product team structure because
its managers wanted to speed up the rate of product innovation. Managers created 20 cross-
functional teams composed of five to seven people from marketing, manufacturing, R&D,
and other functions. 56
Each team focuses its energies on a particular product line, such as
garden products, bathroom products, or kitchen products. These teams develop more than 365
new products a year. 57
T he more complex the structure a company uses to group its activities,
the greater are the problems of linking and coordinating its different functions and divisions. Coordination becomes a problem because each
function or division develops a different orientation toward the other
groups that affects how it interacts with them. Each function or division
comes to view the problems facing the company from its own perspec-
tive; for example, they may develop different views about the major
goals, problems, or issues facing a company.
At the functional level, the manufacturing function typically has a short-term view; its
major goal is to keep costs under control and get the product out the factory door on time. By
contrast, the product development function has a long-term viewpoint because developing a
new product is a relatively slow process and high product quality is seen as more important
than low costs. Such differences in viewpoint may make manufacturing and product develop-
ment managers reluctant to cooperate and coordinate their activities to meet company goals.
At the divisional level, in a company with a product structure, employees may become con-
cerned more with making their division’s products a success than with the profitability of the entire company. They may refuse, or simply not see, the need to cooperate and share informa-
tion or knowledge with other divisions.
cross-functional team A group of managers brought
together from different
departments to perform orga-
nizational tasks.
product team structure An organizational structure in
which employees are perma-
nently assigned to a cross-
functional team and report
only to the product team
manager or to one of his or
her direct subordinates.
Coordinating Functions and
Divisions
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Figure 10.7 The Hierarchy of Authority and Span of Control at McDonald’s Corporation
Don Thompson CEO
McDonald's
Jeff Stratton President
McDonald's USA
Doug Goare President
McDonald's Europe
Edgardo Navarro President
McDonald's Latin America
Dave Hoffman President
McDonald's Asia, Pacific,
Middle East and Africa
Peter Bensen Executive vice president and
CFO
Bridget Coffing Senior vice
president and CCO
Steve Easterbrook
Executive vice president
and global chief brand officer
294 Chapter Ten
The problem of linking and coordinating the activities of different functions and divisions
becomes more acute as the number of functions and divisions increases. We look first at how
managers design the hierarchy of authority to coordinate functions and divisions so that they
work together effectively. Then we focus on integration and examine the different integrating
mechanisms managers can use to coordinate functions and divisions.
Allocating Authority As organizations grow and produce a wider range of goods and services, the size and num-
ber of their functions and divisions increase. To coordinate the activities of people, func-
tions, and divisions and to allow them to work together effectively, managers must develop a
clear hierarchy of authority. 58
Authority is the power vested in a manager to make decisions and use resources to achieve the organization’s goals by virtue of his or her position in an
organization. The hierarchy of authority is an organization’s chain of command —the rela- tive authority that each manager has—extending from the CEO at the top, down through the
middle managers and first-line managers, to the nonmanagerial employees who actually make
goods or provide services. Every manager, at every level of the hierarchy, supervises one or
more subordinates. The term span of control refers to the number of subordinates who report directly to a manager.
Figure 10.7 shows a simplified picture of the restructured hierarchy of authority at
McDonald’s in 2015, after the retirement of COO Tim Fenton. At the top of the hierarchy is
Don Thompson, CEO and president since 2012. Thompson is the manager who has ultimate
responsibility for McDonald’s performance, and he has the authority to decide how to use
organizational resources to benefit McDonald’s stakeholders. Tim Fenton, next in line, is
chief operating officer and is responsible for overseeing 35,000 restaurants across the globe.
Fenton, who reports directly to Thompson, will retire from McDonald’s in late 2014. When
he is gone, the board of directors has decided not to replace him, but to do some restructuring.
McDonald’s area of the world presidents, including the presidents of McDonald’s Europe and
McDonald’s Latin America, will be directly accountable to Thompson. In place of Fenton’s
COO role, Executive Vice President and Chief Financial Officer Pete Bensen will be respon-
sible for the development and franchising functions as well as the worldwide supply chain,
and Steve Easterbrook, who is the executive vice president and global chief brand officer, will
be responsible for the global corporate social responsibility department, the restaurant solu-
tions group, corporate strategy, and the sustainability and philanthropy department. Also in
the top management hierarchy is Bridget Coffing, who is the senior vice president and chief
communications officer. Unlike the other managers, Coffing is not a line manager, someone in the direct line or chain of command who has formal authority over people and resources.
Rather, Coffing is a staff manager, responsible for one of McDonald’s specialist functions, communications. She reports directly to Thompson.
59
Managers at each level of the hierarchy confer on managers at the next level down the
authority to decide how to use organizational resources. Accepting this authority, those
lower-level managers are accountable for how well they make those decisions. Managers who
authority The power to hold people accountable for their
actions and to make deci-
sions concerning the use of
organizational resources.
hierarchy of authority An organization’s chain of com-
mand, specifying the relative
authority of each manager.
span of control The num- ber of subordinates who
report directly to a manager.
line manager Someone in the direct line or chain of
command who has formal
authority over people and
resources at lower levels.
staff manager Someone responsible for managing a
specialist function, such as
finance or marketing.
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Figure 10.8 Tall and Flat Organizations
A.
3
B. TALL ORGANIZATIONAL HIERARCHY (7 LEVELS IN THE HIERARCHY)
5
6
1
2
3
4
FLAT ORGANIZATIONAL HIERARCHY (3 LEVELS IN THE HIERARCHY)
1
7
2
Managing Organizational Structure and Culture 295
make the right decisions are typically promoted, and organizations motivate managers with
the prospects of promotion and increased responsibility within the chain of command.
Below Thompson are the other main levels or layers in the McDonald’s domestic chain
of command—executive vice presidents of its West, Central, and East regions, zone manag-
ers, regional managers, and supervisors. A hierarchy is also evident in each company-owned
McDonald’s restaurant. At the top is the store manager; at lower levels are the first assistant,
shift managers, and crew personnel. McDonald’s managers have decided that this hierarchy
of authority best allows the company to pursue its business-level strategy of providing fast
food at reasonable prices—and its stock price was steadily climbing in the 2010s as perfor-
mance has increased.
TALL AND FLAT ORGANIZATIONS As an organization grows in size (normally measured by the number of its managers and employees), its hierarchy of authority normally
lengthens, making the organizational structure taller. A tall organization has many levels of authority relative to company size; a flat organization has fewer levels relative to company size (see Figure 10.8 ).
60 As a hierarchy becomes taller, problems that make the organization’s
structure less flexible and slow managers’ response to changes in the organizational environ-
ment may result.
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Two employees working in the circuit board
manufacturing area at Jabil Circuit Inc.
illustrate cross-functional empowerment that
can keep production lines moving.
296 Chapter Ten
Communication problems may arise when an organization has many levels in the hierar-
chy. It can take a long time for the decisions and orders of upper-level managers to reach man-
agers further down in the hierarchy, and it can take a long time for top managers to learn how
well their decisions worked. Feeling out of touch, top managers may want to verify that lower-
level managers are following orders and may require written confirmation from them. Middle
managers, who know they will be held strictly accountable for their actions, start devoting too
much time to the process of making decisions to improve their chances of being right. They
might even try to avoid responsibility by making top managers decide what actions to take.
Another communication problem that can result is the distortion of commands and mes-
sages being transmitted up and down the hierarchy, which causes managers at different levels
to interpret what is happening differently. Distortion of orders and messages can be acciden-
tal, occurring because different managers interpret messages from their own narrow func-
tional perspectives. Or distortion can be intentional, occurring because managers low in the
hierarchy decide to interpret information in a way that increases their own personal advantage.
Another problem with tall hierarchies is that they usually indicate that an organization
is employing many managers, and managers are expensive. Managerial salaries, benefits,
offices, and secretaries are a huge expense for organizations. Large companies such as IBM
and GM pay their managers millions of dollars a year. During the current recession, hundreds
of thousands of managers were laid off as companies restructured and downsized their work-
forces to reduce costs. But in 2014 a gradual recovery was underway. 61
THE MINIMUM CHAIN OF COMMAND To ward off the problems that result when an organization becomes too tall and employs too many managers, top managers need to ascertain
whether they are employing the right number of middle and first-line managers and whether
they can redesign their organizational architecture to reduce the number of managers. Top
managers might well follow a basic organizing principle—the principle of the minimum chain
of command—which states that top managers should always construct a hierarchy with the
fewest levels of authority necessary to efficiently and effectively use organizational resources.
Effective managers constantly scrutinize their hierarchies to see whether the number of
levels can be reduced—for example, by eliminating one level and giving the responsibilities
of managers at that level to managers above and by empowering employees below. One man-
ager who has worked to empower employees is David Novak, CEO of Yum Brands. Instead
of dictating what the company’s Taco Bell, KFC, Pizza Hut, and WingStreet restaurants
should do, Novak turned the corporate headquarters into the support center for worldwide
operations. He also wrote a book called Taking People with You: The Only Way to Make BIG Things Happen. The book outlines the leadership program that Novak developed to motivate employees and align them with the organization’s goals.
62
In the United States over 5 million manufacturing jobs have been lost to factories in low-
cost countries abroad in the 2000s. While many large U.S. manufacturing companies have
given up the battle, some small companies such as electronics maker Plexus Corp. have been
able to find ways of organizing that allow them to survive and prosper in a low-cost manu-
facturing world. They have done this by creating empowered work teams. U.S. companies
cannot match the efficiency of manufacturers abroad in producing high volumes of a single
product, such as millions of a particular circuit board used in a laptop com-
puter. So Plexus’s managers decided to focus their efforts on developing
a manufacturing technology called “low–high” that could efficiently pro-
duce low volumes of many different kinds of products. Plexus’s managers
formed a team to design an organizational structure based on creating four
“focused factories” in which control over production decisions is given to
the workers, whose managers cross-trained them so they can perform all
the operations involved in making a product in their “factory.” Now, when
work slows down at any point in the production of a particular product, a
worker further along the production process can move back to help solve
the problem that has arisen at the earlier stage. 63
Furthermore, managers organized workers into self-managed teams that
are empowered to make all the decisions necessary to make a particular
product in one of the four factories. Because each product is different, the
ability of the teams to make rapid decisions and respond to unexpected
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Manager as a Person
Satya Nadella, Microsoft’s New CEO In February 2014 Microsoft hired its third CEO in the company’s almost 40 years.
Satya Nadella was formerly the executive vice president of Microsoft’s cloud and
enterprise group.
Former Microsoft CEO Steve Ballmer retired in 2013. On the day Nadella was
appointed CEO, Ballmer sent an email message to the employees of Microsoft
announcing Nadella’s appointment and touting Nadella’s business, technical, and
leadership skills. He also praised the strength of the leadership team, saying that
together they would drive the company forward. 67
Managing Organizational Structure and Culture 297
contingencies is vital on a production line, where time is money. At Plexus, managers, by
allowing teams to experiment, have reduced changeover time from hours to as little as 30
minutes so the line is making products over 80 percent of the time. 64
The flexibility brought
about by self-managed teams is why Plexus is so efficient and can compete against low-cost
manufacturers abroad.
CENTRALIZATION AND DECENTRALIZATION OF AUTHORITY Another way in which managers can keep the organizational hierarchy flat is by decentralizing authority — that is, by giving lower-level managers and nonmanagerial employees the right to make impor-
tant decisions about how to use organizational resources. 65
If managers at higher levels give
lower-level employees the responsibility of making important decisions and only manage by exception, then the problems of slow and distorted communication noted previously are kept to a minimum. Moreover, fewer managers are needed because their role is not to make deci-
sions but to act as coach and facilitator and to help other employees make the best decisions.
In addition, when decision-making authority is low in the organization and near the customer,
employees are better able to recognize and respond to customer needs.
Decentralizing authority allows an organization and its employees to behave in a flex-
ible way even as the organization grows and becomes taller. This is why managers are so
interested in empowering employees, creating self-managed work teams, establishing cross-
functional teams, and even moving to a product team structure. These design innovations
help keep the organizational architecture flexible and responsive to complex task and general
environments, complex technologies, and complex strategies.
Although more and more organizations are taking steps to decentralize authority, too much decentralization has certain disadvantages. If divisions, functions, or teams are given too
much decision-making authority, they may begin to pursue their own goals at the expense of
the organization’s goals. Managers in engineering design or R&D, for example, may become
so focused on making the best possible product that they fail to realize that the best product
may be so expensive few people are willing or able to buy it. Also, too much decentralization
can cause lack of communication among functions or divisions; this prevents the synergies of
cooperation from ever materializing, and organizational performance suffers.
Top managers must seek the balance between centralization and decentralization of
authority that best meets the four major contingencies an organization faces (see Figure 10.1 ).
If managers are in a stable environment, are using well-understood technology, and are pro-
ducing stable kinds of products (such as cereal, canned soup, or books), there is no pressing
need to decentralize authority, and managers at the top can maintain control of much of orga-
nizational decision making. 66
However, in uncertain, changing environments where high-
tech companies are producing state-of-the-art products, top managers must often empower
employees and allow teams to make important strategic decisions so the organization can
keep up with the changes taking place. No matter what its environment, a company that fails
to control the balance between centralization and decentralization will find its performance
suffering. The accompanying “Manager as a Person” feature describes how Microsoft’s new
CEO is using elements of both centralization and decentralization.
decentralizing authority Giving lower-level managers
and nonmanagerial employ-
ees the right to make impor-
tant decisions about how to
use organizational resources.
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In his first interview as CEO, Nadella discussed elements of centralization and
decentralization at Microsoft. First, he said the effectiveness of the leadership team
was his top priority, suggesting a focus on centralization. However, he also discussed
the need for everyone in the organization to be innovating, suggesting a focus on
decentralization.
On centralization, Nadella wants the leadership team “to commit and engage in an
authentic way, and for us to feel that energy as a team.” 68
Since he has worked with
everyone on the team before, he has confidence in their ability to perform. However,
he wants to see them come together as a team and lead the organization. The job
of the leadership team, according to Nadella, is to clarify what needs to be done,
make sure the organization is aligned to be able to do it, and pursue the work with
intensity. 69
On decentralization, Nadella said that the boundaries within the organization
are crumbling and the company structure is changing. He wants to create a self-
organizing organization in which employees own the innovation agenda and share
implementation. An organization chart or structure is not helpful in creating such a
company structure, Nadella said, but a change in organizational culture could achieve
such a shift. 70
In his first email message to Microsoft employees after being named CEO, Nadella
stressed the need for innovation. He also called on all employees to pitch in and help
lead change in the organizational culture. 71
On the Microsoft web page, Nadella lists his hobbies as poetry and cricket. 72
In fact,
in his first interview as CEO, he described a leadership lesson from his days on the
cricket ground. His team captain once took him out of a match because he was not play-
ing well. However, the team captain also put him back in the match before it was over.
“I never asked him why he did that, but my impression is that he knew he would destroy
my confidence if he didn’t put me back in. And I went on to take a lot more wickets
after that. It was a subtle, important leadership lesson about when to intervene and when
to build the confidence of the team. I think that is perhaps the No. 1 thing that leaders
have to do: to bolster the confidence of the people you’re leading.” 73
298 Chapter Ten
Integrating and Coordinating Mechanisms Much coordination takes place through the hierarchy of authority. However, several problems
are associated with establishing contact among managers in different functions or divisions.
As discussed earlier, managers from different functions and divisions may have different
views about what must be done to achieve the organization’s goals. But if the managers have
equal authority (as functional managers typically do), the only manager who can tell them
what to do is the CEO, who has the ultimate authority to resolve conflicts. The need to solve
everyday conflicts, however, wastes top management time and slows strategic decision mak-
ing; indeed, one sign of a poorly performing structure is the number of problems sent up the
hierarchy for top managers to solve.
To increase communication and coordination among functions or between divisions and
to prevent these problems from emerging, top managers incorporate various integrating mechanisms into their organizational architecture. The greater the complexity of an orga- nization’s structure, the greater is the need for coordination among people, functions, and
divisions to make the organizational structure work efficiently and effectively. 74
Thus when
managers adopt a divisional, matrix, or product team structure, they must use complex inte-
grating mechanisms to achieve the organization’s goals. Several integrating mechanisms are
available to managers to increase communication and coordination. 75
Figure 10.9 lists these
mechanisms, as well as examples of the individuals or groups who might use them.
LIAISON ROLES Managers can increase coordination among functions and divisions by establishing liaison roles. When the volume of contacts between two functions increases, one
way to improve coordination is to give one manager in each function or division the responsibility
LO10-4 Explain why managers must
coordinate jobs, functions,
and divisions using the
hierarchy of authority and
integrating mechanisms.
integrating mechanisms Organizing tools that man-
agers can use to increase
communication and coordi-
nation among functions and
divisions.
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Figure 10.9 Types and Examples of Integrating Mechanisms
SIMPLE
COMPLEX
Direct contact
Liaison roles Marketing manager and research and development manager meet to brainstorm new product ideas.
Task forces Representatives from marketing, research and development, and manufacturing meet to discuss launch of new product.
Cross-functional teams A cross-functional team composed of all functions is formed to manage product to its launch in the market.
Integrating roles and departments Senior managers provide members of cross-functional team with relevant information from other teams and from other divisions.
Liaison roles
Cross-functional team
Integrating role
Integrating role
Television and stereo
division
Washing machine division
Managers responsible for integration
Task force
Managing Organizational Structure and Culture 299
for coordinating with the other. These managers may meet daily, weekly, monthly, or as needed.
A liaison role is illustrated in Figure 10.9 ; the small dot represents the person within a function
who has responsibility for coordinating with the other function. Coordinating is part of the liai-
son’s full-time job, and usually an informal relationship develops between the people involved,
greatly easing strains between functions. Furthermore, liaison roles provide a way of trans-
mitting information across an organization, which is important in large organizations whose
employees may know no one outside their immediate function or division.
TASK FORCES When more than two functions or divisions share many common prob- lems, direct contact and liaison roles may not provide sufficient coordination. In these cases,
a more complex integrating mechanism, a task force , may be appropriate (see Figure 10.9 ). One manager from each relevant function or division is assigned to a task force that meets to
solve a specific, mutual problem; members are responsible for reporting to their departments
on the issues addressed and the solutions recommended. Task forces are often called ad hoc committees because they are temporary; they may meet on a regular basis or only a few times. When the problem or issue is solved, the task force is no longer needed; members return to
their normal roles in their departments or are assigned to other task forces. Typically task
force members also perform many of their normal duties while serving on the task force.
CROSS-FUNCTIONAL TEAMS In many cases the issues addressed by a task force are recurring problems, such as the need to develop new products or find new kinds of customers.
To address recurring problems effectively, managers are increasingly using permanent inte-
grating mechanisms such as cross-functional teams. An example of a cross-functional team
is a new product development committee that is responsible for the choice, design, manufac-
turing, and marketing of a new product. Such an activity obviously requires a great deal of
integration among functions if new products are to be successfully introduced, and using a
complex integrating mechanism such as a cross-functional team accomplishes this. As dis-
cussed earlier, in a product team structure people and resources are grouped into permanent
cross-functional teams to speed products to market. These teams assume long-term responsi-
bility for all aspects of development and making the product.
INTEGRATING ROLES An integrating role is a role whose only function is to increase coordination and integration among functions or divisions to achieve performance gains from
synergies. Usually managers who perform integrating roles are experienced senior managers
task force A committee of managers from various func-
tions or divisions who meet
to solve a specific, mutual
problem; also called ad hoc
committee.
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300 Chapter Ten
who can envisage how to use the resources of the functions or divisions to obtain new syn-
ergies. At PepsiCo, Amy Chen, now director of sales, coordinated with several divisions to
help create a program that would deliver meals during the summer months to children from
low-income families. The resulting program, Food for Good, delivers meals to children who
would not normally receive a lunch at school. 76
The more complex an organization and the
greater the number of its divisions, the more important integrating roles are.
In summary, to keep an organization responsive to changes in its task and general environ-
ments as it grows and becomes more complex, managers must increase coordination among
functions and divisions by using complex integrating mechanisms. Managers must decide
on the best way to organize their structures—that is, choose the structure that allows them to
make the best use of organizational resources.
T h e second principal issue in organizational design is to create, develop,
and maintain an organization’s culture. As we discussed in Chapter 3,
organizational culture is the shared set of beliefs, expectations, values, and norms that influence how members of an organization relate to one
another and cooperate to achieve the organization’s goals. Culture influ-
ences the work behaviors and attitudes of individuals and groups in an organization because
its members adhere to shared values, norms, and expected standards of behavior. Employees
internalize organizational values and norms and then let these values and norms guide their decisions and actions.
77
A company’s culture is a result of its pivotal or guiding values and norms. A company’s
values are the shared standards that its members use to evaluate whether they have helped the company achieve its vision and goals. The values a company might adopt include any
or all of the following standards: excellence, stability, predictability, profitability, economy,
creativity, morality, and usefulness. A company’s norms specify or prescribe the kinds of shared beliefs, attitudes, and behaviors that its members should observe and follow. Norms
are informal, but powerful, rules about how employees should behave or conduct themselves
in a company if they are to be accepted and help it to achieve its goals. Norms can be equally
as constraining as the formal written rules contained in a company’s handbook. Companies
might encourage workers to adopt norms such as working hard, respecting traditions and
authority, and being courteous to others; being conservative, cautious, and a “team player”;
being creative and courageous and taking risks; or being honest and frugal and maintaining
high personal standards. Norms may also prescribe certain specific behaviors such as keeping
one’s desk tidy, cleaning up at the end of the day, taking one’s turn to bring doughnuts, and
even wearing jeans on Fridays.
Ideally a company’s norms help the company achieve its values. For example, a new com-
puter company whose culture is based on values of excellence and innovation may try to
attain this high standard by encouraging workers to adopt norms about being creative, taking
risks, and working hard now and looking long-term for rewards (this combination of values
and norms leads to an entrepreneurial culture in a company). On the other hand, a bank or insurance company that has values of stability and predictability may emphasize norms of
cautiousness and obedience to authority (the result of adopting these values and norms would
be a stable, conservative culture in a company). Over time, members of a company learn from one another how to perceive and interpret
various events that happen in the work setting and to respond to them in ways that reflect
the company’s guiding values and norms. This is why organizational culture is so important:
When a strong and cohesive set of organizational values and norms is in place, employees
focus on what is best for the organization in the long run—all their decisions and actions
become oriented toward helping the organization perform well. For example, a teacher
spends personal time after school coaching and counseling students; an R&D scientist works
80 hours a week, evenings, and weekends to help speed up a late project; or a salesclerk at a
department store runs after a customer who left a credit card at the cash register. An interest-
ing example of a manager who has been working hard to change a company’s dysfunctional
culture is profiled in the accompanying “Manager as a Person” feature.
Organizational Culture
organizational culture The shared set of beliefs,
expectations, values, and
norms that influence how
members of an organization
relate to one another and
cooperate to achieve the
organization’s goals.
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Manager as a Person
Marissa Mayer Shakes Up Yahoo! When Marissa Mayer took the job of Yahoo! CEO in 2012, she inherited a com-
pany that needed a turnaround. Its revenues were down, and its image was stale. 78
In
her time at Yahoo!, Mayer has made several bold moves. She has introduced dozens
of new apps 79
and purchased 37 companies, including blogging service Tumblr. 80
However, her most infamous move was one that would change Yahoo!’s culture. She
ended the company policy of allowing workers to telecommute. The memo ending
the policy was leaked to the press and included this explanation from Jackie Reses,
who is the head of HR:
“To become the absolute best place to work, communication and collaboration
will be important, so we need to be working side-by-side. That is why it is critical that
we are all present in our offices. Some of the best decisions and insights come from
hallway and cafeteria discussions, meeting new people, and impromptu team meet-
ings. Speed and quality are often sacrificed when we work from home. We need to be
one Yahoo!, and that starts with physically being together.” 81
The reaction from employees, journalists, and other critics was mostly nega-
tive. There was some speculation that perhaps the real intent of the policy was to
get unproductive workers to quit without having to hold layoffs. 82
Others lamented
the change in routine: “The tone and tactics have infuriated some at the company.
Even if that was what was previously agreed to with managers and HR, or was
a part of the package to take a position, tough . . . It’s outrageous and a morale
killer.” 83
Under the headline “4 Reasons Marissa Mayer’s No-At-Home-Work Policy Is an
Epic Fail,” business journalist Peter Cohan called the blanket rule on telecommut-
ing a “meat-ax policy” and outlined reasons why the move was bad for Yahoo!. 84
The first reason was that the best employees would quit, leaving Yahoo! with only
the mediocre employees who could not find other jobs that allowed them to tele-
commute. The second reason was that working from home creates less stress for
employees and increases productivity. Bringing people to the office could raise stress
and reduce productivity. The third reason was that bringing employees to the office
would require Yahoo! to spend money on cubicles and other employee-related items
to house the former telecommuters. The final reason was that requiring people to
come to work would increase traffic and air pollution.
Founder of Virgin Group Richard Branson dedicated a blog post to Mayer’s deci-
sion, writing “We like to give people the freedom to work where they want, safe in
the knowledge that they have the drive and expertise to perform excellently, whether
they at their desk or in their kitchen. Yours truly has never worked out of an office,
and never will. So it was perplexing to see Yahoo! CEO Marissa Mayer tell employ-
ees who work remotely to relocate to company facilities. This seems a backwards
step in an age when remote working is easier and more effective than ever.” 85
These criticisms were a far cry from the good wishes that greeted Mayer when
she first accepted the job in 2012. 86
Headlines read “Marissa Mayer: Yahoo!’s Best
Hope” 87
and “Google’s First Lady Marissa Mayer Jumps Ship to Yahoo!” 88
It may still be too early to determine whether Mayer’s policy will change the com-
pany’s fortunes. However, there are indicators that people are coming around. After
Mayer had been in the job for one year, her team asked Yahoo! workers to click on
a link that read “yo/thxmarissa” and leave a note of gratitude to Mayer regarding her
work for Yahoo!. Some of the notes included “Thank you for epitomizing the values
of a Yahoo! superstar” and “Best CEO I ever worked for.” The messages were put
into a book titled “Yahoo! Thanks You Marissa.” 89
In 2013 the company received
twice as many job applications—340,000—as it did in 2012. After the first quarter of
2014, there was good financial news as well. Yahoo!’s 2014 first quarter results were
better than expected. While emphasizing that the company’s turnaround still had a
long way to go, Mayer told investors that the era of decline was over. 90
301
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Figure 10.10 Sources of an Organization’s Culture
Characteristics of organizational
members
Organizational structure
Organizational culture
The employment relationship
Organizational ethics
302 Chapter Ten
Where Does Organizational Culture Come From? In managing organizational architecture, some important questions that arise are these: Where
does organizational culture come from? Why do different companies have different cultures?
Why might a culture that for many years helped an organization achieve its goals suddenly
harm the organization?
Organizational culture is shaped by the interaction of four main factors: the personal
and professional characteristics of people within the organization, organizational ethics, the
nature of the employment relationship, and the design of its organizational structure (see
Figure 10.10 ). These factors work together to produce different cultures in different organiza-
tions and cause changes in culture over time.
CHARACTERISTICS OF ORGANIZATIONAL MEMBERS The ultimate source of organizational culture is the people who make up the organization. If you want to know
why organizational cultures differ, look at how the characteristics of their members differ.
Organizations A, B, and C develop distinctly different cultures because they attract, select,
and retain people who have different values, personalities, and ethics. 92
Recall the attraction–
selection–attrition model from Chapter 3. People may be attracted to an organization whose
values match theirs; similarly, an organization selects people who share its values. Over time,
people who do not fit in leave. The result is that people inside the organization become more
LO10-5 List the four sources of
organizational culture, and
explain why and how a
company’s culture can lead
to competitive advantage.
“She deserves the credit relative to changing the attitude and morale and the desire,
if you will, to . . . attract new folks as well as to retain folks we have,” said Yahoo! CFO
Ken Goldman in early 2014. “So I think—I’m very confident. If you talk to anybody at
Yahoo! today you would find them, whether they’ve been here for a year or five years,
they’re very, very pleased with what they see in working at Yahoo!. I’m absolutely,
very confident in that relative to attrition and our ability to hire all points to that.” 91
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Managing Organizational Structure and Culture 303
similar, the values of the organization become more pronounced and clear-cut, and the culture
becomes distinct from those of similar organizations. 93
The fact that an organization’s members become similar over time and come to share the
same values may actually hinder their ability to adapt and respond to changes in the envi-
ronment. 94
This happens when the organization’s values and norms become so strong and
promote so much cohesiveness in members’ attitudes that the members begin to misperceive
the environment. 95
Companies such as Ford, Google, Apple, and Microsoft need a strong set
of values that emphasize innovation and hard work; they also need to be careful their success
doesn’t lead members to believe their company is the best in the business. Companies fre-
quently make this mistake. One famous example is the CEO of Digital Equipment, who in the
1990s laughed off the potential threat posed by PCs to his powerful minicomputers, claiming,
“Personal computers are just toys.” This company no longer exists.
ORGANIZATIONAL ETHICS The managers of an organization can set out purpose- fully to develop specific cultural values and norms to control how its members behave. One
important class of values in this category stems from organizational ethics , which are the moral values, beliefs, and rules that establish the appropriate way for an organization and
its members to deal with each other and with people outside the organization. Recall from
Chapter 4 that ethical values rest on principles stressing the importance of treating organi-
zational stakeholders fairly and equitably. Managers and employees are constantly making
choices about the right, or ethical, thing to do; and to help them make ethical decisions, top
managers purposefully implant ethical values into an organization’s culture. 96
Consequently
ethical values, and the rules and norms that embody them, become an integral part of an orga-
nization’s culture and determine how its members will manage situations and make decisions.
THE EMPLOYMENT RELATIONSHIP A third factor shaping organizational culture is the nature of the employment relationship a company establishes with its employees via its
human resource policies and practices. Recall from Chapter 1 our discussion of the changing
relationship between organizations and their employees due to the growth of outsourcing and
employment of contingent workers. Like a company’s hiring, promotion, and layoff policies,
human resource policies, along with pay and benefits, can influence how hard employees will
work to achieve the organization’s goals, how attached they will be to the organization, and
whether they will buy into its values and norms. 97
As we discuss in Chapter 12, an organiza-
tion’s human resource policies are a good indicator of the values in its culture concerning
its responsibilities to employees. Consider the effects of a company’s promotion policy, for
example: A company with a policy of promoting from within will fill higher-level positions
with employees who already work for the organization. On the other hand, a company with
a policy of promotion from without will fill its open positions with qualified outsiders. What
does this say about each organization’s culture?
Promoting from within will bolster strong values and norms that build loyalty, align
employees’ goals with the organization, and encourage employees to work hard to advance
within the organization. If employees see no prospect of being promoted from within, they
are likely to look for better opportunities elsewhere, cultural values and norms result in self-
interested behavior, and cooperation and cohesiveness fall. The tech sector has gone through
great turmoil in recent years, and over 2 million U.S. tech employees lost their jobs dur-
ing the 2000s because of outsourcing and the recession. Apple, HP, and IBM—known for
their strong employee-oriented values that emphasized long-term employment and respect for
employees—were among the many companies forced to lay off employees, and their cultures
have changed as a result. To rebuild their cultures and make their remaining employees feel
like “owners,” many companies have HRM pay policies that reward superior performance
with bonuses and stock options. 98
For example, Southwest Airlines and Google established
companywide stock option systems that encourage their employees to be innovative and
responsive to customers. Other companies offered different perks, such as Johnson & John-
son’s concierge service and Cisco’s acupuncture. 99
ORGANIZATIONAL STRUCTURE We have seen how the values and norms that shape employee work attitudes and behaviors derive from an organization’s people, eth-
ics, and HRM policies. A fourth source of cultural values comes from the organization’s
organizational ethics The moral values, beliefs, and
rules that establish the appro-
priate way for an organization
and its members to deal with
each other and with people
outside the organization.
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304 Chapter Ten
structure. Different kinds of structure give rise to different kinds of culture; so to create a certain culture, managers often need to design a particular type of structure. Tall and highly
centralized structures give rise to totally different sets of norms, rules, and cultural values
than do structures that are flat and decentralized. In a tall, centralized organization people
have little personal autonomy, and norms that focus on being cautious, obeying authority, and
respecting traditions emerge because predictability and stability are desired goals. In a flat,
decentralized structure people have more freedom to choose and control their own activities,
and norms that focus on being creative and courageous and taking risks appear, giving rise to
a culture in which innovation and flexibility are desired goals.
Whether a company is centralized or decentralized also leads to the development of dif-
ferent kinds of cultural values. By decentralizing authority and empowering employees, an
organization can establish values that encourage and reward creativity or innovation. In doing
this, an organization signals employees that it’s okay to be innovative and do things their own
way—as long as their actions are consistent with the good of the organization. Conversely,
in some organizations it is important that employees do not make decisions on their own and
that their actions be open to the scrutiny of superiors. In cases like this, centralization can be
used to create cultural values that reinforce obedience and accountability. For example, in
nuclear power plants, values that promote stability, predictability, and obedience to author-
ity are deliberately fostered to prevent disasters. 100
Through norms and rules, employees
are taught the importance of behaving consistently and honestly, and they learn that sharing
information with supervisors, especially information about mistakes or errors, is the only
acceptable form of behavior. 101
An organization that seeks to manage and change its culture must take a hard look at
all four factors that shape culture: the characteristics of its members, its ethical values, its
human resource policies, and its organizational structure. However, changing a culture can
be difficult because of the way these factors interact and affect one another. 102
Often a major
reorganization is necessary for a cultural change to occur, as we discuss in the next chapter.
Strong, Adaptive Cultures versus Weak, Inert Cultures Many researchers and managers believe that employees of some organizations go out of their
way to help the organization because it has a strong and cohesive organizational culture—an
adaptive culture that controls employee attitudes and behaviors. Adaptive cultures are those whose values and norms help an organization to build momentum and to grow and change as
needed to achieve its goals and be effective. By contrast, inert cultures are those whose values and norms fail to motivate or inspire employees; they lead to stagnation and, often, failure
over time. What leads to a strong adaptive culture or one that is inert and hard to change?
Researchers have found that organizations with strong adaptive cultures, like 3M, UPS,
Microsoft, and IBM, invest in their employees. They demonstrate their commitment to their
members by, for example, emphasizing the long-term nature of the employment relationship
and trying to avoid layoffs. These companies develop long-term career paths for their employ-
ees and spend a lot of money on training and development to increase employees’ value to
the organization. In these ways, terminal and instrumental values pertaining to the worth of
human resources encourage the development of supportive work attitudes and behaviors.
In adaptive cultures employees often receive rewards linked directly to their performance
and to the performance of the company as a whole. Sometimes employee stock ownership
plans (ESOPs) are developed in which workers as a group are allowed to buy a significant
percentage of their company’s stock. Workers who are owners of the company have addi-
tional incentive to develop skills that allow them to perform highly and search actively for
ways to improve quality, efficiency, and performance.
Some organizations, however, develop cultures with values that do not include protect-
ing and increasing the worth of their human resources as a major goal. Their employment
practices are based on short-term employment according to the needs of the organization and
on minimal investment in employees who perform simple, routine tasks. Moreover, employ-
ees are not often rewarded on the basis of their performance and thus have little incentive
to improve their skills or otherwise invest in the organization to help it achieve goals. If a
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Managing Organizational Structure and Culture 305
company has an inert culture, poor working relationships frequently develop between the
organization and its employees, and instrumental values of noncooperation, laziness, and
loafing and work norms of output restriction are common.
Moreover, an adaptive culture develops an emphasis on entrepreneurship and respect for
the employee and allows the use of organizational structures, such as the cross-functional
team structure, that empower employees to make decisions and motivate them to succeed. By
contrast, in an inert culture, employees are content to be told what to do and have little incen-
tive or motivation to perform beyond minimum work requirements. As you might expect,
the emphasis is on close supervision and hierarchical authority, which result in a culture that
makes it difficult to adapt to a changing environment.
Google is a good example of a company in which managers strive to create an adaptive cul-
ture that is based on values that emphasize creativity and innovation and where decision mak-
ing is pushed right down to the bottom line to teams of employees who take up the challenge of
developing the advanced software and hardware for which the company is known. Bureaucracy
is kept to a minimum at Google; its adaptive culture is based on informal and personal relation-
ships and norms of cooperation and teamwork. To help strengthen its culture, Google built a
futuristic open-plan campus in which its engineers can work together to innovate ever more
advanced products such as its new Nexus tablet that it announced in 2012. 103
Google’s cultural
values and norms can’t be written down but are present in the work routines that cement people
together and in the language and stories its members use to orient themselves to the company.
Another company with an adaptive culture is GlaxoSmithKline, the prescription drug
maker. Much of GSK’s success can be attributed to its ability to recruit the best research
scientists because its adaptive culture nurtures scientists and emphasizes values and norms
of innovation. Scientists are given great freedom to pursue intriguing ideas even if the com-
mercial payoff is questionable. Moreover, researchers are inspired to think of their work as
a quest to alleviate human disease and suffering worldwide, and GSK has a reputation as an
ethical company whose values put people above profits.
Although the experience of Google and GSK suggests that organizational culture can give
rise to managerial actions that ultimately benefit the organization, this is not always the case.
The cultures of some organizations become dysfunctional, encouraging managerial actions
that harm the organization and discouraging actions that might improve performance. 104
For
example, when Trace Devanny joined health care information technology company TriZetto
as CEO in 2010, he saw that employees had a “comfortable mentality.” Devanny’s solution
was to focus on attitudes and insist that employees listen to clients and then act on their needs.
He made changes that created a culture of accountability for outcomes by turning the com-
pany from being market-focused to being customer-focused. Devanny left the company in
2013, the same year it recorded record earnings. 105
Clearly managers can influence how their
organizational culture develops over time.
D ESIGNING ORGANIZATIONAL STRUCTURE The four main determinants of organizational structure are the external environment,
strategy, technology, and human resources. In general, the higher the
level of uncertainty associated with these factors, the more appropriate is
a flexible, adaptable structure as opposed to a formal, rigid one.
GROUPING TASKS INTO JOBS Job design is the process by which managers group tasks into jobs. To create more interesting jobs, and to get workers to act flexibly, managers
can enlarge and enrich jobs. The job characteristics model is a tool that managers can use to
measure how motivating or satisfying a particular job is.
O RGANIZATIONAL STRUCTURE: GROUPING JOBS INTO FUNCTIONS AND DIVISIONS Managers can choose from many kinds of organizational structures to make the best use of organizational resources. Depending on the specific organizing problems they
face, managers can choose from functional, product, geographic, market, matrix, product
team, and hybrid structures.
Summary and Review
LO10-1
LO10-2
LO10-3
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306 Chapter Ten
COORDINATING FUNCTIONS AND DIVISIONS No matter which structure managers choose, they must decide how to distribute authority in the organization, how many levels
to have in the hierarchy of authority, and what balance to strike between centralization and
decentralization to keep the number of levels in the hierarchy to a minimum. As organizations
grow, managers must increase integration and coordination among functions and divisions.
Four integrating mechanisms that facilitate this are liaison roles, task forces, cross-functional
teams, and integrating roles.
ORGANIZATIONAL CULTURE Organizational culture is the set of values, norms, and standards of behavior that control how individuals and groups in an organization interact with
one another and work to achieve the organization’s goals. The four main sources of organiza-
tional culture are member characteristics, organizational ethics, the nature of the employment
relationship, and the design of organizational structure. How managers work to influence
these four factors determines whether an organization’s culture is strong and adaptive or inert
and difficult to change.
LO10-4
LO10-5
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Management in Action Topics for Discussion and Action
Discussion
1. Would a flexible or a more formal structure be appropriate for these organizations? (a) A large
department store, (b) a Big Five accounting
firm, (c) a biotechnology company. Explain your
reasoning. [LO10-1, 10-2]
2. Using the job characteristics model as a guide, discuss how a manager can enrich or enlarge
subordinates’ jobs. [LO10-2]
3. How might a salesperson’s job or a secretary’s job be enlarged or enriched to make it more motivating?
[LO10-2, 10-3]
4. When and under what conditions might managers change from a functional to (a) a product, (b) a
geographic, or (c) a market structure? [LO10-1, 10-3]
5. How do matrix structure and product team structure differ? Why is product team structure more widely
used? [LO10-1, 10-3, 10-4]
6. What is organizational culture, and how does it affect the way employees behave? [LO10-5]
Action
7. Find and interview a manager and identify the kind of organizational structure that his or her organization
uses to coordinate its people and resources. Why is
the organization using that structure? Do you think a
different structure would be more appropriate? Which
one? [LO10-1, 10-3, 10-4]
8. With the same or another manager, discuss the distribution of authority in the organization. Does
the manager think that decentralizing authority and
empowering employees are appropriate?
[LO10-1, 10-3]
9. Interview some employees of an organization and ask them about the organization’s values and
norms, the typical characteristics of employees, and
the organization’s ethical values and socialization
practices. Using this information, try to describe the
organization’s culture and the way it affects how
people and groups behave. [LO10-1, 10-5]
Building Management Skills Understanding Organizing [LO10-1, 10-2, 10-3]
Think of an organization with which you are familiar,
perhaps one you have worked for—such as a store,
restaurant, office, church, or school. Then answer the
following questions:
1. Which contingencies are most important in explaining how the organization is organized? Do you think it is
organized in the best way?
2. Using the job characteristics model, how motivating do you think the job of a typical employee is in this
organization?
3. Can you think of any ways in which a typical job could be enlarged or enriched?
4. What kind of organizational structure does the organization use? If it is part of a chain, what kind
of structure does the entire organization use? What
other structures discussed in the chapter might allow
the organization to operate more effectively? For
example, would the move to a product team structure
lead to greater efficiency or effectiveness? Why or
why not?
5. How many levels are there in the organization’s hierarchy? Is authority centralized or decentralized?
Describe the span of control of the top manager and
of middle or first-line managers.
6. Is the distribution of authority appropriate for the organization and its activities? Would it be possible
to flatten the hierarchy by decentralizing authority and
empowering employees?
7. What are the principal integrating mechanisms used in the organization? Do they provide sufficient
coordination among individuals and functions? How
might they be improved?
8. Now that you have analyzed the way this organization is structured, what advice would you give its
managers to help them improve how it operates?
307
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Managing Ethically [LO10-1, 10-3, 10-5]
S uppose an organization is downsizing and laying off many of its middle managers. Some top managers charged with deciding whom to terminate might decide to
keep the subordinates they like, and who are obedient to
them, rather than the ones who are difficult or the best per-
formers. They might also decide to lay off the most highly
paid subordinates even if they are high performers. Think
of the ethical issues involved in designing a hierarchy, and
discuss the following issues.
Questions
1. What ethical rules (see Chapter 4) should managers use to decide which employees to terminate when
redesigning their hierarchy?
2. Some people argue that employees who have worked for an organization for many years have a
claim on the organization at least as strong as that
of its shareholders. What do you think of the ethics
of this position—can employees claim to “own”
their jobs if they have contributed significantly to the
organization’s past success? How does a socially
responsible organization behave in this situation?
Small Group Breakout Exercise Bob’s Appliances [LO10-1, 10-3] Form groups of three or four people, and appoint one member as the spokesperson who will communicate your findings to the class when called on by the instructor. Then discuss the following scenario:
B ob’s Appliances sells and services household appliances such as washing machines, dishwashers, ranges, and refrigerators. Over the years, the company has developed a
good reputation for the quality of its customer service, and
many local builders patronize the store. However, large retail-
ers such as Best Buy, Walmart, and Costco are also provid-
ing an increasing range of appliances. Moreover, to attract
more customers these stores also carry a complete range of
consumer electronics products—LCD TVs, computers, and
digital devices. Bob Lange, the owner of Bob’s Appliances,
has decided that if he is to stay in business, he must widen
his product range and compete directly with the chains.
In 2007 he decided to build a 20,000-square-foot store
and service center, and he is now hiring new employees
to sell and service the new line of consumer electronics.
Because of his company’s increased size, Lange is not
sure of the best way to organize the employees. Currently
he uses a functional structure; employees are divided into
sales, purchasing and accounting, and repair. Bob is won-
dering whether selling and servicing consumer electronics
is so different from selling and servicing appliances that he
should move to a product structure (see the accompanying
figure) and create separate sets of functions for each of his
two lines of business. 106
You are a team of local consultants whom Bob has
called in to advise him as he makes this crucial choice.
Which structure do you recommend? Why?
308
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Exploring the World Wide Web [LO10-3]
Go to the website of Hitachi, a Japanese multinational engineering and electronics conglomerate ( http:// www.hitachi.com/about/corporate/organization/ ).
1. Look at the organizational chart. What type of structure does Hitachi have?
2. Click on the message from top management. What does this information tell you about how the structure
might change or stay the same in the future?
3. Find the Hitachi Vision Book. How will the journey toward its vision affect the structure of Hitachi?
Be the Manager [LO10-1, 10-3, 10-5] Speeding Up Website Design
Y ou have been hired by a website design, production, and hosting company whose new animated website designs are attracting a lot of attention and many cus-
tomers. Currently employees are organized into different
functions such as hardware, software design, graphic art,
and website hosting, as well as functions such as market-
ing and human resources. Each function takes its turn to
work on a new project from initial customer request to final
online website hosting.
The problem the company is experiencing is that it typi-
cally takes one year from the initial idea stage to the time a
website is up and running; the company wants to shorten
this time by half to protect and expand its market niche. In
talking to other managers, you discover that they believe
the company’s current functional structure is the source
of the problem—it is not allowing employees to develop
websites fast enough to satisfy customers’ demands. They
want you to design a better structure.
Questions
1. Discuss how you can improve the way the current functional structure operates so it speeds website
development.
2. Discuss the pros and cons of moving to a (a) multidivisional, (b) matrix, and (c) product team
structure to reduce website development time.
3. Which of these structures do you think is most appropriate, and why?
4. What kind of culture would you help create to make the company’s structure work more effectively?
FUNCTIONAL STRUCTURE
Bob Lange
PRODUCT STRUCTURE
Sales Purchasing
and accounting Repair
Consumer electronics
Appliances
Repair Purchasing
and accounting Sales Sales
Purchasing and accounting
Repair
Bob Lange
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Bloomberg Businessweek Case in the News [LO10-1, 10-3]
Panasonic Revives as Other Japanese Tech Giants Falter
T hese are trying times for the men running Japan’s electronics giants. Nintendo President Satoru
Iwata is taking a 50 percent pay cut
after the company forecast a surprise
25 billion yen ($244 million) loss last
month. Kazuo Hirai took the helm
at Sony two years ago promising to
stem a decade of losses at the televi-
sion unit. On February 6 the company
announced it expects to lose $1.1 bil-
lion in the current fiscal year ending
March 31.
Like many Japanese consumer
electronics companies, Panasonic
has tried to be all things to all cus-
tomers, making everything from
smartphones to solar panels. And like
its domestic rivals, it faces competi-
tion from lower-cost manufacturers
in South Korea and China. Panasonic
lost a combined 1.5 trillion yen in the
two years ended in March 2013.
Over the past year, however, Chief
Executive Officer Kazuhiro Tsuga has
engineered a revamp of the Osaka-
based company. By getting out of
such money-losing businesses and
focusing on new ventures, Panasonic
is pushing through “essential struc-
tural reforms,” says Chief Financial
Officer Hideaki Kawai. Tsuga has said
that he plans to eliminate unprofitable
divisions by March 2016.
The strategy is beginning to pay
off. Operating profit at Panasonic’s
automotive and industrial systems
unit, which makes batteries and car
entertainment systems, jumped to
28.2 billion yen in the last quarter of
2013, compared with a loss of 800
million yen the year before. Earn-
ings in the appliances unit increased
60 percent, to 9.8 billion yen, while
profits for the company as a whole
increased 20 percent in the quarter,
to 73.7 billion yen—68 percent higher
than analysts’ estimates. “The com-
pany has been making significant
progress in its business restructur-
ing,” Maki Hanatate, senior credit
officer at ratings agency Moody’s,
wrote in a February 6 report.
Tsuga has suspended production
of panels for plasma TVs while trim-
ming circuit board manufacturing and
giving up on developing consumer
smartphones. The goal is to reduce
reliance on consumer electronics,
where Panasonic has lagged behind
Samsung Electronics and Apple.
Instead Tsuga is building partnerships
with companies such as Tesla Motors,
the electric car maker that agreed in
October to buy 2 billion battery cells
from Panasonic over four years. In
addition to making batteries for elec-
tric cars and car entertainment sys-
tems, Panasonic is focusing on auto
safety devices such as cameras with
360-degree views. By 2019 the com-
pany plans to double revenue from
auto-related products to 2 trillion yen.
One of Tsuga’s biggest chal-
lenges is Panasonic’s semiconductor
operation, which has lost money for
seven consecutive quarters. Pana-
sonic is suffering because of the high
cost of production in its home coun-
try. “It’s really hard to compete in
chips” against cheaper rivals in Tai-
wan and South Korea, says David
Motozo Rubenstein, senior analyst
and managing director with Advanced
Research Japan in Tokyo. “So it’s
tough on both sides for the Japanese.”
Last year Panasonic moved to
reduce its exposure in chips by
merging two operations into joint
ventures, one with Fujitsu and
another with Israel’s Tower Semi-
conductor. On February 4 Panasonic
said it would sell three semiconductor
assembly plants in Southeast Asia to
Singapore-based UTAC Manufactur-
ing Services for $116.5 million.
For now, the company is stick-
ing with LCD televisions and digital
cameras—two parts of the business
that have yet to be restructured.
Still, compared with the problems at
Sony, Panasonic is on the right track,
Fitch Ratings analysts Shelley Jang,
Kelvin Ho, and Steve Durose wrote in a
February 12 report. “Panasonic made
earlier decisions than Sony to get out
of unprofitable businesses,” they said.
The result is a “slimmer, nimbler orga-
nization [that] gives Panasonic the
opportunity to continue its recovery.”
Source: Bruce Einhordn, Mariko Yasu, and
Takashi Amano, “Panasonic Revives as Other
Japanese Tech Giants Falter,” Bloomberg
Business Week, February 13, 2014. Used with
permission of Bloomberg L.P. Copyright
© 2014. All rights reserved .
Questions for Discussion
1. Using the information in the article alone, how do you believe
Panasonic is organized?
2. What aspects of Panasonic’s change do you believe Sony and
Nintendo should imitate?
3. The article suggests that Panasonic was smart to move
faster than Sony and Nintendo.
What other moves do you
believe it should make to stay in
business?
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LO11-1 Define organizational control and explain how it increases organizational effectiveness.
LO11-2 Describe the four steps in the control process and the way it operates over time.
LO11-3 Identify the main output controls, and discuss their advantages and disadvantages as means of coordinating and motivating employees.
LO11-4 Identify the main behavior controls, and discuss their advantages and disadvantages as a means of coordinating and motivating employees.
LO11-5 Discuss the relationship between organizational control and change, and explain why managing change is a vital management task.
Organizational Control and Change
CHAPTER 11
Learning Objectives
After studying this chapter, you should be able to:
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Zappos CEO Tony Hsieh promotes core values and is now switch- ing the company from a traditional hierarchical structure to a system called holacracy, which organizes employees around work to be done instead of the workers who do it.
How can a company be controlled without becoming rigid? Zappos has always been a zany place to work. Before
an employee even starts, the Las Vegas–
based company offers the employee $2,000
to leave. 1 The company believes it saves
money if an employee takes the offer
because the company gets rid of someone
who would be there only for the paycheck.
The CEO wrote a book called Delivering
Happiness about how concepts from hap-
piness can be applied to business. 2 Then
there’s the call center. Rather than running
a lean call center, Zappos encourages its
employees to spend lots of time talking
to customers and going the extra mile to
resolve their issues. There are stories of the
great lengths to which customer service
representatives will go. For example, one
employee went to a rival shoe store, bought
a pair of shoes that Zappos did not have in
stock, and delivered the shoes to the cus-
tomer’s Las Vegas hotel. 3
This different way of doing things is
reflected in the Zappos core values, like
“deliver WOW through service,” “embrace
and drive change,” “create fun and a little
weirdness,” “pursue growth and learn-
ing,” “be adventurous, creative, and open-
minded,” “build a positive team and family
spirit,” “build open and honest relationships
with communication,” “be passionate and
determined,” and “be humble.” 4
And while the book and the active call
center do not sound like trappings of a tra-
ditional lean company, another of the Zap-
pos core values is “do more with less.” The
company claims that while it may have an
informal culture, it is serious about operat-
ing efficiently. On its web page the com-
pany states, “We believe in operational
excellence and realize that there is always
room for improvement in everything we do.
A MANAGER’S CHALLENGE
The Zappos Holacracy
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This means that our work is never done. In
order to stay ahead of the competition (or
would-be competition), we need to continu-
ously innovate as well as make incremental
improvements to our operations, always
striving to make ourselves more efficient,
always trying to figure out how to do some-
thing better. We use mistakes as learning
opportunities.” 5
Now the company is getting even leaner
by removing the traditional chain of com-
mand, job titles, and managers. 6 The change
is designed to prevent the company from
becoming too rigid as it grows. “Research
shows that every time the size of a city dou-
bles, innovation or productivity per resident
increases by 15 percent. But when compa-
nies get bigger, innovation or productivity per
employee generally goes down,” said CEO
Tony Hsieh. “So we’re trying to figure out
how to structure Zappos more like a city, and
less like a bureaucratic corporation. In a city,
people and businesses are self-organizing.
We’re trying to do the same thing by switch-
ing from a normal hierarchical structure to
a system called holacracy, which enables
employees to act more like entrepreneurs
and self-direct their work instead of reporting
to a manager who tells them what to do.” 7
A holacracy is different from a tradi-
tional organization in three important ways.
First, the former hierarchy is replaced with
overlapping and self-governing circles
of employees. 8 Second, employees are
assigned several roles in different circles
where they perform different functions. There
are no job titles because holacracy organizes
around the work to be done instead of the
workers who do it. Decisions about what
each role involves are made within the circle.
Third, managers are redefined as “lead links”
who assign employees to roles but do not
tell them what to do. Despite this lack of for-
mal structure, Zappos says employees will
still be appraised. The constitution of hol-
acracy begins with roles, which it defines as
“an organizational entity with a ‘purpose’ to
express, ‘domains’ to control, and ‘account-
abilities’ to perform.” 9 From this definition
of roles, the constitution builds to include a
circle structure that contains and integrates
roles; a governance process that defines
roles and policies, and an operational pro-
cess in which members of the circles rely on
one another to do operational work. 10
John Bunch, who is leading the change
for Zappos, was quoted in The New York
Times as saying that people see the holacracy
as removing managers. However, Bunch
explains that they are “decoupling the profes-
sional development side of the business from
the technical getting-the-work-done side.” 11
Zappos was acquired by Amazon in 2009
but is run as a mostly independent unit. Zap-
pos expects to transition to holacracy by the
end of 2014.
As we discussed in Chapter 10, the first task facing managers is to estab-
lish a structure of task and job reporting relationships that allows organi-
zational members to use resources most efficiently and effectively.
Structure alone, however, does not provide the incentive or motivation for people to behave
in ways that help achieve organizational goals. When managers choose how to influence,
shape, and regulate the activities of organizational divisions, functions, and employees to
achieve the organization’s mission and goals, they establish the second foundation of organi-
zational architecture: organizational control. An organization’s structure provides the
Overview
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Organizational Control and Change 315
organization with a skeleton, but its control systems give it the muscles, sinews, nerves, and
sensations that allow managers to regulate and govern its activities. The control systems also
give managers specific feedback on how well the organization and its members are perform-
ing. The managerial functions of organizing and controlling are inseparable, and effective
managers must learn to make them work together in a harmonious way.
In this chapter, we look in detail at the nature of organizational control and describe the
main steps in the control process. We also discuss the different types of control systems
that are available to managers to shape and influence organizational activities— output control, behavior control, and clan control. 12 Finally, we discuss the important issue of organizational change, which is possible only when managers have put in place a control
system that allows them to adjust the way people and groups behave and alter or transform
the way the organization operates. Control is the essential ingredient that is needed to
bring about and manage organizational change efficiently and effectively. By the end of
this chapter, you will appreciate the different forms of control available to managers and
understand why developing an appropriate control system is vital to increasing organiza-
tional performance.
As noted in Chapter 1, controlling is the process whereby managers monitor and regulate how efficiently and effectively an organization and
its members are performing the activities necessary to achieve organiza-
tional goals. As discussed in previous chapters, when planning and orga-
nizing, managers develop the organizational strategy and structure that
they hope will allow the organization to use resources most effectively to
create value for customers. In controlling, managers monitor and evalu-
ate whether the organization’s strategy and structure are working as intended, how they could
be improved, and how they might be changed if they are not working.
Control, however, does not mean just reacting to events after they have occurred. It also
means keeping an organization on track, anticipating events that might occur, and then chang-
ing the organization to respond to whatever opportunities or threats have been identified.
Control is concerned with keeping employees motivated, focused on the important problems
confronting the organization, and working together to make the changes that will help an
organization improve its performance over time.
The Importance of Organizational Control To understand the importance of organizational control, consider how it helps managers
obtain superior efficiency, quality, responsiveness to customers, and innovation—the four
building blocks of competitive advantage.
To determine how efficiently they are using their resources, managers must be able to
accurately measure how many units of inputs (raw materials, human resources, and so on) are
being used to produce a unit of output, such as a Toyota vehicle. Managers also must be able
to measure how many units of outputs (goods and services) are being produced. A control
system contains the measures or yardsticks that let managers assess how efficiently the orga-
nization is producing goods and services. Moreover, if managers experiment with changing
how the organization produces goods and services to find a more efficient way of produc-
ing them, these measures tell managers how successful they have been. For example, when
Kimberly-Clark, maker of Kleenex and other products, outsourced logistics at a U.K. plant
to a leading lean organization, it reduced long shifts and overtime for its workers. Absentee-
ism dropped and productivity improved as staff morale went up. Without a control system
in place, managers have no idea how well their organization is performing and how its per-
formance can be improved—information that is becoming increasingly important in today’s
highly competitive environment.
Today much of the competition among organizations centers on increasing the quality of
goods and services. In the car industry, for example, cars within each price range compete
in features, design, and reliability. Thus whether a customer buys a Ford Focus, GM Cruze,
What Is Organizational
Control? LO11-1 Define organizational control
and explain how it increases
organizational effectiveness.
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316 Chapter Eleven
Chrysler 200, Toyota Avalon, or Honda CRV depends significantly on the design and qual-
ity of each car. Organizational control is important in determining the quality of goods and
services because it gives managers feedback on product quality. If the managers of carmak-
ers consistently measure the number of customer complaints and the number of new cars
returned for repairs, or if school principals measure how many students drop out of school
or how achievement scores on nationally based tests vary over time, they have a good indi-
cation of how much quality they have built into their product—whether it is an educated
student or a car that does not break down. Effective managers create a control system that
consistently monitors the quality of goods and services so they can continuously improve
quality—an approach to change that gives them a competitive advantage. These control sys-
tems include personal systems such as email, as the accompanying “Management Insight”
feature suggests.
Email at Work In terms of problems in the modern workplace, email may
be number one. 13
Overuse of this communication medium
and the problems surrounding it are hindering effective-
ness in the workplace. The average worker spends about
13 hours per week on email. 14
How can managers help their
employees handle email so that quality does not suffer?
Three experts offer the following tips on handling email.
Marsha Egan, CEO of InboxDetox.com , shares the fol-
lowing advice for handling email: 15
1. Turn off notifications so you are not distracted by every message that arrives. “If you’re interrupted, even if you
handle it in one minute, it takes another four minutes to
get back to what you were doing before.” 16
2. Don’t check email more than three times a day, and choose when you do it. Egan recommends a morning,
after lunch, and right before the end of the workday check.
3. If you need something in less than three hours, use a different mode of commu- nication such as a phone call. Egan points out two benefits to the behavior. First,
it allows co-workers to work on other tasks without dreading an email notifica-
tion. Second, it models behavior that co-workers might adapt, resulting in fewer
email messages.
4. Treat email in one of three ways: Respond to simple and urgent messages, file those that do not require a response, and flag any that require more thought and
follow-up.
5. Do not open your inbox when you do not have time to send responses. “Check your email only when you have time to respond, not just react.”
17
Jill Duffy, a software analyst who writes a weekly column called “Get Organized,”
provides the following advice:
1. Delete unnecessary messages before reading the necessary ones. Move any items that you can to the trash. The email will still be there later if you decide
you need them.
2. Write short email messages to save time. 3. Reuse standard sent email. For routine email that you send more than once, just
remove the “Re:” in the subject line, update the message if needed, and send.
4. Reuse standard subject lines. This makes writing easier and allows you to sort by subject line.
Management Insight
Marsha Egan, CEO of
InboxDetox.com, is one
CEO who has a system
to help employees han-
dle email efficiently and
without wasting time.
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Organizational Control and Change 317
Effective organizational control can also increase responsiveness to customers. Managers
can help make their organizations more responsive to customers, for example, if they develop
a control system, such as a CRM system, that allows them to evaluate how well customer
contact employees perform their jobs. Monitoring employee behavior can help managers find
ways to increase employees’ performance levels, perhaps by revealing areas in which skill
training or new procedures can allow employees to perform their jobs better. Also, when
employees know their behaviors are being monitored, they have more incentive to be helpful
and consistent in how they act toward customers. For example, Caterpillar has a lean initiative
to bring employees closer to customers so the employees can provide products and services
5. Use groups. If you email the same group of people over and over, put them in a group so you do not have to type everyone’s email addresses each time. This
also allows you to sort messages to and from the group for easy archiving or
deleting.
6. To maximize space in your mailbox, sort your sent items by file size or attach- ment and delete what you can. Working in your sent items is recommended
because you likely have the attachments in your local files.
7. Turn off notifications of incoming email. These are distractions. 8. Turn off email when you need to focus on work. 9. Use auto-replies if you are concerned someone will try to contact you while
you have your email turned off. You can write an auto-reply asking anyone
with an urgent matter to call you instead.
10. Delete or refile messages. If you can, delete messages on which you will not act. If you feel you must hold on to some messages, create folders in which to
store them so they are not in your inbox.
11. Empty the trash at the end of the day. Sometimes you will need to retrieve an email from trash, so make this the last thing you do each day (or each week if
you prefer). 18
Sarah Green, a senior associate editor at Harvard Business Review, shared the follow- ing tips that worked for her. Instead of telling readers what she recommends doing, she
lists the things she stopped doing:
1. She stopped seeing email as separate from “real work.” Building relationships is part of work, and email is one way to accomplish that. Making this mind
shift from email not being real work to it being part of the job made it easier
for her to make time for it.
2. She stopped using email to manage a to-do list and started using a project man- agement app.
3. She stopped scheduling meetings back-to-back with no time for email. Now she places two hours of fake meeting times on the calendar each day so that
she has time for email.
4. She stopped sending a mass email message that she was going on vacation and started putting the dates she would be away in her email signature for
two weeks before she left. This helps people remember that she is leaving and
helps her deal with last-minute requests. The result is that she can disconnect
better when she is away.
5. She stopped relying on herself to sort email and got a filtering system that uses an algorithm to decide which messages are the most important and which can
go into separate folders to be reviewed later. She also got an app that combines
newsletter subscriptions into digest form and un-enrolls her from the ones she
no longer wants.
6. She stopped listening to advice about avoiding reliance on her smartphone, finding that it allowed her to be brief and to the point in her responses.
19
The advice on taming email is varied among the three experts, indicating that each
user should look for a system of controlling email that works for him or her.
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318 Chapter Eleven
that match customers’ needs. Before Caterpillar introduced its lean manufacturing principle
at its Aurora, Illinois facility in 2013, discovering defects on its medium wheel loader value
stream was considered normal. Because the defects were discovered, they were fixed before
being passed on to the customer. However, the defects were still costing the company lost
time and other costs. After the company introduced its lean program at the plant and made it
clear that the company was dedicated to eliminating defects, average internal defects fell by
60 percent. 20
Finally, controlling can raise the level of innovation in an organization. Successful inno-
vation takes place when managers create an organizational setting in which employees feel
empowered to be creative and in which authority is decentralized to employees so they feel
free to experiment and take control of their work activities. Deciding on the appropriate con-
trol systems to encourage risk taking is an important management challenge; organizational
culture is vital in this regard. At Caterpillar the lean initiative extends beyond manufacturing
to all functional areas and has been embraced by leaders at all levels. The standard across the
company is that no defect, no matter how small, be passed on to another stage in the process.
Every person at Caterpillar is expected to perform high-quality work. 21
Control Systems and IT Control systems are formal target-setting, monitoring, evaluation, and feedback systems that provide managers with information about whether the organization’s strategy and struc-
ture are working efficiently and effectively. 22
Effective control systems alert managers when
something is going wrong and give them time to respond to opportunities and threats. An
effective control system has three characteristics: It is flexible enough to allow managers to
respond as necessary to unexpected events; it provides accurate information about organiza-
tional performance; and it gives managers information in a timely manner because making
decisions on the basis of outdated information is a recipe for failure.
New forms of IT have revolutionized control systems because they facilitate the flow of
accurate and timely information up and down the organizational hierarchy and between func-
tions and divisions. Today employees at all levels of the organization routinely feed informa-
tion into a company’s information system or network and start the chain of events that affect
decision making in some other part of the organization. This could be the department store
clerk whose scanning of purchased clothing tells merchandise managers what kinds of cloth-
ing need to be reordered or the salesperson in the field who feeds into a tablet computer the
CRM information necessary to inform marketing about customers’ changing needs.
Control and information systems are developed to measure performance at each stage in
the process of transforming inputs into finished goods and services (see Figure 11.1 ). At the
input stage, managers use feedforward control to anticipate problems before they arise so problems do not occur later during the conversion process.
23 For example, by giving stringent
control systems Formal target-setting, monitoring,
evaluation, and feedback
systems that provide manag-
ers with information about
how well the organization’s
strategy and structure are
working.
feedforward control Control that allows managers
to anticipate problems before
they arise.
Figure 11.1 Three Types of Control
Conversion stage
Input stage
Output stage
Feedforward control
(anticipate problems before they occur)
Concurrent control
(manage problems as they occur)
Feedback control
(manage problems after they arise)
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Organizational Control and Change 319
product specifications to suppliers in advance (a form of performance target), an organization
can control the quality of the inputs it receives from its suppliers and thus avoid potential
problems during the conversion process. Also, IT can be used to keep in contact with sup-
pliers and to monitor their progress. Similarly, by screening job applicants, often by viewing
their résumés electronically and using several interviews to select the most highly skilled peo-
ple, managers can lessen the chance that they will hire people who lack the necessary skills
or experience to perform effectively. In general, the development of management information
systems promotes feedforward control that gives managers timely information about changes
in the task and general environments that may impact their organization later on. Effective
managers always monitor trends and changes in the external environment to try to anticipate
problems. (We discuss management information systems in detail in Chapter 18.)
At the conversion stage, concurrent control gives managers immediate feedback on how efficiently inputs are being transformed into outputs so managers can correct problems as they
arise. Concurrent control through IT alerts managers to the need to react quickly to whatever
is the source of the problem, whether it is a defective batch of inputs, a machine that is out of
alignment, or a worker who lacks the skills necessary to perform a task efficiently. Concur-
rent control is at the heart of total quality management programs (discussed in Chapter 9), in
which workers are expected to constantly monitor the quality of the goods or services they
provide at every step of the production process and inform managers as soon as they discover
problems. For example, United Technologies Corporation uses a system called Achieving
Competitive Excellence (ACE) to get employees involved in identifying and solving design
and quality problems and finding better ways to assemble its products to increase quality and
reduce costs. When problems are corrected on an ongoing basis, the result is finished products
that are more valuable to customers and command higher prices.
At the output stage, managers use feedback control to provide information about custom- ers’ reactions to goods and services so corrective action can be taken if necessary. For exam-
ple, a feedback control system that monitors the number of customer returns alerts managers
when defective products are being produced, and a management information system (MIS)
that measures increases or decreases in relative sales of different products alerts managers to
changes in customer tastes so they can increase or reduce the production of specific products.
The Control Process The control process, whether at the input, conversion, or output stage, can be broken down
into four steps: establishing standards of performance and then measuring, comparing, and
evaluating actual performance (see Figure 11.2 ). 24
• Step 1: Establish the standards of performance, goals, or targets against which perfor- mance is to be evaluated.
concurrent control Control that gives managers
immediate feedback on how
efficiently inputs are being
transformed into outputs so
managers can correct prob-
lems as they arise.
feedback control Control that gives managers informa-
tion about customers’ reac-
tions to goods and services
so corrective action can be
taken if necessary.
LO11-2 Describe the four steps in
the control process and the
way it operates over time.
Figure 11.2 Four Steps in Organizational Control
Step 1
Step 2
Step 3
Step 4 Evaluate the result and initiate corrective action if the standard is not being achieved.
Compare actual performance against chosen standards of performance.
Measure actual performance.
Establish the standards of performance, goals, or targets against which performance is to be evaluated.
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320 Chapter Eleven
At step 1 in the control process managers decide on the standards of performance, goals, or
targets that they will use in the future to evaluate the performance of the entire organization
or part of it (such as a division, a function, or an individual). The standards of performance
that managers select measure efficiency, quality, responsiveness to customers, and innova-
tion. 25
If managers decide to pursue a low-cost strategy, for example, they need to measure
efficiency at all levels in the organization.
At the corporate level, a standard of performance that measures efficiency is operat-
ing costs, the actual costs associated with producing goods and services, including all
employee-related costs. Top managers might set a corporate goal of “reducing operating
costs by 10% for the next three years” to increase efficiency. Corporate managers might
then evaluate divisional managers for their ability to reduce operating costs within their
respective divisions, and divisional managers might set cost-saving targets for functional
managers. Thus performance standards selected at one level affect those at the other levels,
and ultimately the performance of individual managers is evaluated in terms of their ability
to reduce costs.
The number of standards or indicators of performance that an organization’s managers
use to evaluate efficiency, quality, and so on can run into the thousands or hundreds of thou-
sands. Managers at each level are responsible for selecting standards that will best allow them
to evaluate how well the part of the organization they are responsible for is performing. 26
Managers must be careful to choose standards of performance that let them assess how well
they are doing with all four building blocks of competitive advantage. If managers focus on
just one standard (such as efficiency) and ignore others (such as determining what customers
really want and innovating a new line of products to satisfy them), managers may end up hurt-
ing their organization’s performance.
• Step 2: Measure actual performance.
Once managers have decided which standards or targets they will use to evaluate per-
formance, the next step in the control process is to measure actual performance. In prac-
tice, managers can measure or evaluate two things: (1) the actual outputs that result from the behavior of their members and (2) the behaviors themselves (hence the terms output control and behavior control used in this chapter). 27
Sometimes both outputs and behaviors can be easily measured. Measuring outputs and
evaluating behavior is relatively easy in a fast-food restaurant, for example, because employ-
ees are performing routine tasks. Managers at Home Depot are rigorous in using output con-
trol to measure how fast inventory flows through stores. Similarly, managers of a fast-food
restaurant can easily measure outputs by counting how many customers their employees
serve, the time each transaction takes, and how much money each customer spends. Managers
can easily observe each employee’s behavior and quickly take action to solve any problems
that may arise.
When an organization and its members perform complex, nonroutine activities that are
intrinsically hard to measure, it is more challenging for managers to measure outputs or
behavior. 28
For example, it might be simple for a manager at Zappos to measure a customer
service representative’s effectiveness by examining sales figures and customer satisfac-
tion reports. However, it would be difficult for the managers at the companies that supply
Zappos with shoes to measure a shoe designer’s creativity just by watching the designer’s
actions.
In general, the more nonroutine or complex organizational activities are, the harder it
is for managers to measure outputs or behaviors. 29
Outputs, however, are usually easier to
measure than behaviors because they are more tangible and objective. Therefore, the first
kind of performance measures that managers tend to use is those that measure outputs. Then
managers develop performance measures or standards that allow them to evaluate behaviors
to determine whether employees at all levels are working toward organizational goals. Some
simple behavior measures are (1) whether employees come to work on time and (2) whether
employees consistently follow the established rules for greeting and serving customers. The
various types of output and behavior control and how they are used at the different orga-
nizational levels—corporate, divisional, functional, and individual—are discussed in detail
subsequently.
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Organizational Control and Change 321
• Step 3: Compare actual performance against chosen standards of performance.
During step 3, managers evaluate whether—and to what extent—performance deviates from
the standards of performance chosen in step 1. If performance is higher than expected, managers
might decide they set performance standards too low and may raise them for the next period to
challenge their subordinates. 30
Managers at successful companies are well known for the way
they try to improve performance in manufacturing settings by constantly raising performance
standards to motivate managers and workers to find new ways to reduce costs or increase quality.
However, if performance is too low and standards were not reached, or if standards were set
so high that employees could not achieve them, managers must decide whether to take correc-
tive action. 31
It is easy to take corrective action when the reasons for poor performance can be
identified—for instance, high labor costs. To reduce costs, managers can search for low-cost
overseas suppliers, invest more in technology, or implement cross-functional teams. More often,
however, the reasons for poor performance are hard to identify. Changes in the environment,
such as the emergence of a new global competitor, a recession, or an increase in interest rates,
might be the source of the problem. Within an organization, perhaps the R&D function under-
estimated the problems it would encounter in developing a new product or the extra costs of doing
unforeseen research or perhaps the faulty design of just one component in thousands slipped
through the cracks. If managers are to take any form of corrective action, step 4 is necessary.
• Step 4: Evaluate the result and initiate corrective action (that is, make changes) if the standard is not being achieved.
The final step in the control process is to evaluate the results and bring about change as
appropriate. Whether or not performance standards have been met, managers can learn a great
deal during this step. If managers decide the level of performance is unacceptable, they must
try to change how work activities are performed to solve the problem. Sometimes perfor-
mance problems occur because the work standard was too high—for example, a sales target
was too optimistic and impossible to achieve. In this case, adopting more realistic standards
can reduce the gap between actual performance and desired performance.
However, if managers determine that something in the situation is causing the prob-
lem, then to raise performance they will need to change how resources are being utilized or
shared. 32
Perhaps the latest technology is not being used; perhaps workers lack the advanced
training needed to perform at a higher level; perhaps the organization needs to buy its inputs
or assemble its products abroad to compete against low-cost rivals; perhaps it needs to restruc-
ture itself or reengineer its work processes using Six Sigma to increase efficiency. A recent
case among forward-deployed troops throughout Afghanistan demonstrates the four steps of
the control process (see the accompanying “Management Insight” feature).
The Four Control Steps in Afghanistan The U.S. Army’s research and development team
seeks to increase efficiency and performance of
power and energy. The Department of Defense’s
Project Manager Mobile Electric Power is the
energy behind modern warfare. 33
Two electri-
cal engineers from the army’s Communica-
tions-Electronics Research, Development and
Engineering Center (CERDEC) deployed to
Afghanistan to support the project. The mission
of Project Manager Mobile Electric Power is to
manage the department’s mobile electric power
generators. In combat zones, power is mainly
provided by mobile generators. It is the depart-
ment’s policy that all armed forces use the same
Management Insight
U.S. Army mobile power generator.
The mission of Project Manager
Mobile Electric Power is to manage
the mobile electric power gen-
erators used by the army to power
modern warfare using the four steps
of the control process.
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322 Chapter Eleven
The simplest example of a control system is the thermostat in a home. By setting the
thermostat, you establish the standard of performance with which actual temperature is to
be compared. The thermostat contains a sensing or monitoring device, which measures the
actual temperature against the desired temperature. Whenever there is a difference between
them, the furnace or air-conditioning unit is activated to bring the temperature back to the
standard. In other words, corrective action is initiated. This is a simple control system: It is
entirely self-contained and the target (temperature) is easy to measure.
Establishing targets and designing measurement systems are much more difficult for man-
agers because the high level of uncertainty in the organizational environment means managers
rarely know what might happen in the future. Thus it is vital for managers to design control
systems to alert them to problems quickly so they can be dealt with before they become threat-
ening. Another issue is that managers are not just concerned about bringing the organization’s
performance up to some predetermined standard; they want to push that standard forward to
generator sets to the extent possible. Having everyone use the same generator sets
reduces costs and enhances logistics support and interoperability. 34
The job of the two engineers deployed to Afghanistan was to assess and improve the
energy stability of forward-deployed troops. Their work followed the four steps of the
control process.
Step 1: Establish the standards of performance, goals, or targets against which performance is to be evaluated. The two engineers on the project, Noel Pleta and Jen- nifer Whitmore, both outlined the need to know each soldier’s energy needs, in addition
to figuring out how much energy use could be reduced.
Step 2: Measure actual performance. The engineers began with collecting data that determined a power profile by surveying all equipment and combining the information
with manufacturer data. The data were compiled into a database that can be used to make
decisions. A separate planning tool allowed commanders to plan efficient power grids by
generating virtual layouts of outposts and bases, along with how much energy would be
needed based on the number of tents and other energy-using devices.
Step 3: Compare actual performance against chosen standards of performance . The engineers found that much of the current energy and power infrastructure was in bad
condition and that the basics needed to be established as well. “Many of the COPs [com-
bat outposts] were on their last leg of generator power, causing them to shut down their
sustainment of life support systems and focus on the tactical support systems,” Pleta said.
“We found that backup power for tactical operation centers wasn’t consistent. If the TOC
[tactical operation center] goes down, the mission is compromised as well as the soldiers’
safety, and that’s priority. That’s why it’s so important to do it right the first time.” 35
Step 4: Evaluate the result and initiate corrective action if the standard is not being achieved. The engineers did initiate corrective action. More than 30 combat outposts and 35 village stability platforms were rebuilt. Electrical problems that were causing safety con-
cerns were fixed, and new energy plans that improved key facilities for the soldiers, such
as dining halls and latrines, were implemented. In 2014 it was reported that the work of the
CERDEC engineers under Project Manager Mobile Electric Power lowered fuel consumption
by 21 percent across the fleet. Also, units are now set up to do their own quality control by
noting trends based on the tracking of energy/fuel consumption and maintenance frequency. 36
“You just don’t get the same experience behind a desk. With each deployment, we
increase knowledge regarding the latest challenges,” Pleta said. “Most importantly, it
allows us to customize user-friendly solutions that will improve safety, reliability, and
quality of life for the soldier.” 37
The next step is to extend the power assessments to the individual soldier. This pro-
cess will apply the control process to the individual as well as to the squad requirements.
In other words, the analysis will begin by establishing the goal for energy consumption
by soldiers, then measure the actual energy consumption and consider the gap between
the two. Engineers will then look to improve energy use by soldiers and squads by elimi-
nating redundancies and finding ways to reduce energy use.
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Organizational Control and Change 323
encourage employees at all levels to find new ways to raise performance. In 2014 Toyota was
hit with a $1.2 billion fine by the U.S. Justice Department for not reporting a problem with
accelerators in many of its vehicles. In addition to accepting the fine, the company vowed to
make changes to its global operations to be more responsive to problems. 38
In the following sections, we consider three important types of control systems that man-
agers use to coordinate and motivate employees to ensure that they pursue superior efficiency,
quality, innovation, and responsiveness to customers: output control, behavior control, and
clan control (see Figure 11.3 ). Managers use all three to shape, regulate, and govern organi-
zational activities, no matter what specific organizational structure is in place. However, as
Figure 11.3 suggests, an important element of control is embedded in organizational culture,
which is discussed later.
All managers develop a system of output control for their organizations.
First they choose the goals or output performance standards or targets
that they think will best measure efficiency, quality, innovation, and
responsiveness to customers. Then they measure to see whether the performance goals and
standards are being achieved at the corporate, divisional, functional, and individual employee
levels of the organization. The three main mechanisms that managers use to assess output or
performance are financial measures, organizational goals, and operating budgets.
Financial Measures of Performance Top managers are most concerned with overall organizational performance and use various
financial measures to evaluate it. The most common are profit ratios, liquidity ratios, leverage
ratios, and activity ratios. They are discussed here and summarized in Table 11.1 . 39
• Profit ratios measure how efficiently managers are using the organization’s resources to generate profits. Return on investment (ROI), an organization’s net income before taxes divided by its total assets, is the most commonly used financial performance measure
because it allows managers of one organization to compare performance with that of
other organizations. ROI lets managers assess an organization’s competitive advantage.
Operating margin is calculated by dividing a company’s operating profit (the amount it has left after all the costs of making the product and running the business have been
deducted) by sales revenues. This measure tells managers how efficiently an organiza-
tion is using its resources; every successful attempt to reduce costs will be reflected in
increased operating profit, for example. Also, operating margin is a means of comparing
one year’s performance to another; for example, if managers discover operating margin
has improved by 5 percent from one year to the next, they know their organization is
building a competitive advantage.
Output Control
LO11-3 Identify the main output
controls, and discuss
their advantages and
disadvantages as means of
coordinating and motivating
employees.
Figure 11.3 Three Organizational Control Systems
Values Norms Socialization
Direct supervision Management by objectives Rules and standard operating procedures
Financial measures of performance Organizational goals Operating budgets
Output control
Behavior control
Clan control
Type of Control Mechanisms of Control
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324 Chapter Eleven
• Liquidity ratios measure how well managers have protected organizational resources to be able to meet short-term obligations. The current ratio (current assets divided by current liabilities) tells managers whether they have the resources available to meet the
claims of short-term creditors. The quick ratio shows whether they can pay these claims without selling inventory.
• Leverage ratios, such as the debt-to-assets ratio and the times-covered ratio, measure the degree to which managers use debt (borrow money) or equity (issue new shares)
to finance ongoing operations. An organization is highly leveraged if it uses more debt
than equity. Debt can be risky when net income or profit fails to cover the interest on the
debt—as some people learn too late when their paychecks do not allow them to pay off
their credit cards.
• Activity ratios show how well managers are creating value from organizational assets. Inventory turnover measures how efficiently managers are turning inventory over so excess inventory is not carried. Days sales outstanding reveals how efficiently managers are collecting revenue from customers to pay expenses.
The objectivity of financial measures of performance is the reason why so many manag-
ers use them to assess the efficiency and effectiveness of their organizations. When an orga-
nization fails to meet performance standards such as ROI, revenue, or stock price targets,
managers know they must take corrective action. Thus financial controls tell managers when
a corporate reorganization might be necessary, when they should sell off divisions and exit
businesses, or when they should rethink their corporate-level strategies. 40
Today, quantitative
skills are needed by many job candidates and employees, as the accompanying “Management
Insight” feature describes.
Profit Ratios
Return on investment 5 Net profit before taxes
Total assets
Measures how well managers are using the organization’s
resources to generate profits.
Operating margin 5 Total operating profit
Sales revenues
A measure of how much percentage profit a company is earn-
ing on sales; the higher the percentage, the better a company is
using its resources to make and sell the product.
Liquidity Ratios
Current ratio 5 Current assets
Current liabilities
Do managers have resources available to meet claims of short-
term creditors?
Quick ratio 5 Current assets 2 Inventory
Current liabilities
Can managers pay off claims of short-term creditors without
selling inventory?
Leverage Ratios
Debt-to-assets ratio 5 Total debt
Total assets
To what extent have managers used borrowed funds to finance
investments?
Times-covered ratio 5 Profit before interest and taxes
Total interest charges
Measures how far profits can decline before managers cannot
meet interest charges. If this ratio declines to less than 1, the
organization is technically insolvent.
Activity Ratios
Inventory turnover 5 Cost of good sold
Inventory
Measures how efficiently managers are turning inventory over
so that excess inventory is not carried.
Days sales outstanding 5 Current accounts receivable
Sales for period divided by days in period
Measures how efficiently managers are collecting revenues
from customers to pay expenses.
Table 11.1 Four Measures of Financial Performance
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325
Although financial information is an important output control, financial information by
itself does not tell managers all they need to know about the four building blocks of com-
petitive advantage. Financial results inform managers about the results of decisions they have
already made; they do not tell managers how to find new opportunities to build competitive
advantage in the future. To encourage a future-oriented approach, top managers must estab-
lish organizational goals that encourage middle and first-line managers to achieve superior
efficiency, quality, innovation, and responsiveness to customers.
Organizational Goals Once top managers consult with lower-level managers and set the organization’s overall goals,
they establish performance standards for the divisions and functions. These standards specify
for divisional and functional managers the level at which their units must perform if the organi-
zation is to achieve its overall goals. 45
Each division is given a set of specific goals to achieve
(see Figure 11.4 ). For example, Jeffrey Immelt, CEO of GE, has established the goal of having
each GE division be first or second in its industry in profit. Divisional managers then develop
a business-level strategy (based on achieving superior efficiency or innovation) that they hope
will allow them to achieve that goal. 46
In consultation with functional managers, they spec-
ify the functional goals that the managers of different functions need to achieve to allow the
division to achieve its goals. For example, sales managers might be evaluated for their ability
to increase sales; materials management managers, for their ability to increase the quality of
inputs or lower their costs; R&D managers, for the number of products they innovate or the
number of patents they receive. In turn, functional managers establish goals that first-line man-
agers and nonmanagerial employees need to achieve to allow the function to achieve its goals.
Quantitative Skills in the Job Market In today’s job market, quantitative skills are important for college graduates. The
National Association of Colleges and Employers Job Outlook 2014 survey reported that employers highly value an employee’s or candidate’s “ability to analyze quantitative
information.” 41
Other top skills included “ability to work in a team structure,” “ability to
make decisions and solve problems,” “ability to plan, organize, and prioritize work,” and
“ability to verbally communicate with persons inside and outside the organization,” and
“ability to obtain and process information.” 42
These skills will be needed to cope with the flood of data being collected in the global
economy. Data are being collected from all types of sources. In addition to collecting
information on their own operations, companies are collecting data on their customers
and suppliers. Mobile phones and other smart devices are creating and communicating
data. There are even “exhaust data”—data that are by-products of other activities. All
this information is being dubbed “big data.” It is creating datasets so large that typical
database software cannot store or analyze it. So data analysis is no longer the concern
of a few well-trained data “geeks,” according to McKinsey Global Institute. Big data are
now relevant in every sector of the economy. 43
A study by the McKinsey Global Institute predicts that there will be more jobs for
people with strong data analysis skills than there will be people to fill them. There could
be as many as 140,00 to 190,000 unfilled positions in the United States by the year 2018.
The study also expects a lack of 1.5 million managers who can understand big data well
enough to make decisions using them. 44
The gap is so big that the McKinsey report
points out it cannot be filled through hiring. Organizations may need to send existing
employees back to school to get needed training in data analysis.
That’s not to say that soft skills are not in demand as well. Refer back to the list from
the National Association of Colleges and Employers Job Outlook 2014. Many of the top skills include teamwork and communication.
Management Insight
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326 Chapter Eleven
Output control is used at every level of the organization, and it is vital that the goals set
at each level harmonize with the goals set at other levels so managers and other employees
throughout the organization work together to attain the corporate goals that top managers
have set. 47
It is also important that goals be set appropriately so managers are motivated to
accomplish them. If goals are set at an impossibly high level, managers might work only half-
heartedly to achieve them because they are certain they will fail. In contrast, if goals are set so
low that they are too easy to achieve, managers will not be motivated to use all their resources
as efficiently and effectively as possible. Research suggests that the best goals are specific,
difficult goals—goals that challenge and stretch managers’ ability but are not out of reach and
do not require an impossibly high expenditure of managerial time and energy. Such goals are
often called stretch goals. Deciding what is a specific difficult goal and what is a goal that is too difficult or too easy
is a skill that managers must develop. Based on their own judgment and work experience,
managers at all levels must assess how difficult a certain task is, and they must assess the abil-
ity of a particular subordinate manager to achieve the goal. If they do so successfully, chal-
lenging, interrelated goals—goals that reinforce one another and focus on achieving overall
corporate objectives—will energize the organization.
Operating Budgets Once managers at each level have been given a goal or target to achieve, the next step in devel-
oping an output control system is to establish operating budgets that regulate how managers
and workers attain their goals. An operating budget is a blueprint that states how managers intend to use organizational resources to achieve organizational goals efficiently. Typically
managers at one level allocate to subordinate managers a specific amount of resources to
produce goods and services. Once they have been given a budget, these lower-level manag-
ers must decide how to allocate money for different organizational activities. They are then
evaluated for their ability to stay within the budget and to make the best use of available
resources. For example, managers at GE’s washing machine division might have a budget of
$50 million to spend on developing and selling a new line of washing machines. They must
decide how much money to allocate to the various functions such as R&D, engineering, and
sales so the division generates the most customer revenue and makes the biggest profit.
Large organizations often treat each division as a singular or stand-alone responsibility
center. Corporate managers then evaluate each division’s contribution to corporate perfor-
mance. Managers of a division may be given a fixed budget for resources and be evaluated
on the amount of goods or services they can produce using those resources (this is a cost or
expense budget approach). Alternatively, managers may be asked to maximize the revenues
from the sales of goods and services produced (a revenue budget approach). Or managers
may be evaluated on the difference between the revenues generated by the sales of goods and
services and the budgeted cost of making those goods and services (a profit budget approach).
Japanese companies’ use of operating budgets and challenging goals to increase efficiency is
instructive in this context.
operating budget A budget that states how managers
intend to use organizational
resources to achieve organi-
zational goals.
Figure 11.4 Organizationwide Goal Setting
Functional managers set goals for each individual worker that will allow the function to achieve its goals.
Divisional managers set goals for each function that will allow the division to achieve its goals.
Corporate-level managers set goals for individual divisions that will allow the organization to achieve corporate goals.
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Organizational Control and Change 327
In summary, three components—objective financial measures, challenging goals and per-
formance standards, and appropriate operating budgets—are the essence of effective output
control. Most organizations develop sophisticated output control systems to allow managers
at all levels to keep accurate account of the organization so they can move quickly to take cor-
rective action as needed. 48
Output control is an essential part of management.
Problems with Output Control When designing an output control system, managers must be careful to avoid some pitfalls.
For example, they must be sure the output standards they create motivate managers at all levels
and do not cause managers to behave in inappropriate ways to achieve organizational goals.
Suppose top managers give divisional managers the goal of doubling profits over a three-
year period. This goal seems challenging and reachable when it is jointly agreed upon, and
in the first two years profits go up by 70 percent. In the third year, however, an economic
recession hits and sales plummet. Divisional managers think it is increasingly unlikely that
they will meet their profit goal. Failure will mean losing the substantial monetary bonus tied
to achieving the goal. How might managers behave to try to preserve their bonuses?
Perhaps they might find ways to reduce costs because profit can be increased either by
raising sales revenues or reducing costs. Thus divisional managers might cut back on expen-
sive research activities, delay machinery maintenance, reduce marketing expenditures, and
lay off middle managers and workers to reduce costs so that at the end of the year they will
make their target of doubling profits and receive their bonuses. This tactic might help them
achieve a short-run goal—doubling profits—but such actions could hurt long-term profitabil-
ity or ROI (because a cutback in R&D can reduce the rate of product innovation, a cutback in
marketing will lead to the loss of customers, and so on).
The message is clear: Although output control is a useful tool for keeping managers and
employees at all levels motivated and the organization on track, it is only a guide to appropri-
ate action. Managers must be sensitive in how they use output control and must constantly
monitor its effects at all levels in the organization—and on customers and other stakeholders.
Organizational structure by itself does not provide any mechanism that
motivates managers and nonmanagerial employees to behave in ways
that make the structure work—or even improve how it works; hence the
need for control. Put another way, managers can develop an organiza-
tional structure that has the right grouping of divisions and functions, and
an effective chain of command, but it will work as designed only if managers also establish control systems that motivate and shape employee behavior in ways that match this struc- ture.
49 Output control is one method of motivating employees; behavior control is another
method. This section examines three mechanisms of behavior control that managers can use
to keep subordinates on track and make organizational structures work as they are designed to
work: direct supervision, management by objectives, and rules and standard operating proce-
dures (see Figure 11.3 ).
Direct Supervision The most immediate and potent form of behavior control is direct supervision by managers
who actively monitor and observe the behavior of their subordinates, teach subordinates the
behaviors that are appropriate and inappropriate, and intervene to take corrective action as
needed. Moreover, when managers personally supervise subordinates, they lead by example
and in this way can help subordinates develop and increase their own skill levels. (Leadership
is the subject of Chapter 14.)
Direct supervision allows managers at all levels to become personally involved with their
subordinates and allows them to mentor subordinates and develop their management skills.
Thus control through personal supervision can be an effective way of motivating employees
and promoting behaviors that increase efficiency and effectiveness. 50
Behavior Control
LO11-4 Identify the main behavior
controls, and discuss
their advantages and
disadvantages as a means
of coordinating and
motivating employees.
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328 Chapter Eleven
Nevertheless, certain problems are associated with direct supervision. First, it is expensive
because a manager can personally manage only a relatively small number of subordinates
effectively. Therefore, if direct supervision is the main kind of control being used in an orga-
nization, a lot of managers will be needed and costs will increase. For this reason, output con-
trol is usually preferred to behavior control; indeed, output control tends to be the first type of
control that managers at all levels use to evaluate performance. Second, direct supervision can
demotivate subordinates. This occurs if employees feel they are under such close scrutiny that they are not free to make their own decisions or if they feel they are not being evaluated in an
accurate and impartial way. Team members and other employees may start to pass the buck,
avoid responsibility, and cease to cooperate with other team members if they feel their man-
ager is not accurately evaluating their performance and is favoring some people over others.
Third, as noted previously, for many jobs personal control through direct supervision is
simply not feasible. The more complex a job is, the more difficult it is for a manager to evalu-
ate how well a subordinate is performing. The performance of divisional and functional man-
agers, for example, can be evaluated only over relatively long periods (this is why an output
control system is developed), so it makes little sense for top managers to continually monitor
their performance. However, managers can still communicate the organization’s mission and
goals to their subordinates and reinforce the values and norms in the organization’s culture
through their own personal style.
Management by Objectives To provide a framework within which to evaluate subordinates’ behavior and, in particular, to
allow managers to monitor progress toward achieving goals, many organizations implement
some version of management by objectives. Management by objectives (MBO) is a formal system of evaluating subordinates on their ability to achieve specific organizational goals or
performance standards and to meet operating budgets. 51
Most organizations use some form of
MBO system because it is pointless to establish goals and then fail to evaluate whether they
are being achieved. Management by objectives involves three specific steps:
• Step 1: Specific goals and objectives are established at each level of the organization.
MBO starts when top managers establish overall organizational objectives, such as specific
financial performance goals or targets. Then, objective setting cascades down throughout the
organization as managers at the divisional and functional levels set their goals to achieve
corporate objectives. 52
Finally, first-level managers and employees jointly set goals that will
contribute to achieving functional objectives.
• Step 2: Managers and their subordinates together determine the subordinates’ goals.
An important characteristic of management by objectives is its participatory nature. Man-
agers at every level sit down with each of the subordinate managers who report directly to
them, and together they determine appropriate and feasible goals for the subordinate and
bargain over the budget that the subordinate will need to achieve his or her goals. The partici-
pation of subordinates in the objective-setting process is a way of strengthening their com-
mitment to achieving their goals and meeting their budgets. 53
Another reason why it is so
important for subordinates (both individuals and teams) to participate in goal setting is that
doing so enables them to tell managers what they think they can realistically achieve. 54
• Step 3: Managers and their subordinates periodically review the subordinates’ progress toward meeting goals.
Once specific objectives have been agreed on for managers at each level, managers are
accountable for meeting those objectives. Periodically they sit down with their subordinates
to evaluate their progress. Normally salary raises and promotions are linked to the goal-setting
process, and managers who achieve their goals receive greater rewards than those who fall
short. (The issue of how to design reward systems to motivate managers and other organiza-
tional employees is discussed in Chapter 13.)
In companies that have decentralized responsibility for the production of goods and services
to empowered teams and cross-functional teams, management by objectives works somewhat
management by objec- tives (MBO) A goal-setting process in which a manager
and each of his or her sub-
ordinates negotiate specific
goals and objectives for the
subordinate to achieve and
then periodically evaluate the
extent to which the subordi-
nate is achieving those goals.
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Organizational Control and Change 329
differently. Managers ask each team to develop a set of goals and performance targets that the
team hopes to achieve—goals consistent with organizational objectives. Managers then negotiate
with each team to establish its final goals and the budget the team will need to achieve them. The
reward system is linked to team performance, not to the performance of any one team member.
Cypress Semiconductor offers an interesting example of how IT can be used to manage
the MBO process quickly and effectively. In the fast-moving semiconductor business, a pre-
mium is placed on organizational adaptability. At Cypress, CEO T. J. Rodgers was facing a
problem: How could he control his growing 1,500-employee organization without develop-
ing a bureaucratic management hierarchy? Rodgers believed that a tall hierarchy hinders the
ability of an organization to adapt to changing conditions. He was committed to maintaining
a flat and decentralized organizational structure with a minimum of management layers. At
the same time, he needed to control his employees to ensure that they performed in a manner
consistent with the goals of the company. 55
How could he achieve this without resorting to
direct supervision and the lengthy management hierarchy that it implies?
To solve this problem, Rodgers implemented an online information system through which
he can monitor what every employee and team is doing in his fast-moving and decentralized
organization. Each employee maintains a list of 10 to 15 goals, such as “Meet with marketing
for new product launch” or “Make sure to check with customer X.” Noted next to each goal
are when it was agreed upon, when it is due to be finished, and whether it has been finished.
All this information is stored on a central computer. Rodgers claims that he can review the
goals of all employees in about four hours and that he does so each week. 56
How is this possi-
ble? He manages by exception and looks only for employees who are falling behind. He then calls them, not to scold but to ask whether there is anything he can do to help them get the
job done. It takes only about half an hour each week for employees to review and update their
lists. This system allows Rodgers to exercise control over his organization without resorting
to the expensive layers of a management hierarchy and direct supervision.
MBO does not always work out as planned, however. Managers and their subordinates at
all levels must believe that performance evaluations are accurate and fair. Any suggestion that
personal biases and political objectives play a part in the evaluation process can lower or even
destroy MBO’s effectiveness as a control system. This is why many organizations work so
hard to protect the integrity of their systems.
Also, when people work in teams, each member’s contribution to the team and each team’s
contribution to the goals of the organization must be fairly evaluated. This is not easy to do. It
depends on managers’ ability to create an organizational control system that measures perfor-
mance accurately and fairly and links performance evaluations to rewards so that employees
stay motivated and coordinate their activities to achieve the organization’s mission and goals.
Bureaucratic Control When direct supervision is too expensive and management by objectives is inappropri-
ate, managers might turn to another mechanism to shape and motivate employee behavior:
bureaucratic control. Bureaucratic control is control by means of a comprehensive system of rules and standard operating procedures (SOPs) that shapes and regulates the behavior of
divisions, functions, and individuals. In Chapter 2 we discussed Weber’s theory of bureau-
cracy and noted that all organizations use bureaucratic rules and procedures but some use
them more than others. 57
Recall that rules and SOPs are formal, written instructions that spec-
ify a series of actions that employees should follow to achieve a given end; in other words, if
A happens, then do B and C. For example, a simple set of rules developed by the supervisor of some custodial workers (Crew G) at a Texas A&M University building clearly established
task responsibilities and clarified expectations (see Table 11.2 ).
Rules and SOPs guide behavior and specify what employees are to do when they con-
front a problem that needs a solution. It is the responsibility of a manager to develop rules
that allow employees to perform their activities efficiently and effectively. Rules and SOPs
also clarify people’s expectations about one another and prevent misunderstandings over
responsibility or the use of power. Such guidelines can prevent a supervisor from arbitrarily
increasing a subordinate’s workload and prevent a subordinate from ignoring tasks that are a
legitimate part of the job.
bureaucratic control Control of behavior by means
of a comprehensive system of
rules and standard operating
procedures.
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330 Chapter Eleven
When employees follow the rules that managers have developed, their behavior is
standardized —actions are performed the same way time and time again—and the outcomes of their work are predictable. And to the degree that managers can make employees’ behavior
predictable, there is no need to monitor the outputs of behavior because standardized behav- ior leads to standardized outputs, such as goods and services of the same uniform quality. Suppose a worker at Toyota comes up with a way to attach exhaust pipes that reduces the
number of steps in the assembly process and increases efficiency. Always on the lookout for
ways to standardize and improve procedures, managers make this idea the basis of a new rule
that says, “From now on, the procedure for attaching the exhaust pipe to the car is as follows.”
If all workers follow the rule to the letter, every car will come off the assembly line with its
exhaust pipe attached in the new way, and there will be no need to check exhaust pipes at the
end of the line.
In practice, mistakes and lapses of attention happen, so output control is used at the end of
the line, and each car’s exhaust system is given a routine inspection. However, the number of
quality problems with the exhaust system is minimized because the rule (bureaucratic con-
trol) is being followed. Service organizations such as retail stores, fast-food restaurants, and
home improvement stores also attempt to standardize employee behavior, such as customer
service quality, by instructing employees in the correct way to greet customers or the appro-
priate way to serve and bag food. Employees are trained to follow the rules that have proved
to be most effective in a particular situation, and the better trained the employees are, the
more standardized is their behavior and the more trust managers can have that outputs (such
as food quality) will be consistent.
Not following rules is one of the reasons often given for the high death toll (158 people)
of the 2011 tornado that swept through Joplin, Missouri. Tornado warnings were issued and
residents were advised to seek shelter. However, many failed to do so. The reasons why
were examined by the National Weather Service. The service performs a service assessment
to review its performance after severe weather events. In the Joplin tornados, the National
Weather Service concluded that initial siren warnings had lost their credibility due to many
1. All employees must call their supervisor or leader before 5:55 a.m. to notify of absence or tardiness.
2. Disciplinary action will be issued to any employee who abuses sick leave policy. 3. Disciplinary action will be issued to any employee whose assigned area is not up to
custodial standards.
4. If a door is locked when you go in to clean an office, it’s your responsibility to lock it back up.
5. Name tags and uniforms must be worn daily. 6. Each employee is responsible for buffing hallways and offices. Hallways must be
buffed weekly, offices periodically.
7. All equipment must be put in closets during 9:00 a.m. and 11 a.m. breaks. 8. Do not use the elevator to move trash or equipment from 8:50 to 9:05, 9:50 to 10:05,
11:50 to 12:05, or 1:50 to 2:05 to avoid breaks between classes.
9. Try to mop hallways when students are in classrooms, or mop floors as you go down to each office.
10. Closets must be kept clean and all equipment must be clean and operative. 11. Each employee is expected to greet building occupants with “Good morning.” 12. Always knock before entering offices and conference rooms. 13. Loud talking, profanity, and horseplay will not be tolerated inside buildings. 14. All custodial carts must be kept uniform and cleaned daily. 15. You must have excellent “public relations” with occupants at all times.
Table 11.2 Team Rules of Conduct
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Organizational Control and Change 331
false alarms. Residents were waiting for more conclusive evidence that a severe weather
event was actually happening. The report suggested ways to improve responses to warnings,
noting that response to severe weather situations like tornados is a complex, nonlinear pro-
cess. To improve responses to the warning and overcome complacency among residents, the
report suggested a new structure for warnings that would be more credible and allow residents
to make better decisions. 58
Two years later, in May 2013, a series of tornados and related weather events like flash
flooding killed 47 people in Oklahoma City, Oklahoma. Again the National Weather Ser-
vice’s service assessment concluded that sirens were not taken seriously. Some interpreted
the sirens to mean that they should seek further information. 59
The Oklahoma City report
drew on the knowledge gained from the Joplin report that previous experience with tornadoes
influences how residents responded to warnings. What the reports on these two devastating
weather events indicate is that the simple rule that when residents hear a warning they should
take shelter is not enough. Severe weather events are complex situations, and better rules are
needed to protect lives. 60
The goal is simple: Use the rules to achieve a quick resolution of a complex issue. If the
existing rules don’t work, employees must experiment; and when they find a solution, it is
turned into a new rule to be included in the procedures book to aid the future decision making
of all employees in the organization.
Problems with Bureaucratic Control All organizations, make extensive use of bureaucratic control because rules and SOPs effec-
tively control routine organizational activities. With a bureaucratic control system in place,
managers can manage by exception and intervene and take corrective action only when neces-
sary. However, managers need to be aware of a number of problems associated with bureau-
cratic control because such problems can reduce organizational effectiveness. 61
First, establishing rules is always easier than discarding them. Organizations tend to
become overly bureaucratic over time as managers do everything according to the rule book.
If the amount of red tape becomes too great, decision making slows and managers react slug-
gishly to changing conditions. This can imperil an organization’s survival
if agile new competitors emerge.
Second, because rules constrain and standardize behavior and lead
people to behave in predictable ways, people might become so used to
automatically following rules that they stop thinking for themselves. Thus
too much standardization can actually reduce the level of learning taking place in an organization and get the organization off track if managers and
workers focus on the wrong issues. An organization thrives when its mem-
bers are constantly thinking of new ways to increase efficiency, quality,
and customer responsiveness. By definition, new ideas do not come from
blindly following standardized procedures. Similarly, the pursuit of inno-
vation implies a commitment by managers to discover new ways of doing
things; innovation, however, is incompatible with extensive bureaucratic
control.
Consider, for example, what happened at Walt Disney when Bob Iger
became CEO of the troubled company. Bob Iger had been COO of Disney
under CEO Michael Eisner, and he had noticed that Disney was plagued by
slow decision making that had led to many mistakes in putting its new strat-
egies into action. Its Disney stores were losing money; its Internet proper-
ties were flops; and even its theme parks seemed to have lost their luster as
few new rides or attractions were introduced. Iger believed one of the main
reasons for Disney’s declining performance was that it had become too tall
and bureaucratic and its top managers were following financial rules that
did not lead to innovative strategies.
One of Iger’s first moves to turn around performance was to disman-
tle Disney’s central strategic planning office. In this office several levels
of managers were responsible for sifting through all the new ideas and
Looks like even Mickey Mouse approves!
Bob Iger’s redesign of Disney’s methods
of innovation and planning lets employees
move faster on new ideas.
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332 Chapter Eleven
innovations sent up by Disney’s different business divisions, such as theme parks, movies,
and gaming, and then deciding which ones to present to the CEO. Iger saw the strategic plan-
ning office as a bureaucratic bottleneck that reduced the number of ideas coming from below.
So he dissolved the office and reassigned its managers back to the different business units. 62
The result of cutting an unnecessary layer in Disney’s hierarchy has been that more new
ideas are generated by its different business units. The level of innovation has increased
because managers are more willing to speak out and champion their ideas when they know
they are dealing directly with the CEO and a top management team searching for innova-
tive ways to improve performance—rather than a layer of strategic planning bureaucrats
concerned only with the bottom line. 63
Disney continues to thrive. Captain America had the
largest April opening of all time. The company’s portfolio includes movies, theme parks,
children’s retailing, and cruise ships. 64
Managers must always be sensitive about the way they use bureaucratic control. It is most
useful when organizational activities are routine and well understood and when employees
are making programmed decisions—for example, in mass-production settings such as Ford
or in routine service settings such as stores like Target or Midas Muffler. Bureaucratic con-
trol is much less useful in situations where nonprogrammed decisions have to be made
and managers have to react quickly to changes in the task environment. The accompanying
“Ethics in Action” feature describes how one company has thrived without many bureau-
cratic rules.
Netflix: Freedom and Responsibility Netflix, an organization that provides on-demand Internet streaming of movies and
television shows as well as a DVD-by-mail service, uses little bureaucratic con-
trol. There are no traditional performance appraisals, no formal tracking of vacation
time for managers, and no performance-based bonuses. On its web page the com-
pany describes itself this way: “At Netflix we value high performance, freedom, and
responsibility. We don’t focus on rules, processes, or procedures. We are candid and
transparent and seek excellence in all that we do.” 65
Much of this lack of bureaucratic control is captured in a presentation called Free-
dom & Responsibility Culture available on the Netflix website. 66
Sheryl Sandberg,
the chief operating officer at Facebook, is quoted as saying the slideshow “may well
be the most important document ever to come out of [Silicon] Valley.” 67
The pre-
sentation’s name comes from the Netflix philosophy of allowing employees to make
decisions rather than having a strong command and control environment. 68
Patty McCord, the former chief talent officer at Netflix, outlined five ideas that
defined Netflix’s philosophy in a 2014 Harvard Business Review article.
1. “Hire, Reward, and Tolerate Only Fully Formed Adults”: 69 Netflix asks employ- ees to rely on their own judgment rather than corporate policies when making
decisions. Thus it is important that Netflix hire people who understand how their
actions affect others and who put the best interests of the company first.
2. “Tell the Truth about Performance”: 70 The company did away with performance appraisals. It felt they were too infrequent and ritualistic and did not improve
performance. Instead they encourage employees and managers to talk fre-
quently. They also hold informal 360-degree reviews by asking employees to
critique each other.
3. “Managers Own the Job of Creating Great Teams”: 71 Netflix focuses its ener- gies on making sure the right people are doing the right job for their skill set.
The company places great importance on team building.
4. “Leaders Own the Job of Creating the Company Culture”: 72 McCord makes three points about this: (1) There should not be a difference between how
Ethics in Action
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Organizational Control and Change 333
To use output control and behavior control, managers must be able to identify the
outcomes they want to achieve and the behaviors they want employees to perform to
achieve those outcomes. For many of the most important and significant organizational
activities, however, output control and behavior control are inappropriate for several
reasons:
• A manager cannot evaluate the performance of workers such as doctors, research scien- tists, or engineers by observing their daily behavior.
• Rules and SOPs are of little use in telling a doctor how to respond to an emergency situ- ation or a scientist how to discover something new.
• Output controls such as the amount of time a surgeon takes for each operation or the costs of making a discovery are crude measures of the quality of performance.
How can managers attempt to control and regulate the behavior of their subordinates when
personal supervision is of little use, when rules cannot be developed to tell employees what
to do, and when outputs and goals cannot be measured at all or can be measured usefully only
over long periods?
One source of control increasingly being used by organizations is
clan control , which takes advantage of the power of internalized val- ues and norms to guide and constrain employee attitudes and behavior
in ways that increase organizational performance. 76
The first function of a control system
is to shape the behavior of organizational members to ensure that they are working toward
organizational goals and to take corrective action if those goals are not being met. The
second function of control, however, is to keep organizational members focused on think-
ing about what is best for their organization in the future and to keep them looking for new
opportunities to use organizational resources to create value. Clan control serves this dual
function of keeping organizational members goal-directed while open to new opportuni-
ties because it takes advantage of the power of organizational culture, discussed in the
previous chapter.
Organizational culture functions as a kind of control system because managers can delib-
erately try to influence the kind of values and norms that develop in an organization—values
and norms that specify appropriate and inappropriate behaviors and so determine the way its
members behave. 77
We discussed the sources of organizational culture and the way manag-
ers can help create different kinds of cultures in Chapter 10, so there is no need to repeat this
discussion here. Another example of using internalized values and norms to guide behavior is
described in the accompanying “Management Insight” feature.
Clan Control clan control The control exerted on individuals and
groups in an organization
by shared values, norms,
standards of behavior, and
expectations.
culture and values are described and how they are carried out in the company.
(2) Employees need to understand how the business works so they can sup-
port it. (3) There should be awareness that within the culture there will be
subcultures to manage.
5. “Good Talent Managers Think Like Businesspeople and Innovators First, and Like HR People Last”:
73 She thinks HR is better served to innovate and think
of themselves like businesspeople, rather than focus on implementing morale
improvement plans that don’t usually work. 74
Netflix was founded in 1997, launched its subscription service in 1999, and
introduced streaming in 2007. It went from 857,000 members in 2002 to more than
40 million members in 2013. 75
It has been successful despite having little bureau-
cratic control.
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334
As we have discussed, many problems can arise if an organization’s con-
trol systems are not designed correctly. One of these problems is that an
organization cannot change or adapt in response to a changing environ-
ment unless it has effective control over its activities. Companies can
lose this control over time, or they can change in ways that make them
more effective. Organizational change is the movement of an organization away from its present state toward some preferred future state to increase its efficiency and effectiveness.
Organizational Change
How Philanthrofits Help Users Help Charities The popularity of a new category of fitness apps provides an example of how a control sys-
tem can use internalized values and norms. Philanthrofits 78
are apps that donate money to
charities based on the behaviors of the users. For example, the app Charity Miles donates
25 cents per mile for walkers and runners to charities including Habitat for Humanity,
Feeding America, and Autism Speaks. 79
With a $1 million sponsorship pool, the company
hopes that as the number of athletes using the app increase, so will the corporate sponsors,
thus providing more money for athletes to donate to charity. 80
Users must share their activ-
ity on Facebook for their designated charity to receive the money raised.
On its web page, a Charity Miles user who lost 50 pounds by running wrote, “Char-
ity Miles helped me get started with running because I knew with each run, I was doing
something bigger. It helped me get to where I am today, and I would like others to get the
same experience from it that I have.” 81
Another app, stickK, was developed by Yale University economists based on research of
the effectiveness of people making contracts to achieve their goals. The standard objectives
offered by the app include losing weight, exercising regularly, quitting smoking, preparing
for a race, and maintaining weight. The user can also choose a custom goal, such as raising
one’s grade point average. Next the user can enter credit card information to wager money
on whether the user will achieve the set goals. This step is optional. If the goal is achieved,
the credit card is not charged. If the goal is not achieved, the money the user wagered will
go to a charity of the user’s choice. The chosen charity can be one the user supports or
one the user would prefer not to support. To hold the user accountable, the user chooses a
referee to monitor progress. The referee verifies the accuracy of the user’s reports. Finally,
the user can ask friends and family who also are registered for the app to act as supporters.
These supporters can send the user encouraging messages on the app. 82
There are too many Philanthrofit apps on the market to mention them all here. But
Charity Miles and stickK represent two ways of leveraging users’ internalized values
and norms to influence behavior. Charity Miles allows the user to donate a sponsor’s
money. StickK has users donate their own money. Charity Miles donates money when
users perform their activities and stickK donates when they do not. But perhaps the big-
gest difference is that stickK also allows users to donate to either a charity or an “anti-
charity” if the user does not live up to the contract.
If a stickK user chooses to send money to a charity, stickK does not inform the user
which charity receives the money. The idea is that if the user knew what good cause
received the money, he or she might feel OK about breaking the contract. Instead the
stickK web page lists a few reputable charities such as the Red Cross and Doctors with-
out Borders. Users who chose the charity option are told that their money went to such a
charity without providing the charity name.
However, if the user chooses an anti-charity, the user is told which charity got their
money. An anti-charity is one with views the user opposes. The stickK website provides
a choice of anti-charities from either side of controversial issues, including the political
action committees supporting both the Republican and Democratic parties.
Management Insight
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Organizational Control and Change 335
Interestingly enough, there is a fundamental tension or need to balance two opposing
forces in the control process that influences how organizations change. As just noted, orga-
nizations and their managers need to be able to control their activities and make their opera-
tions routine and predictable. At the same time, however, organizations have to be responsive
to the need to change, and managers and employees have to “think on their feet” and realize
when they need to depart from routines to be responsive to unpredictable events. In other
words, even though adopting the right set of output and behavior controls is essential for
improving efficiency, because the environment is dynamic and uncertain, employees also
need to feel that they have the autonomy to depart from routines as necessary to increase
effectiveness. (See Figure 11.5 .)
For this reason many researchers believe that the highest-performing organizations are
those that are constantly changing—and thus become experienced at doing so—in their search
to become more efficient and effective. Companies like UPS, Toyota, and Walmart are con-
stantly changing the mix of their activities to move forward even as they seek to make their
existing operations more efficient. For example, UPS entered the air express parcel market,
bought a chain of mailbox stores, and began offering a consulting service. At the same time
it has been increasing the efficiency of its ground and global air transport network, including
2,864 alternative fuel and technology vehicles. 83
Lewin’s Force-Field Theory of Change Researcher Kurt Lewin developed a theory about organizational change. According to his
force-field theory, a wide variety of forces arise from the way an organization operates— from its structure, culture, and control systems—that make organizations resistant to
change. At the same time a wide variety of forces arise from changing task and general
environments that push organizations toward change. These two sets of forces are always
in opposition in an organization. 84
When the forces are evenly balanced, the organization
is in a state of inertia and does not change. To get an organization to change, managers
must find a way to increase the forces for change, reduce resistance to change, or do both simultaneously. Any of these strategies will overcome inertia and cause an organization
to change.
Figure 11.6 illustrates Lewin’s theory. An organization at performance level P1 is in bal-
ance: Forces for change and resistance to change are equal. Management, however, decides
that the organization should strive to achieve performance level P2. To get to level P2, man-
agers must increase the forces for change (the increase is represented by the lengthening of the up arrows), reduce resistance to change (the reduction is represented by the shortening of the down arrows), or both. If managers pursue any of the three strategies successfully,
organizational change The movement of an orga-
nization away from its pres-
ent state and toward some
preferred future state to
increase its efficiency and
effectiveness.
LO11-5 Discuss the relationship
between organizational
control and change, and
explain why managing
change is a vital
management task.
Figure 11.5 Organizational Control and Change
Need to improve
operations
Need to respond to new events
Managers must balance the need for an organization to improve the way it currently operates and the need for it
to change in response to new, unanticipated events.
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336 Chapter Eleven
the organization will change and reach performance level P2. Before we look in more detail
at the techniques managers can use to overcome resistance and facilitate change, we need
to look at the types of change they can implement to increase organizational effectiveness.
Evolutionary and Revolutionary Change Managers continually face choices about how best to respond to the forces for change. There
are several types of change that managers can adopt to help their organizations achieve
desired future states. 85
In general, types of change fall into two broad categories: evolutionary
change and revolutionary change. 86
Evolutionary change is gradual, incremental, and narrowly focused. Evolutionary change is not drastic or sudden but, rather, is a constant attempt to improve, adapt, and adjust strat-
egy and structure incrementally to accommodate changes taking place in the environment. 87
Sociotechnical systems theory and total quality management, or kaizen, are two instruments
of evolutionary change. Such improvements might entail using technology in a better way or
reorganizing the work process.
Some organizations, however, need to make major changes quickly. Faced with drastic,
unexpected changes in the environment (for example, a new technological breakthrough) or
with an impending disaster resulting from mismanagement, an organization might need to act
quickly and decisively. In this case, revolutionary change is called for.
Revolutionary change is rapid, dramatic, and broadly focused. Revolutionary change involves a bold attempt to quickly find new ways to be effective. It is likely to result in a radical shift in ways
of doing things, new goals, and a new structure for the organization. The process has repercussions
at all levels in the organization—corporate, divisional, functional, group, and individual. Reengi-
neering, restructuring, and innovation are three important instruments of revolutionary change.
Managing Change The need to constantly search for ways to improve efficiency and effectiveness makes it vital
that managers develop the skills necessary to manage change effectively. Several experts have
proposed a model of change that managers can follow to implement change successfully—
that is, to move an organization away from its present state and toward some desired future
state to increase its efficiency and effectiveness. 88
Figure 11.7 outlines the steps in this pro-
cess. In the rest of this section we examine each one.
ASSESSING THE NEED FOR CHANGE Organizational change can affect practi- cally all aspects of organizational functioning, including organizational structure, culture,
strategies, control systems, and groups and teams, as well as the human resource management
evolutionary change Change that is gradual, incre-
mental, and narrowly focused.
revolutionary change Change that is rapid, dramatic,
and broadly focused.
Figure 11.6 Lewin’s Force-Field Model of Change
Resistance to change Resistance to change
Forces for change
Time
L e ve
l o f p e rf
o rm
a n ce
P1
C ha
ng e
P2
Forces for change
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Organizational Control and Change 337
system and critical organizational processes such as communication, motivation, and leader-
ship. Organizational change can alter how managers carry out the critical tasks of planning,
organizing, leading, and controlling and the ways they perform their managerial roles.
Deciding how to change an organization is a complex matter because change disrupts the
status quo and poses a threat, prompting employees to resist attempts to alter work relation-
ships and procedures. Organizational learning—the process through which managers try to
increase organizational members’ abilities to understand and appropriately respond to chang-
ing conditions—can be an important impetus for change and can help all members of an orga-
nization, including managers, effectively make decisions about needed changes.
Assessing the need for change calls for two important activities: recognizing that there is a
problem and identifying its source. Sometimes the need for change is obvious, such as when an
organization’s performance is suffering. Often, however, managers have trouble determining
that something is going wrong because problems develop gradually; organizational performance
may slip for a number of years before a problem becomes obvious. Thus during the first step
in the change process, managers need to recognize that there is a problem that requires change.
Often the problems that managers detect have produced a gap between desired perfor-
mance and actual performance. To detect such a gap, managers need to look at performance
measures—such as falling market share or profits, rising costs, or employees’ failure to meet
their established goals or stay within budgets—that indicate whether change is needed. These
measures are provided by organizational control systems, discussed earlier in the chapter.
To discover the source of the problem, managers need to look both inside and outside
the organization. Outside the organization, they must examine how changing environmental
forces may be creating opportunities and threats that are affecting internal work relationships.
Perhaps the emergence of low-cost competitors abroad has led to conflict among different
departments that are trying to find new ways to gain a competitive advantage. Managers also
need to look within the organization to see whether its structure is causing problems between
departments. Perhaps a company does not have integrating mechanisms in place to allow dif-
ferent departments to respond to low-cost competition.
DECIDING ON THE CHANGE TO MAKE Once managers have identified the source of the problem, they must decide what they think the organization’s ideal future state would
be. In other words, they must decide where they would like their organization to be in the
future—what kinds of goods and services it should be making, what its business-level strat-
egy should be, how the organizational structure should be changed, and so on. During this
step, managers also must plan how to attain the organization’s ideal future state.
This step in the change process also includes identifying obstacles or sources of resistance
to change. Managers must analyze the factors that may prevent the company from reaching
its ideal future state. Obstacles to change are found at the corporate, divisional, departmental,
and individual levels of the organization.
Corporate-level changes in an organization’s strategy or structure, even seemingly trivial
changes, may significantly affect how divisional and departmental managers behave. Sup-
pose that to compete with low-cost foreign competitors, top managers decide to increase the
resources spent on state-of-the-art machinery and reduce the resources spent on marketing
or R&D. The power of manufacturing managers would increase, and the power of market-
ing and R&D managers would fall. This decision would alter the balance of power among
Figure 11.7 Four Steps in the Organizational Change Process
•
•
Compare prechange performance with postchange performance. Use benchmarking.
Decide whether change will occur from the top down or from the bottom up. Introduce and manage change.
•
•
Decide what the organization's ideal future state would be. Identify obstacles to change.
•
•
Recognize that there is a problem. Identify the source of the problem.
•
•
Assess the need
for change
Decide on the
change to make Implement the change Evaluate the change
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338 Chapter Eleven
departments and might increase conflict as departments fight to retain their status in the orga-
nization. An organization’s present strategy and structure are powerful obstacles to change.
Whether a company’s culture is adaptive or inert facilitates or obstructs change. Organiza-
tions with entrepreneurial, flexible cultures, such as high-tech companies, are much easier
to change than are organizations with more rigid cultures, such as those sometimes found in
large, bureaucratic organizations like the military or GM.
The same obstacles to change exist at the divisional and departmental levels. Division
managers may differ in their attitudes toward the changes that top managers propose and, if
their interests and power seem threatened, will resist those changes. Managers at all levels
usually fight to protect their power and control over resources. Because departments have
different goals and time horizons, they may also react differently to the changes other man-
agers propose. When top managers are trying to reduce costs, for example, sales managers
may resist attempts to cut back on sales expenditures if they believe that problems stem from
manufacturing managers’ inefficiencies.
At the individual level, too, people often resist change because it brings uncertainty and
stress. For example, individuals may resist the introduction of a new technology because they
are uncertain about their abilities to learn it and effectively use it.
These obstacles make organizational change a slow process. Managers must recognize
the potential obstacles to change and take them into consideration. Some obstacles can be
overcome by improving communication so all organizational members are aware of the need
for change and of the nature of the changes being made. Empowering employees and invit-
ing them to participate in planning for change also can help overcome resistance and allay
employees’ fears. In addition, managers can sometimes overcome resistance by emphasiz-
ing group or shared goals such as increased organizational efficiency and effectiveness. The
larger and more complex an organization is, the more complex is the change process.
IMPLEMENTING THE CHANGE Generally, managers implement—that is, introduce and manage—change from the top down or from the bottom up.
89 Top-down change is imple-
mented quickly: Top managers identify the need for change, decide what to do, and then move
quickly to implement the changes throughout the organization. For example, top managers may
decide to restructure and downsize the organization and then give divisional and departmental
managers specific goals to achieve. With top-down change, the emphasis is on making the
changes quickly and dealing with problems as they arise; it is revolutionary in nature.
Bottom-up change is typically more gradual or evolutionary. Top managers consult with middle and first-line managers about the need for change. Then, over time, managers at all
levels work to develop a detailed plan for change. A major advantage of bottom-up change is
that it can co-opt resistance to change from employees. Because the emphasis in bottom-up
change is on participation and on keeping people informed about what is going on, uncer-
tainty and resistance are minimized. The accompanying “Managing Globally” feature pro-
vides an example of a change that leads to other changes.
top-down change A fast, revolutionary approach to
change in which top manag-
ers identify what needs to be
changed and then move quickly
to implement the changes
throughout the organization.
bottom-up change A grad- ual or evolutionary approach
to change in which managers
at all levels work together to
develop a detailed plan for
change.
Managing Globally
Changing Online Retailing with Virtusize Sometimes an organization can make one small change that cascades throughout the
organization, cutting costs and reallocating resources to important projects. In the
online apparel industry, one such small change could be a reduction in merchan-
dise returns. A company called Virtusize claims to reduce fit-related returns by
50 percent. 90
Before the Zappos policy of free returns, online shoppers paid to return ill-fitting
clothing and shoes. Then Zappos provided free returns and told customers to order
in multiple sizes and return the ones that did not fit. To compete, other online retail-
ers followed suit. Online shoppers now return between 20 and 30 percent of apparel
orders. 91
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Organizational Control and Change 339
EVALUATING THE CHANGE The last step in the change process is to evaluate how successful the change effort has been in improving organizational performance.
97 Using
measures such as changes in market share, in profits, or the ability of scientists to innovate
new drugs, managers compare how well an organization is performing after the change with
how well it was performing before. Managers also can use benchmarking , comparing their performance on specific dimensions with the performance of high-performing organiza-
tions to decide how successful a change effort has been. For example, when Xerox was
performing poorly in the 1980s, it benchmarked the efficiency of its distribution operations
against that of L.L.Bean, the efficiency of its central computer operations against that of
John Deere, and the efficiency of its marketing abilities against that of Procter & Gamble.
Those three companies are renowned for their skills in these different areas, and by study-
ing how they performed, Xerox was able to dramatically increase its own performance.
Benchmarking is a key tool in total quality management, an important change program
discussed in Chapter 9.
In summary, organizational control and change are closely linked because organizations
operate in environments that are constantly changing; so managers must be alert to the need
to change their strategies and structures. Managers of high-performing organizations are
attuned to the need to continually modify the way they operate, and they adopt techniques
like empowered work groups and teams, benchmarking, and global outsourcing to remain
competitive in a global world.
benchmarking The pro- cess of comparing one
company’s performance on
specific dimensions with the
performance of other high-
performing organizations.
Virtusize’s vision is to be “a global standard for
illustrating size and fit of clothes sold online”. 92
The
company helps online retailers show the size and fit of
clothing to online shoppers by illustrating the silhouette
of the garment, so there are fewer fit-related returns.
Virtusize is a web widget that lets the online shoppers
insert reference garments for different categories of
clothing, such as pants, jackets, shirts and dresses.
To insert a reference garment, there are two options.
The online shopper can enter measurements of a gar-
ment they already own or tag a previous purchase made
at one of the Virtusize connected stores. Virtusize will
then overlay the two silhouettes to help the online shop-
per to clearly see the difference in size and fit of the
garment they want to buy compared to the garment they
already own.
By decreasing the need for fit-related returns, com-
panies like Virtusize can save money for organizations
in at least two ways. 93
First, decreasing both the volume
of returns and the volume of re-ships to customers can save the organization shipping
costs. Nick Robertson, CEO of the global online fashion and beauty retailer ASOS,
estimates that a 1 percent reduction in returns would add $16 million to the com-
pany’s bottom line. 94
Second, fewer fit-related returns mean fewer customer support
calls, reducing staff time in call centers.
But the savings to online retailers go beyond shipping and customer calls. If an
online retailer has fewer returns to handle, the retailer can carry less necessary inven-
tory, which saves on warehousing and delivery logistics costs. 95
Also, more intan-
gibly, when customers do not have to return their online orders, their satisfaction
increases and they may be more willing to buy from the retailer again. 96
With the monetary savings provided by reduced fit-related returns, organizations
can shift their focus to other efforts, such as improving customer service or develop-
ing new products. Just one small change in the supply chain can mean big change
throughout the organization.
A page from the Virtusize website. The company helps online
retailers show the size and fit of clothing by comparing an
item silhouette to a reference silhouette with the shopper’s
own measurements.
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340 Chapter Eleven
WHAT IS ORGANIZATIONAL CONTROL? Controlling is the pro- cess whereby managers monitor and regulate how efficiently and effec-
tively an organization and its members are performing the activities
necessary to achieve organizational goals. Controlling is a four-step pro-
cess: (1) establishing performance standards, (2) measuring actual perfor-
mance, (3) comparing actual performance against performance standards, and (4) evaluating
the results and initiating corrective action if needed.
OUTPUT CONTROL To monitor output or performance, managers choose goals or per- formance standards that they think will best measure efficiency, quality, innovation, and
responsiveness to customers at the corporate, divisional, departmental or functional, and indi-
vidual levels. The main mechanisms that managers use to monitor output are financial mea-
sures of performance, organizational goals, and operating budgets.
BEHAVIOR CONTROL In an attempt to shape behavior and induce employees to work toward achieving organizational goals, managers use direct supervision, management by
objectives, and bureaucratic control by means of rules and standard operating procedures.
CLAN CONTROL Clan control is the control exerted on individuals and groups by shared values, norms, and prescribed standards of behavior. An organization’s culture is deliber-
ately fashioned to emphasize the values and norms top managers believe will lead to high
performance.
ORGANIZATIONAL CHANGE There is a need to balance two opposing forces in the control process that influences the way organizations change. On one hand, managers need to
be able to control organizational activities and make their operations routine and predictable.
On the other hand, organizations have to be responsive to the need to change, and managers
must understand when they need to depart from routines to be responsive to unpredictable
events. The four steps in managing change are (1) assessing the need for change, (2) deciding
on the changes to make, (3) implementing change, and (4) evaluating the results of change.
Summary and Review
LO11-1, 11-2
LO11-3
LO11-4
LO11-5
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341
Management in Action Topics for Discussion and Action
Discussion
1. What is the relationship between organizing and controlling? [LO11-1]
2. How do output control and behavior control differ? [LO11-2, 11-3]
3. Why is it important for managers to involve subordinates in the control process? [LO11-3, 11-4]
4. What kind of controls would you expect to find most used in (a) a hospital, (b) the Navy, and (c) a city
police force? Why? [LO11-2, 11-3, 11-4]
5. What are the main obstacles to organizational change? What techniques can managers use to
overcome these obstacles? [LO11-1, 11-5]
Action
6. Ask a manager to list the main performance measures that he or she uses to evaluate how well
the organization is achieving its goals. [LO11-1, 11-3, 11-4]
7. Ask the same or a different manager to list the main forms of output control and behavior control that
he or she uses to monitor and evaluate employee
behavior. [LO11-3, 11-4]
Building Management Skills Understanding Controlling [LO11-1, 11-3, 11-4]
For this exercise you will analyze the control systems
used by a real organization such as a department store,
restaurant, hospital, police department, or small busi-
ness. It can be the organization that you investigated
in Chapter 10 or a different one. Your objective is to
uncover all the different ways in which managers moni-
tor and evaluate the performance of the organization and
employees.
1. At what levels does control take place in this organization?
2. Which output performance standards (such as financial measures and organizational goals) do
managers use most often to evaluate performance at
each level?
3. Does the organization have a management by objectives system in place? If it does, describe it. If it
does not, speculate about why not.
4. How important is behavior control in this organization? For example, how much of managers’ time is spent
directly supervising employees? How formalized is the
organization? Do employees receive a book of rules to
teach them how to perform their jobs?
5. What kind of culture does the organization have? What are the values and norms? What effect does
the organizational culture have on the way employees
behave or treat customers?
6. Based on this analysis, do you think there is a fit between the organization’s control systems and its culture? What
is the nature of this fit? How could it be improved?
Managing Ethically [LO11-1, 11-5]
S ome managers and organizations go to great lengths to monitor their employees’ behavior, and they keep exten- sive records about employees’ behavior and performance.
Some organizations also seem to possess norms and values
that cause their employees to behave in certain ways.
Questions
1. Either by yourself or in a group, think about the ethical implications of organizations’ monitoring
and collecting information about their employees.
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Small Group Breakout Exercise How Best to Control the Sales Force? [LO11-1, 11-3, 11-5] Form groups of three or four people, and appoint one member as the spokesperson who will communicate your findings to the class when called on by the instructor. Then discuss the following scenario:
Y ou are the regional sales managers of an organization that supplies high-quality windows and doors to build- ing supply centers nationwide. Over the last three years,
the rate of sales growth has slackened. There is increasing
evidence that, to make their jobs easier, salespeople are
primarily servicing large customer accounts and ignoring
small accounts. In addition, the salespeople are not deal-
ing promptly with customer questions and complaints, and
this inattention has resulted in poor after-sales service. You
have talked about these problems, and you are meeting
to design a control system to increase both the amount of
sales and the quality of customer service.
1. Design a control system that you think will best motivate salespeople to achieve these goals.
2. What relative importance do you put on (a) output control, (b) behavior control, and (c) organizational
culture in this design?
Exploring the World Wide Web [LO11-1, 11-5]
Go to the website of Fortune ’s 100 Best Companies to Work For. Check out a few of the different companies on the list. Read a few of the “What makes it so great?”
profiles.
1. Do you notice any common values and norms in the top companies?
2. Is there anything about a particular company’s culture or structure that would make you want to work there?
Be the Manager
Y ou have been asked by your company’s CEO to find a way to improve the performance of its teams of web design and web hosting specialists and program-
mers. Each team works on a different aspect of website
production; and while each is responsible for the quality
of its own performance, its performance also depends
on how well the other teams perform. Your task is to cre-
ate a control system that will help to increase the perfor-
mance of each team separately and facilitate cooperation
among the teams. This is necessary because the vari-
ous projects are interlinked and affect one another just
as the different parts of a car must fit together. Because
competition in the website production market is intense,
it is imperative that each website be up and running
as quickly as possible and incorporate all the latest
advances in website software technology.
Questions
1. What kind of output controls will best facilitate positive interactions both within the teams and among
the teams?
2. What kind of behavior controls will best facilitate positive interactions both within the teams and among
the teams?
3. How would you help managers develop a culture to promote high team performance?
What kinds of information is it ethical or unethical to
collect? Why? Should managers and organizations
tell subordinates they are collecting such information?
2. Similarly, some organizations’ cultures seem to develop norms and values that cause their members
to behave in unethical ways. When and why does
a strong norm that encourages high performance
become one that can cause people to act unethically?
How can organizations keep their values and norms
from becoming “too strong”?
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