do you know Organization Theory?

14 Part 1: Introduction to Organizations

From Multinationals to Nonprofits

Some organizations are large, multinational corporations; others are small, family- owned businesses; and still others are nonprofit organizations or governmental agencies. Some manufacture products such as automobiles, flat-panel televisions, or light bulbs, whereas others provide services such as legal representation, Internet and telecommunications services, mental health resources, or car repair. Later in this text, Chapter 7 will look at the distinctions between manufacturing and service technologies. Chapter 9 discusses size and life cycle and describes some differences between small and large organizations.

Another important distinction is between for-profit businesses and nonprofit organizations. All of the topics in this text apply to nonprofit organizations such as the Salvation Army, the World Wildlife Fund, the Save the Children Foundation, and Chicago’s La Rabida Hospital, which is dedicated to serving the poor, just as they do to businesses such as Xerox, GameSpot, Sirius XM Radio, and Dunkin’ Donuts. However, there are some important distinctions to keep in mind. The primary difference is that managers in businesses direct their activities toward earning money for the company and its owners, whereas managers in nonprofits direct much of their effort toward generating some kind of social impact. The unique characteristics and needs of nonprofit organizations present unique challenges for organizational leaders.37

Financial resources for government and charity nonprofits typically come from government appropriations, grants, and donations rather than from the sale of products or services to customers. In businesses, managers focus on improving the organization’s products and services to increase sales revenues. In nonprofits, however, services are typically provided to nonpaying clients, and a major problem for many organizations is securing a steady stream of funds to continue operating. Nonprofit managers, committed to serving clients with limited funds, must focus on keeping organizational costs as low as possible and demonstrating a highly efficient use of resources. Moreover, for-profit firms often compete with nonprofits for lim- ited donations through their own philanthropic fundraising efforts.38

In addition, many nonprofit organizations, such as hospitals and private universities, do have a “bottom line” in the sense of having to generate enough revenues to cover expenses, buy new equipment, upgrade technology, and so forth, so managers often struggle with the question of what constitutes organizational effectiveness. It is easy to measure dollars and cents, but the metrics of success

exHiBiT 1.1 The Organization Is an Open System

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Products and

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OutputInput

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Raw materials People

Information Financial

resources

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 1: Organizations and Organization Design 15

in nonprofits are much more ambiguous. Managers have to measure intangible goals such as “improve public health,” “make a difference in the lives of the disenfranchised,” or “enhance appreciation of the arts.”

Managers in nonprofit organizations also deal with many diverse stakeholders and must market their services to attract not only clients (customers) but also volunteers and donors. This can sometimes create conflict and power struggles among organizations, as illustrated by the Make-A-Wish Foundation, which has found itself at odds with small, local wish-granting groups as it expands to cities across the United States. The more kids a group can count as helping, the easier it is to raise funds. Local groups don’t want Make-A-Wish invading their turf, particularly at a time when charitable donations in general have declined along with the declining economy. Small groups are charging that Make-A-Wish is abusing the power of its national presence to overwhelm or absorb the smaller organizations. “We should not have to compete for children and money,” says the director of the Indiana Children’s Wish Fund. “They [Make-A-Wish] use all their muscle and money to get what they want.”39

Thus, the organization design concepts discussed throughout this book, such as dealing with issues of power and conflict, setting goals and measuring effectiveness, coping with environmental uncertainty, implementing effective control mechanisms, and satisfying multiple stakeholders, apply to nonprofit organizations such as the Indiana Children’s Wish Fund just as they do to businesses such as Xerox. These concepts and theories are adapted and revised as needed to fit the unique needs and problems of various small, large, profit, or nonprofit organizations.

Importance of Organizations

It may seem hard to believe today, but organizations as we know them are relatively recent in the history of humankind. Even in the late nineteenth century there were few organizations of any size or importance—no labor unions, no trade associations, and few large businesses, nonprofit organizations, or governmental agencies. What a change has occurred since then! The development of large organizations transformed all of society, and, indeed, the modern corporation may be the most significant innovation of the past 100 years.40

Organizations are all around us and shape our lives in many ways. But what contributions do organizations make? Why are they important? Exhibit 1.2 indicates seven reasons organizations are important to you and to society. First, recall that an organization is a means to an end. Organizations bring together resources to accomplish specific goals. A good example is Northrup Grumman Newport News (formerly Newport News Shipbuilding), which builds nuclear-powered, Nimitz-class aircraft carriers. Putting together an aircraft carrier is an incredibly complex job involving 47,000 tons of precision-welded steel, more than 1 million distinct parts, 900 miles of wire and cable, and more than seven years of hard work by 17,800 employees.41 How could such a job be accomplished without an organization to acquire and coordinate these varied resources?

Organizations also produce goods and services that customers want at com- petitive prices. Companies look for innovative ways to produce and distribute desir- able goods and services more efficiently. Harley-Davidson once didn’t need to worry about efficiency, but the recent recession changed all that. The company’s York, Pennsylvania, factory improved efficiency by redesigning the production process.

Briefcase as an organization manager, keep this guideline in mind: Consider the needs and interests of all stake- holders when setting goals and designing the organization to achieve effectiveness.

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16 Part 1: Introduction to Organizations

Bring together resources

to achieve desired goals

Produce goods and services

ef�ciently

Facilitate innovation

Use modern manufacturing

and information technologies

Adapt to and in�uence a

rapidly changing environment

Accomodate challenges of

diversity, ethics, and coordination

Create value for owners, customers, employees

exHiBiT 1.2 Importance of Organizations

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Harley-Davidson has always charged a huge premium for its bikes, and customers were willing to pay the price and wait as long as 18 months to get a bike. It’s almost as if inefficiency was part of the charm. But by 2009, the inefficiency wasn’t charming anymore. Harley was close to collapse. The stock price had fallen from a high of nearly $75 to $8.

Managers struggled with what to do. For a company with an “American blue-collar, working brand,” busting the union or building motorcycles in Mexico would have been catastrophic. They knew the company could compete only by redesigning the production system to increase efficiency. They tore down the existing plant and built a new one, where hundreds of workers, operating in teams of five or six, manually build each motorcycle. It seems like an expensive way to do business, but plant manager Ed Magee points out that there are around 1,200 different configurations and a new bike starts its way through the production line every 80 seconds. Virtually each one is unique, and workers have no idea what’s coming 80 seconds later. Unlike robots, human beings can adjust on the fly. For example, one worker noticed that the plastic piece that holds electric parts to the front of a motorcycle wasn’t fitting correctly and took a few extra shoves to push into place. He knew those few extra shoves could add up to 2,200 lost bikes a year. With the worker’s help, Harley fixed that problem.

Harley’s very existence was threatened in 2009, but the York plant recently won an Industry Week Best Plants award. Customer demand is soaring now that people can get a bike within a couple of weeks of ordering rather than waiting a year and a half. Craig Kennison at the research firm Baird said “it’s certainly the best turnaround I’ve ever seen.”42

Although there are no robots on the main assembly line at Harley, they do per- orm various peripheral jobs. Managers have combined advanced technology with improved human systems to build motorcycles faster and better. Redesigning or- ganizational structures and management practices can also contribute to increased

In PractIce harley-

Davidson

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 1: Organizations and Organization Design 17

efficiency. Organizations create a drive for innovation rather than a reliance on stan- dard products and outmoded approaches to management and organization design.

Organizations adapt to and influence a rapidly changing environment. Consider Amazon, which continues to adapt and evolve along with the evolving Internet. Founder and CEO Jeff Bezos continues to push the boundaries of fast shipping, expanding next day and same day shipping service and building new warehouses and distribution cen- ters.43 Many organizations have entire departments charged with monitoring the exter- nal environment and finding ways to adapt to or influence that environment.

Through all of these activities, organizations create value for their owners, cus- tomers, and employees. Managers analyze which parts of the operation create value and which parts do not; a company can be profitable only when the value it creates is greater than the cost of resources.

Finally, organizations must cope with and accommodate today’s challenges of workforce diversity and growing concerns over ethics and sustainability, as well as find effective ways to motivate employees to work together to accomplish organizational goals.

Dimensions of Organization Design Organizations shape our lives, and well-informed managers can shape organiza- tions. The first step for understanding organizations is to look at the features that describe specific organizational design traits. These features describe organizations in much the same way that personality and physical traits describe people.

Exhibit 1.3 illustrates two types of interacting features of organizations: structural dimensions and contingency factors. structural dimensions provide labels to describe the internal characteristics of an organization. They create a basis for measuring and comparing organizations. Contingency factors encompass larger elements that

exHiBiT 1.3 Interacting Structural Dimensions of Design and Contingency Factors

Contingency Factors

Goals and Strategy

SizeEnvironment

TechnologyCulture Structural Dimensions

Formalization Specialization Hierarchy of authority Complexity

• • • •

Centralization • •

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18 Part 1: Introduction to Organizations

influence structural dimensions, including the organization’s size, technology, environment, culture, and goals. Contingency factors describe the organizational setting that influences and shapes the structural dimensions. Contingency factors can be confusing because they represent both the organization and the environment. These factors can be envisioned as a set of overlapping elements that shape an organization’s structure and work processes, as illustrated in Exhibit 1.3. To understand and evaluate organizations, one must examine both structural dimensions and contingency factors.44 These features of organization design interact with one another and can be adjusted to accomplish the purposes listed earlier in Exhibit 1.2.

structural Dimensions

Key structural dimensions of organizations include formalization, specialization, hierarchy of authority, complexity, and centralization.

1. Formalization pertains to the amount of written documentation in the organi- zation. Documentation includes procedures, job descriptions, regulations, and policy manuals. These written documents describe behavior and activities. For- malization is often measured by simply counting the number of pages of docu- mentation within the organization. Large universities, for example, tend to be high on formalization because they have several volumes of written rules for such things as registration, dropping and adding classes, student associations, dormitory governance, and financial assistance. A small, family-owned business, in contrast, may have almost no written rules and would be considered informal.

2. Specialization is the degree to which organizational tasks are subdivided into separate jobs. If specialization is extensive, each employee performs only a nar- row range of tasks. If specialization is low, employees perform a wide range of tasks in their jobs. Specialization is sometimes referred to as the division of labor.

3. Hierarchy of authority describes who reports to whom and the span of control for each manager. The hierarchy is depicted by the vertical lines on an organization chart, as illustrated in Exhibit 1.4. The hierarchy is related to span of control (the number of employees reporting to a supervisor). When spans of control are narrow, the hierarchy tends to be tall. When spans of control are wide, the hierarchy of authority will be shorter.

4. Complexity refers to the number of distinct departments or activities within the organization. Complexity can be measured along three dimensions: vertical, horizontal, and spatial. Vertical complexity is the number of levels in the hierar- chy. Different organizational levels possess different stores of knowledge and ex- pertise.45 Horizontal complexity is the number of departments or occupational specialties existing horizontally across the organization. Spatial complexity is the degree to which an organization’s departments and personnel are dispersed geographically. The organization in Exhibit 1.4 has a vertical complexity of five levels. Its horizontal complexity at level 3 would be seven departments. Spatial complexity would be 1 since the offices are all in the same location.

5. Centralization refers to the hierarchical level that has authority to make decisions. When decision making is kept at the top level, the organization is centralized. When decisions are delegated to lower organizational levels, it is decentralized. Examples of organizational decisions that might be centralized or decentralized include purchasing equipment, establishing goals, choosing suppliers, setting prices, hiring employees, and deciding marketing territories.

To understand the importance of paying attention to structural dimensions of organization design, consider the following examples.

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Chapter 1: Organizations and Organization Design 19

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

20 Part 1: Introduction to Organizations

One newspaper reporter recently described Japan as “a rule-obsessed nation with a penchant for creating bureaucracy, designating titles and committees for even the most mundane of tasks.” When the fishing village of Minamisanriku was ravaged by a tsunami in the spring of 2011, that propensity served a valuable purpose. The creation of rules, procedures, and authority structures helped create a sense of normalcy and comfort at the Shizugawa Elementary School Evacuation Center, for example. The group of evacuees created six divisions to oversee various aspects of daily life, such as cooking, cleaning, inventory control, and medical care, and each function had detailed rules and procedures to follow. The cleaning crews, for instance, followed an instruction sheet describing in minute detail how to separate types of garbage and recyclables, how to replace the garbage bags, and so forth. The exhaustive and meticulous procedures kept the center running smoothly and helped people cope with a devastating situation. “The Japanese people are the type to feel more reassured the more rules are in place,” said Shintaro Goto, a 32-year-old actor and electrician who moved back to the village from Tokyo just months before the tsunami.

Contrast that smooth operation to what happened after a Transocean oil rig drilling a well for oil giant BP at Deepwater Horizon exploded in the Gulf of Mexico, killing 11 crew members and setting off an environmental disaster. Setting aside the question of what caused the explosion in the first place, once it happened the structure aboard the rig exacerbated the situation. Activities were so loosely organized that no one seemed to know who was in charge or what their level of authority and responsibility was. When the explosion occurred, confusion reigned. Twenty-three-year-old Andrea Fleytas issued a mayday (distress signal) over the radio when she realized no one else had done so, but she was chastised for overstepping her authority. One manager said he didn’t call for help because he wasn’t sure he had authorization to do so. Still another said he tried to call to shore but was told the order needed to come from someone else. Crew members knew the emergency shutdown needed to be triggered, but there was confusion over who had the authority to give the OK. As fire spread, several minutes passed before people received directions to evacuate. Again, an alarmed Fleytas turned on the public address system and announced that the crew was abandoning the rig. “The scene was very chaotic,” said worker Carlos Ramos. “There was no chain of command. Nobody in charge.”46

Contingency Factors

Understanding structural dimensions alone does not help us understand or appropri- ately design organizations. It is also necessary to look at contingency factors, includ- ing size, organizational technology, the external environment, goals and strategy, and organizational culture.

1. Size can be measured for the organization as a whole or for specific compo- nents, such as a plant or division. Because organizations are social systems, size is typically measured by the number of employees. Other measures such as total sales or total assets also reflect magnitude, but they do not indicate the size of the human part of the system.

2. Organizational technology refers to the tools, techniques, and actions used to transform inputs into outputs. It concerns how the organization actually pro- duces the products and services it provides for customers and includes such things as flexible manufacturing, advanced information systems, and the Internet. An automobile assembly line, a college classroom, and an overnight package delivery system are technologies, although they differ from one another.

3. The environment includes all elements outside the boundary of the organiza- tion. Key elements include the industry, government, customers, suppliers, and

In PractIce Shizugawa

elementary School

evacuation Center

and Bp transocean Deepwater horizon Oil

rig

Briefcase

as an organization manager, keep these guidelines in mind: think of the organiza- tion as a means to an end. It is a way to organize people and resources to accomplish a specific purpose. Describe the organiza- tion according to its degree of formalization, specialization, cen- tralization, complexity, and hierarchy. Look at contingency factors of size, technology, the environment, goals and strategy, and the organi- zational culture.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 1: Organizations and Organization Design 21

the financial community. The environmental elements that affect an organiza- tion the most are often other organizations.

4. The organization’s goals and strategy define the purpose and competitive tech- niques that set it apart from other organizations. Goals are often written down as an enduring statement of company intent. A strategy is the plan of action that describes resource allocation and activities for dealing with the environment and for reaching the organization’s goals. Goals and strategies define the scope of operations and the relationship with employees, customers, and competitors.

5. An organization’s culture is the underlying set of key values, beliefs, understand- ings, and norms shared by employees. These underlying values and norms may pertain to ethical behavior, commitment to employees, efficiency, or customer service, and they provide the glue to hold organization members together. An organization’s culture is unwritten but can be observed in its stories, slogans, ceremonies, dress, and office layout.

The five structural dimensions and five contingency factors discussed here are interdependent. Certain contingency factors will influence the appropriate degree of specialization, formalization, and so forth for the organization. For example, large organization size, a routine technology, and a stable environment all tend to create an organization that has greater formalization, specialization, and centralization. More detailed relationships among contingency factors and structural dimensions are explored throughout this book.

1an organization can be understood primarily by understanding the people who make it up. aNsWEr: Disagree. An organization has distinct characteristics that are independent of the nature of the people who make it up. All the people could be replaced over time while an organization’s structural dimen- sions and contingency factors would remain similar.

assess YouR answeR

The organizational features illustrated in Exhibit 1.3 provide a basis for measuring and analyzing characteristics that cannot be seen by the casual observer, and they reveal significant information about an organization. Consider, for example, the dimensions of Valve Software compared with those of Walmart and a governmental agency.

In PractIce Valve Software

Valve Software Corporation is a leader in the video game industry, with Counter-Strike, Half- Life 2, Left 4 Dead, Portal, and the popular digital distribution platform Steam. In September 2013, the United Kingdom’s WhatCulture online magazine ranked Gabe Newell, the co-founder of Valve, on its list of the “five richest tech billionaires who dropped out of univer- sity.” Newell acts as the CEO of Valve, but the company has been “boss free since 1996,” as its website proclaims. “It’s amazing what creative people can come up with when there’s nobody there telling them what to do.” Valve’s unique organization structure caused a minor media blitz after someone posted the employee handbook online in the spring of 2012, but Valve has been functioning smoothly without bosses since it was founded. Newell and co- founder Mike Harrington, former Microsoft employees, wanted to create a flat, fast organiza- tion that allowed employees maximum flexibility. It sounds like a dream for employees, but many people don’t adapt to the “no-structure structure” and leave for more traditional jobs. At Valve, everyone has a voice in making important decisions. Any employee can participate in hiring decisions, which are usually made by teams. There are no promotions, only new

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22 Part 1: Introduction to Organizations

Exhibit 1.5 illustrates several structural dimensions and contingency factors of Valve Software, Walmart, and the state arts agency. Valve is a small organization that ranks very low with respect to formalization and centralization and has a medium degree of specialization. Horizontal collaboration to serve customers with innovative products is emphasized over the vertical hierarchy. Walmart is much more formalized, specialized, and centralized, with a strong vertical hierarchy. Efficiency is more important than new products and services, so most activities are guided by standard regulations. The arts agency, in contrast to the other organizations, reflects its status as a small part of a large government bureaucracy. The agency is overwhelmed with rules and standard procedures. Rules are dictated from the top and communication flows down a strong vertical chain of command.

Structural dimensions and contingency factors can thus tell a lot about an organization and about differences among organizations. These various organization design features are examined in more detail in later chapters to determine the appropriate level of each structural dimension needed to perform effectively based on various contingency factors.

projects, with someone emerging as the de facto leader. Firings are rare, but teams decide together if someone isn’t working out. Team meetings are highly informal and people are invited to share feelings as well as business ideas.

Contrast Valve’s approach to that of Walmart, which achieves its competitive edge through internal cost efficiency. A standard formula is used to build each store, with uniform displays and merchandise. Walmart’s administrative expenses are the lowest of any chain. The distribution system is a marvel of efficiency. Goods can be delivered to any store in less than two days after an order is placed. Stores are controlled from the top, although store managers have some free- dom to adapt to local conditions. Employees follow standard procedures set by management and have little say in decision making. However, performance is typically high, and most employees consider that the company treats them fairly.

An even greater contrast is seen in many government agencies or nonprofit organizations that rely heavily on public funding. Most state humanities and arts agencies, for example, are staffed by a small number of highly trained employees, but workers are overwhelmed with rules and regulations and swamped by paperwork. Employees who have to implement rule changes often don’t have time to read the continuous stream of memos and still keep up with their daily work. Employees must require extensive reporting from their clients in order to make regular reports to a variety of state and federal funding sources.47

exHiBiT 1.5 Differing Characteristics of Three Organizations

Company: Technology: Size: Goals:

Valve Software Software development 105 people Innovation

Walmart Retailing 250,000 plus people Ef�ciency

State Arts Agency Government Agency 50–55 people Ef�ciency

Structural Characteristics:

Strong hierarchy of authority Specialization

Formalization Centralization

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Chapter 1: Organizations and Organization Design 23

Performance and Effectiveness Outcomes

The whole point of understanding structural dimensions and contingency factors is to design the organization in such a way as to achieve high performance and effectiveness. Managers adjust various aspects of the organization to most efficiently and effectively transform inputs into outputs and provide value. Efficiency refers to the amount of resources used to achieve the organization’s goals. It is based on the quantity of raw materials, money, and employees necessary to produce a given level of output. Effectiveness is a broader term, meaning the degree to which an organization achieves its goals.

To be effective, organizations need clear, focused goals and appropriate strategies for achieving them. The concept of effectiveness, including goals and strategies and various approaches to measuring effectiveness, will be discussed in detail in Chapter 2. Many organizations apply new technology to improve efficiency and effectiveness. A physician’s office in Philadelphia increased efficiency by using information technology to reduce paperwork and streamline procedures, enabling the practice to handle more patients with three fewer office employees. The new system improved effectiveness too. Staff can locate information more quickly and make fewer mistakes, leading to a higher quality of care and better customer service.48

Achieving effectiveness is not always a simple matter because different people want different things from the organization. For customers, the primary concern is high-quality products and services provided in a timely manner at a reasonable price, whereas employees are mostly concerned with adequate pay, good working conditions, and job satisfaction. Managers carefully balance the needs and interests of various stakeholders in setting goals and striving for effectiveness. This is referred to as the stakeholder approach, which integrates diverse organizational activities by looking at various organizational stakeholders and what they want from the organization. A stakeholder is any group within or outside of the organization that has a stake in the organization’s performance. The satisfaction level of each group can be assessed as an indication of the organization’s performance and effectiveness.49 For example, in contrast to the view of government offices as bureaucratic quagmires of inefficiency run by lazy managers, the Hudson Street passport office in lower Manhattan gets glowing reviews on Yelp and other online rating sites. Michael Hoffman, director of the Hudson Street passport office, has a goal of giving customers exactly what they want. Even though he has to deal with some degree of specialization and standardization, he also has discretion in how he manages employees and runs the office. Hoffman has organized the office waiting and work areas in such a way that people and work flow smoothly. He also coaches and supports employees and gives them the resources and discretion to do their jobs without approval from managers when possible. The Hudson Street passport office is a clear example that good organization design and management make a tremendous difference.50

2 the primary role of managers in business organizations is to achieve maximum efficiency. aNsWEr: Disagree. Efficiency is important, but organizations must respond to a variety of stakeholders, who may want different things from the organization. Managers strive for both efficiency and effec- tiveness in trying to meet the needs and interests of stakeholders. Effectiveness is often considered more important than efficiency.

assess YouR answeR

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24 Part 1: Introduction to Organizations

Exhibit 1.6 illustrates various stakeholders and what each group wants from the organization. Stakeholder interests sometimes conflict, and organizations often find it difficult to simultaneously satisfy the demands of all groups. A business might have high customer satisfaction, but the organization might have difficulties with creditors or supplier relationships might be poor. Consider Walmart. Customers love its efficiency and low prices, but the low-cost emphasis has caused friction with suppliers. Some activist groups argue that Walmart’s tactics are unethical because they force suppliers to lay off workers, close factories, and outsource to manufac- turers from low-wage countries. One supplier said clothing is being sold at Walmart so cheaply that many U.S. companies couldn’t compete even if they paid their work- ers nothing. The challenges of managing such a huge organization have also led to strains in relationships with employees and other stakeholder groups, as evidenced by recent gender discrimination suits and complaints about low wages and poor benefits.51 The example of Walmart provides a glimpse of how difficult it can be for managers to satisfy multiple stakeholders. In all organizations, managers have to evaluate stakeholder concerns and establish goals that can achieve at least minimal satisfaction for major stakeholder groups.

the Evolution of Organization Design Organization design is not a collection of facts; it is a way of thinking about organizations and how people and resources are organized to collectively accomplish a specific purpose.52 Organization design is a way to see and analyze organizations

exHiBiT 1.6 Major Stakeholder Groups and What They Expect

EMPLOYEES • • •

Satisfaction Pay

Supervision

OWNERS AND STOCKHOLDERS • Financial return

SUPPLIERS • • Satisfactory transactions

Revenue from purchases

COMMUNITY • •

Good corporate citizen Contribution to community affairs

UNION • • Worker pay

Bene…ts

CUSTOMERS • • •

High-quality goods, services Service

Value

CREDITORS • • Creditworthiness Fiscal responsibility

GOVERNMENT •

•

Obedience to laws and regulations

Fair competition

MANAGEMENT • • Ef…ciency

Effectiveness

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Chapter 1: Organizations and Organization Design 25

more accurately and deeply than one otherwise could. The way to see and think about organizations is based on patterns and regularities in organizational design and behavior. Organization scholars search for these regularities, define them, measure them, and make them available to the rest of us. The facts from the research are not as important as the general patterns and insights into organizational functioning gained from a comparative study of organizations. Insights from organization design research can help managers improve organizational efficiency and effectiveness, as well as strengthen the quality of organizational life.53 One area of insight is how organization design and management practices have varied over time in response to changes in the larger society.

historical Perspectives

You may recall from an earlier management course that the modern era of manage- ment theory began with the classical management perspective in the late nineteenth and early twentieth century. The emergence of the factory system during the Indus- trial Revolution posed problems that earlier organizations had not encountered. As work was performed on a much larger scale by a larger number of workers, people began thinking about how to design and manage work in order to increase produc- tivity and help organizations attain maximum efficiency. The classical perspective, which sought to make organizations run like efficient, well-oiled machines, is associ- ated with the development of hierarchy and bureaucratic organizations and remains the basis of much of modern management theory and practice. In this section, we will examine the classical perspective, with its emphasis on efficiency and organization, as well as other perspectives that emerged to address new concerns, such as employee needs and the role of the environment. Elements of each perspective are still used in organization design, although they have been adapted and revised to meet chang- ing needs. These different perspectives can also be associated with different ways in which managers think about and view the organization, called manager frame of reference. Complete the questionnaire in the “How Do You Fit the Design?” box on page 26 to understand your frame of reference.

Efficiency Is Everything. Pioneered by Frederick Winslow Taylor, scientific management emphasizes scientifically determined jobs and management practices as the way to improve efficiency and labor productivity. Taylor proposed that workers “could be retooled like machines, their physical and mental gears recalibrated for better productivity.”54 He insisted that management itself would have to change and emphasized that decisions based on rules of thumb and tradition should be replaced with precise procedures developed after careful study of individual situations.55 To use this approach, managers develop precise, standard procedures for doing each job, select workers with appropriate abilities, train workers in the standard procedures, carefully plan work, and provide wage incentives to increase output.

Taylor’s approach is illustrated by the unloading of iron from railcars and reloading finished steel for the Bethlehem Steel plant in 1898. Taylor calculated that with correct movements, tools, and sequencing, each man was capable of loading 47.5 tons per day instead of the typical 12.5 tons. He also worked out an incentive system that paid each man $1.85 per day for meeting the new standard, an increase from the previous rate of $1.15. Productivity at Bethlehem Steel shot up overnight. These insights helped to establish organizational assumptions that the role of management is to maintain stability and efficiency, with top managers doing the thinking and workers doing what they are told.

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26 Part 1: Introduction to Organizations

hOW DO YOU FIt thE DEsIgN?

EvOLUtION OF stYLE This questionnaire asks you to describe yourself. For each item, give the number “4” to the phrase that best describes you, “3” to the item that is next best, and on down to “1” for the item that is least like you.

1. My strongest skills are: a. Analytical skills b. Interpersonal skills c. Political skills d. Flair for drama

2. The best way to describe me is: a. Technical expert b. Good listener c. Skilled negotiator d. Inspirational leader

3. What has helped me the most to be successful is my ability to:

a. Make good decisions b. Coach and develop people c. Build strong alliances and a power base d. Inspire and excite others

4. What people are most likely to notice about me is my:

a. Attention to detail b. Concern for people c. Ability to succeed in the face of conflict and

opposition d. Charisma

5. My most important leadership trait is: a. Clear, logical thinking b. Caring and support for others c. Toughness and aggressiveness d. Imagination and creativity

6. I am best described as: a. An analyst b. A humanist c. A politician d. A visionary

scoring: Compute your scores according to the following rater. The higher score represents your way of viewing the organization and will influence your management style.

Structure = 1a + 2a + 3a + 4a + 5a + 6a = Human Resource = 1b + 2b + 3b + 4b + 5b + 6b =

Political = 1c + 2c + 3c + 4c + 5c + 6c = Symbolic = 1d + 2d + 3d + 4d + 5d + 6d =

Interpretation: Organization managers typically view their world through one or more mental frames of reference. (1) The structural frame of reference sees the organization as a machine that can be economically efficient with vertical hierarchy and routine tasks that give a manager the formal authority to achieve goals. This manager way of thinking became strong during the era of scientific management when efficiency was everything. (2) The human resource frame sees the organization as its people, with manager emphasis given to support, empowerment, and belonging. This manager way of thinking gained importance after the Hawthorne Studies. (3) The political frame sees the organization as a competition for scarce resources to achieve goals, with manager emphasis on building agreement among diverse groups. This manager way of thinking reflects the need for organizations to share information, have a collaborative strategy, and have all parts working together. (4) The symbolic frame sees the organization as theater, with manager emphasis on symbols, vision, culture, and inspiration. This manager way of thinking is important for managing an adaptive culture in a learning organization.

Which frame reflects your way of viewing the world? The first two frames of reference—structural and human resource—are important for newer managers at the lower and middle levels of an organization. These two frames usually are mastered first. As managers gain experience and move up the organization, they should acquire politi- cal and collaborative skills (Chapter 13) and also learn to use symbols to shape cultural values (Chapter 10). It is important for managers not to be stuck in one way of viewing the organization because their progress may be limited.

Source: Roy G. Williams and Terrence E. Deal, When Opposites Dance: Balancing the Manager and Leader Within (Palo Alto, CA: Davies-Black, 2003), pp. 24–28. Reprinted with permission.

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Chapter 1: Organizations and Organization Design 27

The ideas of creating a system for maximum efficiency and organizing work for maximum productivity are deeply embedded in our organizations. A Harvard Business Review article discussing innovations that shaped modern management puts scientific management at the top of its list of 12 influential innovations.56

how to get Organized. Another subfield of the classical perspective took a broader look at the organization. Whereas scientific management focused primarily on the technical core—on work performed on the shop floor—administrative principles looked at the design and functioning of the organization as a whole. For example, Henri Fayol proposed 14 principles of management, such as “each subordinate receives orders from only one superior” (unity of command) and “similar activities in an organization should be grouped together under one manager” (unity of direction). These principles formed the foundation for modern management practice and organization design.

The scientific management and administrative principles approaches were powerful and gave organizations fundamental new ideas for establishing high productivity and increasing prosperity. Administrative principles in particular contributed to the development of bureaucratic organizations, which emphasized designing and managing organizations on an impersonal, rational basis through such elements as clearly defined authority and responsibility, formal recordkeeping, and uniform application of standard rules. Although the term bureaucracy has taken on negative connotations in today’s organizations, bureaucratic characteristics worked extremely well for the needs of the Industrial Age. One problem with the classical perspective, however, is that it failed to consider the social context and human needs.

What about People? Early work on industrial psychology and human relations received little attention because of the prominence of scientific management. How- ever, a major breakthrough occurred with a series of experiments at a Chicago elec- tric company, which came to be known as the hawthorne studies. Interpretations of these studies at the time concluded that positive treatment of employees improved their motivation and productivity. The publication of these findings led to a revolu- tion in worker treatment and laid the groundwork for subsequent work examin- ing treatment of workers, leadership, motivation, and human resource management. These human relations and behavioral approaches added new and important con- tributions to the study of management and organizations.

However, the hierarchical system and bureaucratic approaches that developed during the Industrial Revolution remained the primary approach to organization design and functioning well into the 1980s. In general, this approach worked well for most organizations until the past few decades. During the 1980s, though, it began to cause problems. Increased competition, especially on a global scale, changed the playing field.57 North American companies had to find a better way.

Can Bureaucracies Be Flexible? The 1980s produced new corporate cultures that valued lean staff, flexibility and learning, rapid response to the customer, engaged employees, and quality products. Organizations began experimenting with teams, flattened hierarchies, and participative management approaches. For example, in 1983, a DuPont plant in Martinsville, Virginia, cut management layers from eight to four and began using teams of production employees to solve problems and take

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28 Part 1: Introduction to Organizations

over routine management tasks. The new design led to improved quality, decreased costs, and enhanced innovation, helping the plant be more competitive in a changed environment.58 Rather than relying on strict rules and hierarchy, managers began looking at the entire organizational system, including the external environment.

Since the 1980s, organizations have undergone even more profound and far- reaching changes. Flexible approaches to organization design have become preva- lent. Recent influences on the shifting of organization design include the Internet and other advances in communications and information technology; globalization and the increasing interconnection of organizations; the rising educational level of employees and their growing quality-of-life expectations; and the growth of knowl- edge- and information-based work as primary organizational activities.59

It all Depends: Key Contingencies

Many problems occur when all organizations are treated as similar, which was the case with scientific management and administrative principles that attempted to de- sign all organizations alike. The structures and systems that work in the retail divi- sion of a conglomerate will not be appropriate for the manufacturing division. The organization charts and financial procedures that are best for an entrepreneurial Internet firm like Pinterest will not work for a large food processing plant at Kraft or a large nonprofit organization such as the United Way.

A basic premise of this text is that effective organization design means understanding various contingencies and how organizations can be designed to fit contingency factors. Contingency means that one thing depends on other things, and for organizations to be effective there must be a “goodness of fit” between their design and various contingency factors.60 What works in one setting may not work in another setting. There is no “one best way.” Contingency theory means it depends. For example, a government agency may experience a certain environ- ment, use a routine technology, and desire efficiency. In this situation, a manage- ment approach that uses bureaucratic control procedures, a hierarchical structure, and formalized communications would be appropriate. Likewise, a free-flowing design and management processes work best in a high-tech company that faces an uncertain environment with a non-routine technology. The correct approach is con- tingent on the organization’s situation. In the following section, we examine two fundamental approaches to organization design, along with the typical contingency factors associated with each approach.

Briefcase as an organization manager, keep these guidelines in mind: Be cautious when ap- plying something that works in one situation to another situation. all organizational systems are not the same. Use organization design concepts to identify the correct structure and management systems for each organization.

3a CEO’s top priority is to make sure the organization is designed correctly. aNsWEr: Agree. Top managers have many responsibilities, but one of the most important is making sure the organization is designed correctly. Organization design organizes and focuses people’s work and shapes their response to customers and other stakeholders. Managers consider both structural dimensions and contingency factors as well as make sure the various parts of the organization work together to achieve important goals.

assess YouR answeR

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Chapter 1: Organizations and Organization Design 29

the Contrast of Organic and Mechanistic Designs Organizations can be categorized along a continuum ranging from a mechanistic design to an organic design. Tom Burns and G. M. Stalker first used the terms organic and mechanistic to describe two extremes of organization design after observing industrial firms in England.61 In general, a mechanistic design means that the organization is characterized by machine-like standard rules, procedures, and a clear hierarchy of authority. Organizations are highly formalized and are also centralized, with most decisions made at the top. An organic design means that the organization is much looser, free-flowing, and adaptive. Rules and regulations often are not written down or, if written down, are flexibly applied. People may have to find their own way through the system to figure out what to do. The hierarchy of authority is looser and not clear-cut. Decision-making authority is decentralized.

Various contingency factors will influence whether an organization is more effective with a primarily mechanistic or a primarily organic design. Exhibit 1.7 summarizes the differences in organic and mechanistic designs based on five elements: structure, tasks, formalization, communication, and hierarchy. The exhibit also lists the typical contingency factors associated with each type of design.

exHiBiT 1.7 The Contrast of Organic and Mechanistic Designs

Specialized Tasks

Vertical Communication

Many Rules, Formalized

Strict Hierarchy of Authority

Horizontal Communication

Few Rules, Informal

Collaborative Teamwork

Empowered Roles

Decentralized Structure

Mechanistic Design

Typical Contingency Factors: Large Size Ef�ciency Strategy Stable Environment Rigid Culture Manufacturing Technology

Typical Contingency Factors: Small Size Innovation Strategy Changing Environment Adaptive Culture Service Technology

Organic Design

Centralized Structure

Specialized Tasks

Vertical Communication

Many Rules, Formalized

Strict Hierarchy of Authority

Horizontal Communication

Few Rules, Informal

Collaborative Teamwork

Empowered Roles

Decentralized Structure

Mechanistic Design

Typical Contingency Factors: Large Size Ef�ciency Strategy Stable Environment Rigid Culture Manufacturing Technology

Typical Contingency Factors: Small Size Innovation Strategy Changing Environment Adaptive Culture Service Technology

Organic Design

Centralized Structure

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30 Part 1: Introduction to Organizations

• Centralized Versus Decentralized Structure. Centralization and decentralization pertain to the hierarchical level at which decisions are made. In a mechanistic design, the structure is centralized, whereas an organic design uses decentral- ized decision making. Centralization means that decision authority is located near the top of the organizational hierarchy. Knowledge and control of activities are centralized at the top of the organization, and employees are expected to do as they are told. With decentralization, decision-making authority is pushed down to lower organizational levels. In a highly organic organization, knowledge and control of activities are located with employees rather than with supervisors or top executives. People are encouraged to take care of problems by working with one another and with customers, using their discretion to make decisions.

• Specialized Tasks Versus Empowered Roles. A task is a narrowly defined piece of work assigned to a person. With a mechanistic design, tasks are broken down into specialized, separate parts, as in a machine, with each employee performing activities according to a specific job description. A role, in contrast, is a part in a dynamic social system. A role has discretion and responsibility, allowing the per- son to use his or her judgment and ability to achieve an outcome or meet a goal. In an organization with an organic design, employees play a role in the team or department and roles may be continually redefined or adjusted.

• Formal Versus Informal Systems. With a mechanistic design, there are numer- ous rules, regulations, and standard procedures. Formal systems are in place to manage information, guide communication, and detect deviations from estab- lished standards and goals. With an organic design, on the other hand, there are few rules or formal control systems. Communication and information sharing is informal.

• Vertical Versus Horizontal Communication. Mechanistic organizations empha- size vertical communication up and down the hierarchy. Top managers pass in- formation downward to employees about goals and strategies, job instructions, procedures, and so forth, and in turn ask that employees provide information up the hierarchy concerning problems, performance reports, financial information, suggestions and ideas, and so forth. In an organic organization, there is greater emphasis on horizontal communication, with information flowing in all direc- tions within and across departments and hierarchical levels. The widespread sharing of information enables all employees to have complete information about the company so they can act quickly. In addition, organic organizations maintain open lines of communication with customers, suppliers, and even com- petitors to enhance learning capability.

• Hierarchy of Authority Versus Collaborative Teamwork. In organizations with a mechanistic design, there is a close adherence to vertical hierarchy and the formal chain of command. Work activities are typically organized by common function from the bottom to the top of the organization and there is little collaboration across functional departments. The entire organization is controlled through the vertical hierarchy. An organic design, on the other hand, emphasizes collaborative teamwork rather than hierarchy. Structure is created around horizontal workflows or processes rather than departmental functions, with people working across department and organizational boundaries to solve problems. Organic design thus encourages intrapreneurship, so that people across the organization are coming up with and promoting new ideas that respond to needs of customers.62 Self-directed teams are the fundamental work unit in highly organic organizations.

Briefcase as an organization manager, keep these guidelines in mind: think about whether the organization should have a mostly mecha- nistic design (associ- ated with large size, efficiency strategy, a stable environment, a rigid culture, and a manufacturing technol- ogy) or a mostly organic design (associated with smaller size, innova- tion strategy, a chang- ing environment, an adaptive culture, and a service technology).

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Chapter 1: Organizations and Organization Design 31

Contemporary Design Ideas: radical Decentralization To some extent, organizations are still imprinted with the hierarchical, formalized, mechanistic approach that arose in the nineteenth century with Frederick Taylor. Yet current challenges require greater flexibility for most organizations. A few organizations, such as Valve Software, described earlier, have shifted to an extremely organic, “bossless” design. In fact, a few bossless work environments, such as W. L. Gore and the French company FAVI, have existed for decades, but this has become a real trend in recent years. For one thing, how and where work gets done has shifted in big ways because many people can easily work from home or other locations outside a regular office. At Symantec, for example, most employees used to work in cubicles but now many of them work from home or other remote locations scattered all over the world.63 Even for companies with people working on-site, new technology means that everyone can be wired into the heart of the organization.64 When everyone has access to the information they need and the training to make good decisions, having layers of managers just eats up costs and slows down response time.

Many bossless companies, such as Valve, Netflix (video streaming and rentals), and Atlassian (enterprise software) are in technology-related industries, but companies as diverse as GE Aviation (aviation manufacturing), W. L. Gore & Associates (best known for Gore-Tex fabrics), Whole Foods (supermarkets), and Semco (diversified manufacturing) have succeeded for years with bossless structures. Morning Star provides one of the most interesting examples of a bossless work environment.

In PractIce Morning Star

Chris Rufer, founder of Morning Star, the world’s largest tomato processor with three fac- tories that produce products for companies such as Heinz and Campbell Soup Company, believes if people can manage the complexities of their own lives without a boss, there is no reason they can’t manage themselves in the workplace. Rufer organized Morning Star, where 400 or so employees produce over $700 million a year in revenues, based on the principles of self-management:

• No one has a boss • Employees negotiate responsibilities with their peers • Everyone can spend the company’s money • There are no titles or promotions • Compensation is decided by peers

How does such a system work? As the company grew from the original 24 colleagues (as employees are called) to around 400, problems occurred. Some people had trouble working in an environment with no bosses and no hierarchy. Thus, Rufer created the Morning Star Self-Management Institute to provide training for people in the principles and systems of self-management. Every colleague now goes through training, in groups of 10 to 15 people, to learn how to work effectively as part of a team, how to handle the responsibilities of “planning, organizing, leading, and controlling” that are typically carried out by managers, how to balance freedom and accountability, how to understand and effectively communicate with others, and how to manage conflicts.

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32 Part 1: Introduction to Organizations

In a bossless work environment such as that at Morning Star, nobody gives or- ders, and nobody takes them. Accountability is to the customer and the team rather than to a manager. There can be many advantages to a bossless work environment, including increased flexibility, greater employee initiative and commitment, and bet- ter, faster decision making.66 However, bossless work environments also present new challenges. Costs may be lower because of reduced overhead, but money has to be invested in ongoing training and development for employees so they can work effectively within a bossless system and manage themselves. The culture also has to engage employees and support the non-hierarchical environment.

Framework for the Book How does a course in organization design differ from a course in management or organizational behavior? The answer is related to the concept called level of analysis.

Levels of analysis

Each organization is a system that is composed of various subsystems. Organization systems are nested within systems, and one level of analysis has to be chosen as the primary focus. Four levels of analysis normally characterize organizations, as illustrated in Exhibit 1.8. The individual human being is the basic building block of organizations. The human being is to the organization what a cell is to a

Today, every colleague writes a personal mission statement and is responsible for ac- complishing it, including obtaining whatever tools and resources are needed. That means anyone can order supplies and equipment, and colleagues are responsible for initiating the hiring process when they need more help. Every year, each individual negotiates a Colleague Letter of Understanding (CLOU) with the people most affected by his or her work. Every CLOU has a clearly defined set of metrics that enables people to track their progress in achieving goals and meeting the needs of colleagues. “Around here,” one colleague said, “nobody’s your boss and everybody’s your boss.”65

exHiBiT 1.8 Levels of Analysis in Organizations

External environment (interorganizational set, community)

Organization level of analysis

Group level of analysis

Individual level of analysis

Organization A

Department A Department B Department C

Organization B

Organization C

Organization D

Source: Based on Andrew H. Van De Ven and Diane L. Ferry, Measuring and Assessing Organizations (New York: Wiley, 1980), 8; and Richard L. Daft and Richard M. Steers, Organizations: A Micro/Macro Approach (Glenview, lL: Scott, Foresman, 1986), 8

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Chapter 1: Organizations and Organization Design 33

biological system. The next higher system level is the group or department. These are collections of individuals who work together to perform group tasks. The next level of analysis is the organization itself. An organization is a collection of groups or departments that combine into the total organization.

Organizations themselves can be grouped together into the next higher level of analysis, which is the interorganizational set and community. The inter- organizational set is the group of organizations with which a single organization interacts. Other organizations in the community make up an important part of an organization’s environment.

Organization design focuses on the organizational level of analysis, but with concern for groups and the environment. To explain the organization, one should look not only at its characteristics but also at the characteristics of the environment and of the departments and groups that make up the organization. The focus of this book is to help you understand organizations by examining their specific characteristics, the nature of and relationships among groups and departments that make up the organization, and the collection of organizations that make up the environment.

Are individuals included in organization design? Organization design does consider the behavior of individuals, but in the aggregate. People are important, but they are not the primary focus of analysis. Organization design is distinct from organizational behavior.

Organizational behavior is the micro approach to organizations because it focuses on the individuals within organizations as the relevant units of analysis. Organizational behavior examines concepts such as motivation, leadership style, and personality and is concerned with cognitive and emotional differences among people within organizations.

Organization theory and design is a macro examination of organizations because it analyzes the whole organization as a unit. Organization design is concerned with people aggregated into departments and organizations and with the differences in structure and behavior at the organization level of analysis. Organization design might be considered the sociology of organizations, while organizational behavior is the psychology of organizations.

Organization design is directly relevant to top- and middle-management con- cerns and partly relevant to lower management. Top managers are responsible for the entire organization and must set goals, develop strategy, interpret the external environment, and decide organization structure and design. Middle management is concerned with major departments, such as marketing or research, and must decide how the department relates to the rest of the organization. Middle managers must design their departments to fit work-unit technology and deal with issues of power and politics, intergroup conflict, and information and control systems, each of which is part of organization theory and design. Organization design is only partly con- cerned with lower management because this level of supervision is concerned with employees who operate machines, create services, or sell goods. Organization design is concerned with the big picture of the organization and its major departments.

Plan of the Book

The topics within the field of organization design are interrelated. Chapters are presented so that major ideas unfold in logical sequence. The framework that guides the organization of the book is shown in Exhibit 1.9. Part 1 introduces the basic idea of organizations as social systems and the essential concepts of organization design.

Briefcase as an organization manager, keep this guideline in mind: Make yourself a com- petent, influential manager by using the frameworks that orga- nization design provides to interpret and under- stand the organization around you.

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34 Part 1: Introduction to Organizations

exHiBiT 1.9 Framework for the Book

CHAPTER 1 Organizations and Organization Design

CHAPTER 2

CHAPTER 3

Strategy, Organization Design, and Effectiveness

Fundamentals of Organization Structure

CHAPTER 4

CHAPTER 5

CHAPTER 6

The External Environment

Interorganizational Relationships

Designing Organizations for the International Environment

CHAPTER 7 Manufacturing and Service Technologies

CHAPTER 8

CHAPTER 9

Technology for Control, Social Business, and Big Data

Organizational Size, Life Cycle, and Decline

CHAPTER 10

CHAPTER 11

CHAPTER 12

CHAPTER 13

Organizational Culture and Ethical Values

Innovation and Change

Decision-Making Processes

Con€ict, Power, and Politics

Part 1 Introduction to Organizations

Part 2 Organizational Purpose and Structural Design

Part 3 Open System Design Elements Part 4 Internal Design Elements

Part 5 Managing Dynamic Processes

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Chapter 1: Organizations and Organization Design 35

This discussion provides the groundwork for Part 2, which is about strategic management, goals and effectiveness, and the fundamentals of organization structure. This section examines how managers help the organization achieve its purpose, including the design of an appropriate structure, such as a functional, divisional, matrix, or horizontal structure. Part 3 looks at the various open system elements that influence organization structure and design, including the external environment, interorganizational relationships, and the global environment.

Parts 4 and 5 look at processes inside the organization. Part 4 describes how or- ganization design is related to the contingency factors of manufacturing and service technology, and organizational size and life cycle. Part 5 shifts to dynamic processes that exist within and between major organizational departments and includes topics such as innovation and change, culture and ethical values, decision-making pro- cesses, managing intergroup conflict, and power and politics.

Plan of Each Chapter

Each chapter begins with opening questions to immediately engage the student in the chapter content. Theoretical concepts are introduced and explained in the body of the chapter. Several In Practice segments are included in each chapter to illustrate the concepts and show how they apply to real organizations. Each chapter also contains a How Do You Fit the Design? questionnaire that draws students more deeply into a particular topic and enables them to experience organization design issues in a personal way. A BookMark is included in each chapter to present organizational issues that today’s managers face in the real world. These short book reviews discuss current concepts and applications to deepen and enrich the student’s understanding of organizations. The examples and book reviews illustrate the dramatic changes taking place in management thinking and practice. Key points for designing and managing organizations are highlighted in the Briefcase items throughout the chapter. Each chapter closes with a Design Essentials section that reviews and explains important theoretical concepts.

Design Essentials ■ Organization design provides tools to understand, design, and manage organi-

zations more effectively, including issues such as how to adapt to a changing environment, cope with increasing size and complexity, manage internal conflict and coordination, and shape the right kind of culture to meet goals.

■ Managers today face new challenges, including globalization, intense competition, rigorous scrutiny of ethical and green practices, the need for rapid response, and incorporating social business and big data.

■ Organizations are open systems that obtain inputs from the external environ- ment, add value through a transformation process, and discharge products and services back to the environment.

■ Organizations are highly important, and managers are responsible for shaping organizations to perform well and meet the needs of society. The structural dimensions of formalization, specialization, hierarchy of authority, complexity, and centralization and the contingency factors of size, organizational technology, environment, goals and strategy, and culture provide labels for measuring and

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36 Part 1: Introduction to Organizations

analyzing organizations. These characteristics vary widely from organization to organization. Subsequent chapters provide frameworks for analyzing organizations with these concepts.

■ Many types of organizations exist. One important distinction is between for- profit businesses, in which managers direct their activities toward earning money for the company, and nonprofit organizations, in which managers direct their efforts toward generating some kind of social impact. Managers strive to design organizations to achieve both efficiency and effectiveness. Effectiveness is complex because different stakeholders have different interests and needs that they want satisfied by the organization.

■ Organization design perspectives have varied over time. Managers can under- stand organizations better by gaining a historical perspective and by under- standing the contrast between organic and mechanistic designs.

■ Organization designs fall on a scale ranging from mechanistic to organic. A mech- anistic design is characterized by a centralized structure, specialized tasks, formal systems, vertical communication, and a strict hierarchy of authority. An organic design is characterized by a decentralized structure, empowered roles, informal systems, horizontal communication, and collaborative teamwork. Challenges in today’s environment are causing many organizations to shift to more organic de- signs, although mechanistic characteristics are still valuable for some situations.

■ Most concepts in organization theory and design pertain to the top- and middle- management levels of the organization. This book is concerned more with the topics of those levels than with the operational-level topics of supervision and motivation of employees, which are discussed in courses on organizational behavior.

KEY CONCEPts

administrative principles big data analytics bureaucratic organizations centralization contingency factors contingency decentralization effectiveness efficiency

Hawthorne Studies level of analysis mechanistic open system organic organization theory and design organizational behavior organizations role

scientific management social business social media programs stakeholder stakeholder approach structural dimensions sustainability task

DIsCUssION QUEstIONs

1. What is the definition of organization? Briefly explain each part of the definition as you understand it.

2. Describe some ways in which social business has influ- enced or affected an organization with which you are familiar, such as your college or university, a local re- tailer or restaurant, a volunteer organization, a club to which you belong, or even your family. Can you iden- tify both positive and negative aspects of this influence?

3. A handful of companies on the Fortune 500 list are more than 100 years old, which is rare. What

organizational characteristics do you think might ex- plain 100-year longevity?

4. Can an organization be efficient without being effec- tive? Can an inefficient organization still be an effective one? Explain your answers.

5. What is the difference between formalization and spe- cialization? Do you think an organization high on one dimension would also be high on the other? Discuss.

6. What does contingency mean? What are the implica- tions of contingency theory for managers?

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Chapter 1: Organizations and Organization Design 37

7. What are the primary differences between an organic and a mechanistic organization design? Which type of organi- zation do you think would be easier to manage? Discuss.

8. What does it mean to say an organization is an open system? How is the stakeholder approach related to the concept of open systems?

9. What are some differences one might expect among stakeholder expectations for a nonprofit organization

versus a for-profit business? Do you think nonprofit managers have to pay more attention to stakeholders than do business managers? Discuss.

10. Early management theorists believed that organiza- tions should strive to be logical and rational, with a place for everything and everything in its place. Discuss the pros and cons of this approach for today’s organizations.

ChaPtEr 1 WOrKshOP Measuring Dimensions of Organizations

Individually or in a small group of two, interview two em- ployees who are in different organizations or who are in the same organization but in different parts and doing different jobs. Ask each person to answer the following questions

on a four-point scale from Definitely False, Mostly False, Mostly True, Definitely True. You will be asked to analyze the patterns of scores for the two respondents.

Formalization

Definitely False

Mostly False

Mostly True

Definitely True

1. There is a written description for my job.

2. There is a chart showing where people are in the hierarchy.

3. There is a written record of each person’s job performance.

4. There is a written document that tells what to do in a crisis.

5. We have written procedures here for most situations.

Formalization Score . (Sum questions 1 to 5 giving four points for each Definitely True, three points for each Mostly True, two points for each Mostly False, and one point for each Definitely False.

Centralization Definitely

False Mostly False

Mostly True

Definitely True

6. A person who works in this job cannot expect to make all his or her own decisions.

7. Any decision I make has to have my boss’s approval.

8. Even small matters are typically referred to someone higher up for a decision.

9. I participate in the decision to hire staff at my level.

10. How things are done here is left up to the person doing the work.

Centralization Score . (Sum questions 6 to 8, giving four points for each Definitely True, three points for each Mostly True, two points for each Mostly False, and one point for each Definitely False. Reverse score items 9 and 10, giving one point for each Definitely True, two points for each Mostly True, three points for each Mostly False, and four points for each Definitely False.)

Technology (Work Variety)

Definitely False

Mostly False

Mostly True

Definitely True

11. My job has new things happening every day.

12. One thing around here is the high variety of work.

13. There is something different to do here every day.

14. The work here is very routine.

15. People like me do about the same job in the same way most of the time.

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38 Part 1: Introduction to Organizations

Technology Score _____. (Sum questions 11 to 13, giving four points for each Definitely True, three points for each Mostly True, two points for each Mostly False, and one point for each Definitely False. Reverse score items 14 and 15, giving one point for each Definitely True, two points for each Mostly True, three points for each Mostly False, and four points for each Definitely False.)

Questions 1. What are the main differences between the three scores

for the two people you interviewed? 2. Do you notice any patterns in the three scores, such as

a higher score on one characteristic is associated with a higher or lower score on another characteristic?

3. Which of the interviewees seemed more satisfied in their work? Do you think satisfaction is related to their scores on formalization, centralization, and technol- ogy? Explain.

CasE FOr aNaLYsIs | It Isn’t so simple: Infrastructure Change at royce Consulting67

The lights of the city glittered outside Ken Vincent’s twelfth- floor office. After nine years of late nights and missed holidays, Ken was in the executive suite with the words “ Associate Partner” on the door. Things should be easier now, but the proposed changes at Royce Consulting had been more challenging than he had expected. “I don’t understand,” he thought. “At Royce Consulting our clients, our people, and our reputation are what count, so why do I feel so much ten- sion from the managers about the changes that are going to be made in the office? We’ve analyzed why we have to make the changes. Heck, we even got an outside person to help us. The administrative support staff are pleased. So why aren’t the managers enthusiastic? We all know what the decision at tomorrow’s meeting will be—Go! Then it will all be over. Or will it?” Ken thought as he turned out the lights.

Background Royce Consulting is an international consulting firm whose clients are large corporations, usually with long-term con- tracts. Royce employees spend weeks, months, and even years working under contract at the client’s site. Royce consultants are employed by a wide range of industries, from manufacturing facilities to utilities to service busi- nesses. The firm has over 160 consulting offices located in 65 countries. At this location Royce employees included 85 staff members, 22 site managers, 9 partners and associate partners, 6 administrative support staff, 1 human resource professional, and 1 financial support person.

For the most part, Royce Consulting hired entry-level staff straight out of college and promoted from within. New hires worked on staff for five or six years; if they did well, they were promoted to manager. Managers were responsible for maintaining client contracts and assisting partners in creating proposals for future engagements. Those who were not promoted after six or seven years gen- erally left the company for other jobs.

Newly promoted managers were assigned an office, a major perquisite of their new status. During the previous year, some new managers had been forced to share an of- fice because of space limitations. To minimize the friction of sharing an office, one of the managers was usually as- signed to a long-term project out of town. Thus, practically speaking, each manager had a private office.

Infrastructure and Proposed Changes Royce was thinking about instituting a hoteling office system—also referred to as a “nonterritorial” or “free- address” office. A hoteling office system makes offices available to managers on a reservation or drop-in basis. Managers are not assigned a permanent office; instead, whatever materials and equipment the manager needs are moved into the temporary office. These are some of the features and advantages of a hoteling office system:

• No permanent office assigned • Offices are scheduled by reservations • Long-term scheduling of an office is feasible • Storage space would be located in a separate file room • Standard manuals and supplies would be maintained

in each office • Hoteling coordinator is responsible for maintaining

offices • A change in “possession of space” • Eliminates two or more managers assigned to the same

office • Allows managers to keep the same office if desired • Managers would have to bring in whatever files they

needed for their stay • Information available would be standardized regard-

less of office • Managers do not have to worry about “housekeeping

issues”

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Chapter 1: Organizations and Organization Design 39

The other innovation under consideration was an up- grade to state-of-the-art electronic office technology. All managers would receive a new notebook computer with up- dated communications capability to use Royce’s integrated and proprietary software. Also, as part of the electronic of- fice technology, an electronic filing system was considered. The electronic filing system meant information regarding proposals, client records, and promotional materials would be electronically available on the Royce Consulting network.

The administrative support staff had limited experi- ence with many of the application packages used by the managers. While they used word processing extensively, they had little experience with spreadsheets, communica- tions, or graphics packages. The firm had a graphics de- partment and the managers did most of their own work, so the administrative staff did not have to work with those application software packages.

Work Patterns Royce Consulting was located in a large city in the Midwest. The office was located in the downtown area, but it was easy to get to. Managers assigned to in-town projects often stopped by for a few hours at various times of the day. Man- agers who were not currently assigned to client projects were expected to be in the office to assist on current projects or work with a partner to develop proposals for new business.

In a consulting firm, managers spend a significant portion of their time at client sites. As a result, the office occupancy rate at Royce Consulting was about 40 to 60 percent. This meant that the firm paid lease costs for offices that were empty approximately half of the time. With the planned growth over the next 10 years, assigning permanent offices to every manager, even in doubled-up arrangements, was judged to be economically unnecessary given the amount of time offices were empty. The proposed changes would require managers and administrative sup- port staff to adjust their work patterns. Additionally, if a hoteling office system was adopted, managers would need to keep their files in a centralized file room.

Organizational Culture Royce Consulting had a strong organizational culture, and management personnel were highly effective at communi- cating it to all employees.

stability of Culture The culture at Royce Consulting was stable. The leadership of the corporation had a clear picture of who they were and what type of organization they were. Royce Consulting had positioned itself to be a leader in all areas of large business consulting. Royce Consulting’s CEO articulated the firm’s commitment to being client-centered. Everything that was done at Royce Consulting was because of the client.

training New hires at Royce Consulting received extensive training in the culture of the organization and the methodology em- ployed in consulting projects. They began with a structured program of classroom instruction and computer-aided courses covering technologies used in the various indus- tries in which the firm was involved. Royce Consulting recruited top young people who were aggressive and who were willing to do whatever was necessary to get the job done and build a common bond. Among new hires, cama- raderie was encouraged along with a level of competition. This kind of behavior continued to be cultivated through- out the training and promotion process.

Work relationships Royce Consulting employees had a remarkably similar out- look on the organization. Accepting the culture and norms of the organization was important for each employee. The norms of Royce Consulting revolved around high perfor- mance expectations and strong job involvement.

By the time people were made managers, they were aware of what types of behaviors were acceptable. Man- agers were formally assigned the role of coach to younger staff people, and they modeled acceptable behavior. Behav- ioral norms included when they came into the office, how late they stayed at the office, and the type of comments they made about others. Managers spent time checking on staff people and talking with them about how they were doing.

The standard for relationships was that of profession- alism. Managers knew they had to do what the partners asked and they were to be available at all times. A norms survey and conversations made it clear that people at Royce Consulting were expected to help each other with on-the- job problems, but personal problems were outside the realm of sanctioned relationships. Personal problems were not to interfere with performance on a job. To illustrate, vacations were put on hold and other kinds of commitments were set aside if something was needed at Royce Consulting.

Organizational values Three things were of major importance to the organiza- tion: its clients, its people, and its reputation. There was a strong client-centered philosophy communicated and prac- ticed. Organization members sought to meet and exceed customer expectations. Putting clients first was stressed. The management of Royce Consulting listened to its clients and made adjustments to satisfy the client.

The reputation of Royce Consulting was important to those leading the organization. They protected and enhanced it by focusing on quality services delivered by quality people. The emphasis on clients, Royce Consulting personnel, and the firm’s reputation was cultivated by developing a highly motivated, cohesive, and committed group of employees.

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40 Part 1: Introduction to Organizations

Management style and hierarchical structure The company organization was characterized by a direc- tive style of management. The partners had the final word on all issues of importance. It was common to hear state- ments like “Managers are expected to solve problems, and do whatever it takes to finish the job” and “Whatever the partners want, we do.” Partners accepted and asked for managers’ feedback on projects, but in the final analysis, the partners made the decisions.

Current situation Royce Consulting had an aggressive five-year plan that was predicated on a continued increase in business. Increases in the total number of partners, associate partners, managers, and staff were forecast. Additional office space would be required to accommodate the growth in staff; this would increase rental costs at a time when Royce’s fixed and vari- able costs were going up.

The partners, led by managing partner Donald Gray and associate partner Ken Vincent, believed that something had to be done to improve space utilization and the pro- ductivity of the managers and administrative personnel. The partners approved a feasibility study of the innova- tions and their impact on the company.

The ultimate decision makers were the partner group who had the power to approve the concepts and commit the required financial investment. A planning committee consisted of Ken Vincent; the human resources person; the financial officer; and an outside consultant, Mary Schrean.

the Feasibility study Within two working days of the initial meeting, all the partners and managers received a memo announcing the hoteling office feasibility study. The memo included a brief description of the concept and stated that it would include an interview with the staff. By this time, partners and man- agers had already heard about the possible changes and knew that Gray was leaning toward hoteling offices.

Interviews with the Partners All the partners were interviewed. One similarity in the comments was that they thought the move to hoteling of- fices was necessary, but they were glad it would not affect them. Three partners expressed concern about managers’ acceptance of the change to a hoteling system. The conclu- sion of each partner was that if Royce Consulting moved to hoteling offices, with or without electronic office tech- nology, the managers would accept the change. The rea- son given by the partners for such acceptance was that the managers would do what the partners wanted done.

The partners all agreed that productivity could be im- proved at all levels of the organization: in their own work as well as among the secretaries and the managers.

Partners acknowledged that current levels of informa- tion technology at Royce Consulting would not support the move to hoteling offices and that advances in electronic office technology needed to be considered.

Partners viewed all filing issues as secondary to both the office layout change and the proposed technology improvement. What eventually emerged, however, was that ownership and control of files was a major concern, and most partners and managers did not want anything centralized.

Interviews with the Managers Personal interviews were conducted with all ten managers who were in the office. During the interviews, four of the managers asked Schrean whether the change to hoteling offices was her idea. The managers passed the question off as a joke; however, they expected a response from her. She stated that she was there as an adviser, that she had not generated the idea, and that she would not make the final decision regarding the changes.

The length of time that these managers had been in their current positions ranged from six months to five years. None of them expressed positive feelings about the hoteling system, and all of them referred to how hard they had worked to make manager and gain an office of their own. Eight managers spoke of the status that the office gave them and the convenience of having a permanent place to keep their information and files. Two of the managers said they did not care so much about the status but were concerned about the convenience. One manager said he would come in less frequently if he did not have his own office. The managers believed that a change to hoteling offices would decrease their productivity. Two managers stated that they did not care how much money Royce Consulting would save on lease costs; they wanted to keep their offices.

However, for all the negative comments, all the man- agers said that they would go along with whatever the partners decided to do. One manager stated that if Royce Consulting stays busy with client projects, having a perma- nently assigned office was not a big issue.

During the interviews, every manager was enthusiastic and supportive of new productivity tools, particularly the improved electronic office technology. They believed that new computers and integrated software and productivity tools would definitely improve their productivity. Half the managers stated that updated technology would make the change to hoteling offices “a little less terrible,” and they wanted their secretaries to have the same software as they did.

The managers’ responses to the filing issue varied. The volume of files managers had was in direct proportion to their tenure in that position: The longer a person was a manager, the more files he or she had. In all cases, manag- ers took care of their own files, storing them in their offices and in whatever filing drawers were free.

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Chapter 1: Organizations and Organization Design 41

As part of the process of speaking with managers, their administrative assistants were asked about the pro- posed changes. Each of the six thought that the electronic office upgrade would benefit the managers, although they were somewhat concerned about what would be expected of them. Regarding the move to hoteling offices, each said that the managers would hate the change, but that they would agree to it if the partners wanted to move in that direction.

results of the survey A survey developed from the interviews was sent to all partners, associate partners, and managers two weeks af- ter the interviews were conducted. The completed survey was returned by 6 of the 9 partners and associate part- ners and 16 of the 22 managers. This is what the survey showed.

Work Patterns. It was “common knowledge” that managers were out of the office a significant portion of their time, but there were no figures to substantiate this belief, so the respondents were asked to provide data on where they spent their time. The survey results indicated that partners spent 38 percent of their time in the office; 54 percent at client sites; 5 percent at home; and 3 percent in other places, such as airports. Managers reported spending 32 percent of their time in the office, 63 percent at client sites, 4 percent at home, and 1 percent in other places.

For 15 workdays, the planning team also visually checked each of the 15 managers’ offices four times each day: at 9 a.m., 11 a.m., 2 p.m., and 4 p.m. These times were selected because initial observations indicated that these were the peak occupancy times. An average of six offices (40 percent of all manager offices) were empty at any given time; in other words, there was a 60 percent occupancy rate.

alternative Office Layouts. One of the alternatives out- lined by the planning committee was a continuation of and expansion of shared offices. Eleven of the managers responding to the survey preferred shared offices to hotel- ing offices. Occasions when more than one manager was in the shared office at the same time were infrequent. Eight managers reported 0 to 5 office conflicts per month; three managers reported 6 to 10 office conflicts per month. The type of problems encountered with shared offices included not having enough filing space, problems in directing tele- phone calls, and lack of privacy.

Managers agreed that having a permanently assigned office was an important perquisite. The survey confirmed the information gathered in the interviews about man- agers’ attitudes: All but two managers preferred shared

offices over hoteling, and managers believed their produc- tivity would be negatively impacted. The challenges facing Royce Consulting if they move to hoteling offices centered around tradition and managers’ expectations, file accessi- bility and organization, security and privacy issues, unpre- dictable work schedules, and high-traffic periods.

Control of Personal Files. Because of the comments made during the face-to-face interviews, survey respondents were asked to rank the importance of having personal control of their files. A five-point scale was used, with 5 being “strongly agree” and 1 being “strongly disagree.” Here are the responses:

Respondents Sample Rank

Partners 6 4.3

Managers:

0–1 year 5 4.6

2–3 years 5 3.6

4 years 6 4.3

Electronic technology. Royce Consulting had a basic net- work system in the office that could not accommodate the current partners and managers working at a remote site. The administrative support staff had a separate network, and the managers and staff could not communicate elec- tronically. Of managers responding to the survey, 95 per- cent wanted to use the network but only 50 percent could actually do so.

Option analysis A financial analysis showed that there were significant cost differences between the options under consideration:

Option 1: Continue private offices with some office sharing

• Lease an additional floor in existing building; annual cost, $360,000

• Build out the additional floor (i.e., construct, furnish, and equip offices and work areas): one-time cost, $600,000

Option 2: Move to hoteling offices with upgraded of- fice technology

• Upgrade office electronic technology: one-time cost, $190,000

Option 1 was expensive because under the terms of the existing lease, Royce had to commit to an entire floor if it wanted additional space. Hoteling offices showed an over- all financial advantage of $360,000 per year and a one- time savings of $410,000 over shared or individual offices.

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42 Part 1: Introduction to Organizations

the Challenge Vincent met with Mary Schrean to discuss the upcoming meeting of partners and managers, where they would present the results of the study and a proposal for action. Included in the report were proposed layouts for both shared and hoteling offices. Vincent and Gray were planning to recommend a hoteling office system, which would include storage areas, state-of-the-art electronic office technology for managers and administrative support staff, and centralized files. The rationale for their decision emphasized the amount of time that managers were out of the office and the high cost of maintaining the status quo and was built around the following points:

1. Royce’s business is different: offices are empty from 40 to 60 percent of the time.

2. Real estate costs continue to escalate. 3. Projections indicate there will be increased need for

offices and cost-control strategies as the business develops.

4. Royce Consulting plays a leading role in helping orga- nizations implement innovation.

“It’s still a go,” thought Vincent as he and the others returned from a break. “The cost figures support it and the growth figures support it. It’s simple—or is it? The decision is the easy part. What is it about Royce Consulting that will help or hinder its acceptance? In the long run, I hope we strengthen our internal processes and don’t hinder our effectiveness by going ahead with these simple changes.”

NOtEs

1. This case is based on Anthony Bianco and Pamela L. Moore, “Downfall: The Inside Story of the Management Fiasco at Xerox,” BusinessWeek, March 5, 2001, 82–92; Robert J. Grossman, “HR Woes at Xerox,” HR Magazine, May 2001, 34–45; Jeremy Kahn, “The Paper Jam from Hell,” Fortune, November 13, 2000, 141–146; Pamela L. Moore, “She’s Here to Fix the Xerox,” BusinessWeek, August 6, 2001, 47–48; Claudia H. Deutsch, “At Xerox, the Chief Earns (Grudging) Respect,” The New York Times, June 2, 2002, Section 3, 1, 12; Olga Kharif, “Anne Mulcahy Has Xerox by the Horns,” BusinessWeek Online, May 29, 2003; Amy Yee, “Xerox Comeback Continues to Thrive,” Financial Times, January 26, 2005, 30; George Anders, “Corporate News; Business: At Xerox, Jettisoning Dividend Helped Company Out of a Crisis,” The Asian Wall Street Journal, November 28, 2007, 6; Andrew Davidson, “Xerox Saviour in the Spotlight,” Sunday Times, June 1, 2008, 6; Betsy Morris, “The Accidental CEO,” Fortune, June 23, 2003, 58–67; Matt Hartley, “Copy That: Xerox Tries Again to Rebound,” The Globe and Mail, January 7, 2008, B1; Nanette Byrnes and Roger O. Crockett, “An Historic Succession at Xerox,” BusinessWeek, June 8, 2009, 18–22; William M. Bulkeley, “Xerox Names Burns Chief as Mulcahy Retires Early,” The Wall Street Journal, May 22, 2009, B1; Geoff Colvin, “C-Suite Strategies: Ursula Burns Launches Xerox Into the Future,” Fortune, April 22, 2010, http://money.cnn.com/2010/04/22/news/companies/xerox_ ursula_burns.-fortune/ (accessed July 1, 2011); Brian Bergstein, “Q+A Ursula Burns,” MIT Technology Review, February 20, 2013, http://www.technologyreview.com /featuredstory/511281/xeroxs-ceo-wants-tp-shake-up-the- services-market/ (accessed February 10, 2014); David Zax, “How Xerox Evolved From Copier Company to Creative Powerhouse,” Fast Company, December 11, 2013, http://www.fastcompany.com/3023240/most-creative -people/dreaming-together-how-xerox-keeps-big-ideas- flowing (accessed February 10, 2014); and “Xerox Positioned in the Visionaries Quadrant of Gartner’s 2013 Magic Quadrant for Enterprise Content Management,” Press Release, Xerox, October 17, 2013, http://news.xerox.com/news /Xerox-positioned-in-the-Visionaries-Quadrant-of-Gartners- 2013-Magic-Quadrant-for-ECM (accessed February 10, 2014).

2. Dana Mattioli, Joann S. Lublin, and Ellen Byron, “Kodak Struggles to Find Its Moment,” The Wall Street Journal, August 11, 2011, http://online.wsj.com/news/articles/SB100 01424053111903454504576488033424421882 (accessed September 24, 2014).

3. Ed O’Keefe, “Lieberman Calls for Wider Inquiry into Secret Service Scandal,” The Washington Post, April 23, 2012, A3; Laurie Kellman and Alicia A. Caldwell, “Inquiry Hears of Wider Secret Service Misbehavior,” The Salt Lake Tribune, May 25, 2012; and Evan Perez, “Secret Service Agents Sent Home after One Found Passed Out in Amsterdam,” CNN.com, March 26, 2014, http://www.cnn.com/2014/03/25/us/ secret- service-amsterdam/ (accessed March 26, 2014).

4. Damian Paletta and Dionne Searcey, “Inside IRS Unit Un- der Fire,” The Wall Street Journal, May 25, 2013, A1; and Nicholas Confessore, David Kocieniewski, and Michael Luo, “Confusion and Staff Troubles Rife at I.R.S. Office in Ohio,” The New York Times, May 18, 2013, http://www.nytimes .com/2013/05/19/us/politics/at-irs-unprepared-office-seemed -unclear-about-the-rules.html?pagewanted=all&_r=0 (accessed August 15, 2013).

5. Mike Ramsey and Evan Ramstad, “Once a Global Also-Ran, Hyundai Zooms Forward,” The Wall Street Journal, July 30, 2011, A1; Richard Siklos, “Bob Iger Rocks Disney,” Fortune, January 19, 2009, 80–86; Ellen Byron, “Lauder Touts Beauty Bargains,” The Wall Street Journal, May 5, 2009.

6. Harry G. Barkema, Joel A.C. Baum, and Elizabeth A. Mannix, “Management Challenges in a New Time,” Academy of Management Journal 45, no. 5 (2002), 916–930.

7. Gregory C. Unruh and Ángel Cabrera, “Join the Global Elite,” Harvard Business Review, May 2013, 135–139.

8. Mike Ramsey, “Ford’s CEO Revs up Auto Maker’s China Role,” The Wall Street Journal, April 16, 2013, B7.

9. Steven Greenhouse and Stephanie Clifford, “U.S. Retailers Offer Safety Plan for Bangladeshi Factories” The New York Times, July 10, 2013, http://www.nytimes.com/2013/07/11/ business/global/us-retailers-offer-safety-plan-for-bangladeshi- factories.html?pagewanted=all&_r=0 (accessed August 21, 2013); and Kate O’Keeffe and Sun Narin, “H&M Clothes Made in Collapsed Cambodian Factory,” The Wall Street Journal, May 21, 2013, http://online.wsj.com/article/SB10001

Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 1: Organizations and Organization Design 43

424127887324787004578497091806922254.html (accessed August 21, 2013).

10. Vanessa Fuhrmans, “Amazon Acts on German Controversy; Online Retailer Cuts Ties with Security Firm after a Televi- sion Documentary on Working Conditions,” The Wall Street Journal, February 19, 2013, B3; Eva Dou and Paul Mozur, “IPhone-Factory Deaths Dog Apple and Supplier,” The Wall Street Journal Online, December 11, 2013, http://online.wsj .com/news/articles/SB1000142405270230420220457925191 3898555706 (accessed February 10, 2014).

11. Keith H. Hammonds, “The New Face of Global Competi- tion,” Fast Company, February 2003, 90–97; and Pete E ngardio, Aaron Bernstein, and Manjeet Kripalani, “Is Your Job Next?” BusinessWeek, February 3, 2003, 50–60.

12. Pete Engardio, “Can the U.S. Bring Jobs Back from China?” BusinessWeek, June 30, 2008, 38ff.

13. Anna Prior and Don Clark, “Corporate News: Texas Instruments to Cut Jobs,” The Wall Street Journal, January 22, 2014, B2.

14. Janet Adamy, “McDonald’s Tests Changes in $1 Burger as Costs Rise,” The Wall Street Journal, August 4, 2008, B1.

15. Lavonne Kuykendall, “Auto Insurers Paying Up to Compete for Drivers,” The Wall Street Journal, April 9, 2008, B5.

16. Reported in Dan Kadlec, “Gordon Gekko Lives: New Evi- dence That Greed Is Rampant on Wall Street,” Time, July 17, 2013, http://business.time.com/2013/07/17/gordon-gekko -lives-new-evidence-that-greed-is-rampant-on-wall-street/ (accessed July 19, 2013).

17. Monica Langley and Dan Fitzpatrick, “Embattled J.P. Morgan Bulks Up Overnight,” The Wall Street Journal Online, September 12, 2013, http://online.wsj.com/news/articles/SB1 0001424127887324755104579071304170686532 (accessed February 11, 2014).

18. This definition is based on Marc J. Epstein and Marie-Josée Roy, “Improving Sustainability Performance: Specifying, Implementing and Measuring Key Principles,” Journal of General Management 29, no. 1, (Autumn 2003), 15–31; World Commission on Economic Development, Our Common Future (Oxford: Oxford University Press, 1987); and Marc Gunther, “Tree Huggers, Soy Lovers, and Profits,” Fortune, June 23, 2003, 98–104.

19. Steve Minter, “A Net Gain for Sustainable Manufacturing,” Industry Week, August 2013, 48.

20. Pinar Cankurtaran, Fred Langerak, and Abbie Giffin, “Consequences of New Product Development Speed: A Meta- Analysis,” Journal of Product Innovation Management 30, no. 3, (2013), 465–486.

21. Brad Kenney, “Callaway Improves Long Game with Collaborative Tech,” Industry Week, June 2008, 72.

22. Robert Safian, “Secrets of the Flux Leader,” Fast Company, November 2012, 96–136.

23. Quoted in Safian, “Secrets of the Flux Leader.” 24. This section is based partly on Fahri Karakas, “Welcome to

World 2.0: The New Digital Ecosystem,” Journal of Business Strategy 30, no. 4, (2009), 23–30.

25. Jacques Bughin, Michael Chui, and James Manyika, “ Capturing Business Value with Social Technologies,” McKinsey Quarterly, November 2012, http://www.mckinsey .com/insights/high_tech_telecoms_internet/capturing _business_value_with_social_technologies (accessed September 27, 2013).

26. Roland Deiser and Sylvain Newton, “Six Social-Media Skills Every Leader Needs,” McKinsey Quarterly, Issue 1, February 2013, http://www.mckinsey.com/insights/high

_tech_telecoms_internet/six_social-media_skills_every_leader_ needs (accessed August 21, 2013).

27. Ibid. 28. Leslie Gaines-Ross, “Get Social: A Mandate for New CEOs,”

MIT Sloan Management Review, March 7, 2013, http:// sloanreview.mit.edu/article/get-social-a-mandate-for-new- ceos/ ( accessed August 21, 2013).

29. Deiser and Newton, “Six Social Media Skills Every Leader Needs.” 30. Darrell K. Rigby, Management Tools 2013: An Executive’s

Guide (Bain & Company 2013), http://www.bain.com/Images /MANAGEMENT_TOOLS_2013_An_Executives_guide .pdf (accessed August 27, 2013); Margaret Rouse, “Big Data Analytics,” TechTarget.com, January 10, 2012, http:// searchbusinessanalytics.techtarget.com/definition/big-data- analytics (accessed August 27, 2013); and David Kiron, Renee Boucher Ferguson, and Pamela Kirk Prentice, “From Value to Vision: Reimagining the Possible with Data Analytics,” MIT Sloan Management Review Special Report, March 5, 2013, http://sloanreview.mit.edu/reports/analytics-innovation/ ( accessed August 27, 2013).

31. Steve Lohr, “Sure, Big Data Is Great. But So Is Intuition,” The New York Times, December 29, 2012.

32. Andrew McAfee and Erik Brynjolfsson, “Big Data: The Management Revolution,” Harvard Business Review, October 2012, 61–68.

33. Lohr, “Sure, Big Data Is Great. But So Is Intuition.” 34. McAfee and Brynjolfsson, “Big Data: The Management

Revolution.” 35. Howard Aldrich, Organizations and Environments

( Englewood Cliffs, N.J.: Prentice Hall, 1979), 3. 36. Royston Greenwood and Danny Miller, “Tackling Design

Anew: Getting Back to the Heart of Organizational Theory,” Academy of Management Perspectives, November 2010, 78–88.

37. This section is based on Peter F. Drucker, Managing the Non- Profit Organization: Principles and Practices (New York: HarperBusiness, 1992); Thomas Wolf, Managing a Nonprofit Organization (New York: Fireside/Simon & Schuster, 1990); and Jean Crawford, “Profiling the Non-Profit Leader of To- morrow,” Ivey Business Journal, May–June 2010.

38. Christine W. Letts, William P. Ryan, and Allen Grossman, High Performance Nonprofit Organizations (New York: John Wiley & Sons, Inc., 1999), 30–35; Crawford, “Profiling the Non-Profit Leader of Tomorrow.”

39. Lisa Bannon, “Dream Works: As Make-a-Wish Expands Its Turf, Local Groups Fume,” The Wall Street Journal, July 8, 2002, A1, A8.

40. Robert N. Stern and Stephen R. Barley, “Organizations and Social Systems: Organization Theory’s Neglected Mandate,” Administrative Science Quarterly 41, (1996), 146–162.

41. Philip Siekman, “Build to Order: One Aircraft Carrier,” Fortune, July 22, 2002, 180[B]–180[J].

42. Adam Davidson, “Building a Harley Faster,” New York Times Magazine, January 28, 2014, http://www.nytimes .com/2014/02/02/magazine/building-a-harley-faster.html? _r=0 (accessed February 12, 2014).

43. Lindsey Kratochwill, “02: Amazon: For Speeding Up the Delivery of Change,” Fast Company (part of the section “The Most Innovative Companies 2013”) http://www .fastcompany.com/most-innovative-companies/2013/amazon (accessed February 12, 2014).

44. The discussion of structural dimensions and contin- gency factors was heavily influenced by Richard H. Hall,

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44 Part 1: Introduction to Organizations

Organizations: Structures, Processes, and Outcomes ( Englewood Cliffs, N.J.: Prentice Hall, 1991); D. S. Pugh, “The Measurement of Organization Structures: Does Context Determine Form?” Organizational Dynamics 1 (Spring 1973), 19–34; and D. S. Pugh, D. J. Hickson, C. R. Hinings, and C. Turner, “Dimensions of Organization Structure,” Administra- tive Science Quarterly 13, (1968), 65–91.

45 This discussion is based in part on Virpi Turkulainen and Mikko Kitokivi, “The Contingent Value of Organizational Integration,” Journal of Organization Design 2, no. 2, (2013), 31–43.

46. Daisuke Wakabayashi and Toko Sekiguchi, “Disaster in Japan: Evacuees Set Rules to Create Sense of Normalcy,” The Wall Street Journal, March 26, 2011, A8; Ian Urbina, “In Gulf, It Was Unclear Who Was in Charge of Oil Rig,” The New York Times, June 6, 2010, A1; Douglas A. Blackmon, Vanessa O’Connell, Alexandra Berzon, and Ana Campoy, “There Was ‘Nobody in Charge,’” The Wall Street Journal, May 27, 2010, http://online.wsj.com/articles/SB10001424052748704113 504575264721101985024 (accessed September 29, 2014); and Campbell Robertson, “Efforts to Repel Gulf Oil Spill Are Described as Chaotic,” The New York Times, June 14, 2010, http://www.nytimes.com/2010/06/15/science/earth/15cleanup .html?pagewanted=all (accessed September 29, 2014).

47. “5 Richest Tech Billionaires Who Dropped Out of Univer- sity,” WhatCulture!, September 30, 2013, http://whatculture. com/technology/5-richest-tech-billionaires-who-dropped- out-of-university.php (accessed September 30, 2013); “Our People,” Valve Website, http://www.valvesoftware.com/ company/people.html (accessed September 30, 2013); Claire Suddath, “Why There Are No Bosses at Valve,” Bloomberg Businessweek, April 27, 2012, www.businessweek.com / articles/2012-04-27/why-there-are-no-bosses-at-valve ( accessed August 10, 2012); Rachel Emma Silverman, “Who’s the Boss? There Isn’t One,” The Wall Street Journal, June 20, 2012, B1; and Alex Hern, “Valve Software: Free Marketer’s Dream, or Nightmare?” New Statesman, August 3, 2012, www.newstatesman.com/blogs/economics/2012/08/ valve -software-free-marketeers-dream-or-nightmare (accessed August 10, 2012); and John Huey, “Wal-Mart: Will It Take Over the World?” Fortune, January 30, 1989, 52–61.

48. Steve Lohr, “Who Pays for Efficiency?” The New York Times, June 11, 2007, H1.

49. T. Donaldson and L. E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,” Academy of Management Review 20, (1995), 65–91; Anne S. Tusi, “A Multiple-Constituency Model of Effectiveness: An Empirical Examination at the Human Resource Sub- unit Level,” Administrative Science Quarterly 35, (1990), 458–483; Charles Fombrun and Mark Shanley, “What’s in a Name? Reputation Building and Corporate Strategy,” Acad- emy of Management Journal 33, (1990), 233–258; and Terry Connolly, Edward J. Conlon, and Stuart Jay Deutsch, “Orga- nizational Effectiveness: A Multiple-Constituency Approach,” Academy of Management Review 5, (1980), 211–217.

50. Ray Fisman and Tim Sullivan, “The Most Efficient Office in the World,” Slate, July 31, 2013, http://www.slate.com /articles/business/the_dismal_science/2013/07/renewing _your_passport_visit_the_incredibly_efficient_new_york_ city_passport.html (accessed February 14, 2014).

51. Charles Fishman, “The Wal-Mart You Don’t Know—Why Low Prices Have a High Cost,” Fast Company, December 2003, 68–80.

52. Greenwood and Miller, “Tackling Design Anew.” 53. Greenwood and Miller, “Tackling Design Anew”; and

Roger L. M. Dunbar and William H. Starbuck, “Learning to Design Organizations and Learning from Designing Them,” Organization Science 17, no. 2, (March–April 2006), 171–178.

54. Quoted in Cynthia Crossen, “Early Industry Expert Soon Realized a Staff Has Its Own Efficiency,” The Wall Street Journal, November 6, 2006, B1.

55. Robert Kanigel, The One Best Way: Frederick Winslow Taylor and the Enigma of Efficiency (New York: Viking, 1997); Alan Farnham, “The Man Who Changed Work Forever,” Fortune, July 21, 1997, 114; and Charles D. Wrege and Ann Marie Stoka, “Cooke Creates a Classic: The Story Behind F. W. Taylor’s Principles of Scientific Management,” Academy of Management Review, October 1978, 736–749. For a discussion of the impact of scientific management on American industry, government, and nonprofit organizations, also see Mauro F. Guillèn, “Scientific Management’s Lost Aesthetic: Architecture, Organization, and the Taylorized Beauty of the Mechanical,” Administrative Science Quarterly 42, (1997), 682–715.

56. Gary Hamel, “The Why, What, and How of Management In- novation,” Harvard Business Review, February 2006, 72–84.

57. Amanda Bennett, The Death of the Organization Man (New York: William Morrow, 1990).

58. Ralph Sink, “My Unfashionable Legacy,” Strategy + Business (Autumn 2007), http://www.strategy-business.com/press/ enewsarticle/enews122007?pg=0 (accessed August 7, 2008).

59. Dunbar and Starbuck, “Learning to Design Organizations.” 60. Johannes M. Pennings, “Structural Contingency Theory:

A Reappraisal,” Research in Organizational Behavior 14, (1992), 267–309; and Turkulainen and Kitokivi, “The Con- tingent Value of Organizational Integration.”

61. Tom Burns and G. M. Stalker, The Management of Innovation (London: Tavistock, 1961).

62. Li-Yun Sun and Wen Pan, “Market Orientation, Intrapreneur- ship Behavior, and Organizational Performance: Test of a Structural Contingency Model,” Journal of Leadership and Organizational Studies 18, no. 2, (2011), 274–285.

63. Roxane Divol and Thomas Fleming, “The Evolution of Work: One Company’s Story,” McKinsey Quarterly, Issue 4, (2012), 111–115.

64. Tom Ashbrook, “The Bossless Office,” On Point with Tom Ashbrook (June 20, 2013, at 11:00 a.m.), http://onpoint .wbur.org.

65. Doug Kirkpatrick, “Self-Management’s Success at Morning Star,” T 1 D, October 2012, 25–27; and Gary Hamel, “First, Let’s Fire All the Managers,” Harvard Business Review, December 2011, 48–60.

66. Hamel, “First, Let’s Fire All the Managers.” 67. Presented to and accepted by the Society for Case Research.

All rights reserved to the authors and SCR. This case was prepared by Sally Dresdow of the University of

Wisconsin at Green Bay and Joy Benson of the University of Illinois at Springfield and is intended to be used as a basis for class discussion. The views represented here are those of the case authors and do not necessarily reflect the views of the Society for Case Research. The authors’ views are based on their own professional judgments. The names of the organiza- tion, individuals, and location have been disguised to preserve the organization’s request for anonymity.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Organization Purpose and Structural Design Chapter 2 Strategy, Organization Design, and Effectiveness Chapter 3 Fundamentals of Organization Structure

2 Part

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46

the role of Strategic Direction in Organization Design Organizational Purpose

Strategic Intent • Operating Goals • Goal Conflict and the Hybrid Organization • The Importance of Goals

two Frameworks for Selecting Strategy and Design

Porter’s Competitive Strategies • Miles and Snow’s Strategy Typology • How Strategies Affect Organization Design • Other Contingency Factors Affecting Organization Design

assessing Organizational Effectiveness Definition • Who Decides?

Four Effectiveness approaches Goal Approach • Resource-Based Approach • Internal Process Approach • Strategic Constituents Approach

an Integrated Effectiveness Model

Design Essentials

Learning Objectives after reading this chapter you should be able to: 1. Describe the importance of strategy and the

strategy process. 2. Understand strategic purpose and operating

goals. 3. Explain why goal conflict occurs in

organizations and how managers deal with conflicting goals.

4. Know Porter’s strategy model and Miles and Snow’s strategy typology.

5. Explain how strategy affects organization design.

6. Discuss the goal, resource, internal process, and strategic constituents approaches to measuring effectiveness.

7. Explain the competing values model and how it relates to effectiveness.

Strategy, Organization Design, and Effectiveness2ChaPtEr

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Chapter 2: Strategy, Organization Design, and Effectiveness 47

Before reading this chapter, please check whether you agree or disagree with each of the following statements:

1 a company’s strategic intent or direction reflects managers’ systematic analysis of organizational and environmental factors. I aGrEE I DISaGrEE

2 the best business strategy is to make products and services as distinctive as possible to gain an edge in the marketplace. I aGrEE I DISaGrEE

3 the best measures of business performance are financial.I aGrEE I DISaGrEE

One of the primary responsibilities of managers is to position their organizations for success by establishing goals and strategies that can keep the organization competi- tive. Consider the situation at Instagram, where director of operations Emily White has been leading the charge to turn the popular online app into a real business. Instagram, which Facebook acquired for around a billion dollars, hasn’t made a cent so far. One problem, White believes, is the lack of a clear mission and goals to guide staff and sell the service to future advertisers. She spent her first two weeks working with co- founder and CEO Kevin Systrom to come up with a short, lofty mission statement: “To capture and share the world’s moments.” White, Systrom, and the rest of the Instagram team are now formulating a strategy and goals to bring in marketing dollars without alienating loyal Instagram users. Partnerships with other companies are likely to be a big part of the strategy. For example, Levi Strauss & Co. recently kicked off a market- ing campaign in which a group of artists on a cross-country train ride will create music and art as they arrive in major cities and upload photos and videos to Instagram.1

Instagram probably has a long way to go before it is profitable, but managers know that establishing mission, goals, and strategy is the first step for any business to achieve its purpose. Managers have to know where they want the organization to go before they can take it there. When managers don’t have clear goals, or have conflicting goals, the organization finds itself in a difficult position and achieving anything may seem improbable. Consider the faulty early implementation of the Affordable Care Act (ObamaCare). Staff building the federally run insurance exchange HealthCare.gov struggled to develop different parts of the exchange under sometimes conflicting directives from different bosses in different agencies with wildly divergent goals. One person familiar with the development captured the confusion when he said, “It was like building a bridge by starting from both sides of the river. You hoped they met in the middle.”2

Purpose of this Chapter

Top managers give direction to organizations. They set goals and develop the plans for their organization to attain them. The purpose of this chapter is to help you un- derstand the types of goals that organizations pursue and some of the competitive strategies managers use to reach those goals. We provide an overview of strategic

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48 Part 2: Organization Purpose and Structural Design

management, examine two significant frameworks for determining strategic action, and look at how strategies affect organization design. The chapter also describes the most popular approaches to measuring the effectiveness of organizational efforts. To manage organizations well, managers need a clear way to measure how effective the organization is in attaining its goals.

the role of Strategic Direction in Organization Design The choice of goals and strategy influences how an organization should be designed. An organizational goal is a desired state of affairs that the organization attempts to reach.3 A goal represents a result or end point toward which organizational efforts are directed.

Top executives decide the end purpose the organization will strive for and de- termine the direction it will take to accomplish it. It is this purpose and direction that shapes how the organization is designed and managed. Indeed, the primary responsibility of top management is to determine an organization’s goals, strategy, and design, thereby adapting the organization to a changing environment.4 Middle managers do much the same thing for major departments within the guidelines pro- vided by top management. Exhibit 2.1 illustrates the relationships through which top managers provide direction and then design.

Exhibit 2.1 Top Management Role in Organization Direction, Design, and Effectiveness

Strategic Intent

Source: Adapted from Arie Y. Lewin and Carroll U. Stephens, “Individual Properties of the CEO as Determinants of Organization Design,” unpublished manuscript, Duke University, 1990; and Arie Y. Lewin and Carroll U. Stephens, “CEO Attributes as Determinants of Organization Design: An Integrated Model,” Organization Studies 15, no. 2 (1994), 183–212.

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Chapter 2: Strategy, Organization Design, and Effectiveness 49

The direction-setting process typically begins with an assessment of the oppor- tunities and threats in the external environment, including the amount of change, uncertainty, and resource availability, which we discuss in more detail in Chapter 4. Top managers also assess internal strengths and weaknesses to define the company’s distinctive competence compared with other firms in the industry. This competitive analysis of the internal and external environments is one of the central concepts in strategic management.5

1a company’s strategic intent or direction reflects managers’ systematic analysis of organizational and environmental factors. aNSWEr: Agree. The best strategies come from systematic analysis of organizational strengths and weaknesses combined with analysis of opportunities and threats in the environment. Careful study combined with experience enable top managers to decide on specific goals and strategies.

AssEss Your AnswEr

The next step is to define and articulate the organization’s strategic intent, which includes defining an overall mission and official goals based on the correct fit be- tween external opportunities and internal strengths. Leaders then formulate specific operational goals and strategies that define how the organization is to accomplish its overall mission. In Exhibit 2.1, organization design reflects the way goals and strategies are implemented so that the organization’s attention and resources are consistently focused toward achieving the mission and goals.

Organization design is the administration and execution of the strategic plan. Managers make decisions about structural form, including whether the organiza- tion will be designed primarily for learning and innovation (an organic approach) or to achieve efficiency (a mechanistic approach), as discussed in Chapter 1. Other choices are made about information and control systems, the type of production technology, human resource policies, culture, and linkages to other organizations. Changes in structure, technology, human resource policies, culture, and interorga- nizational linkages will be discussed in subsequent chapters. Also note the arrow in Exhibit 2.1 running from organization design back to strategic intent. This means that strategies are often made within the current structure of the organization so that current design constrains, or puts limits on, goals and strategy. More often than not, however, the new goals and strategy are selected based on environmental needs and then top managers attempt to redesign the organization to achieve those ends.

Finally, Exhibit 2.1 illustrates how managers evaluate the effectiveness of organiza- tional efforts—that is, the extent to which the organization realizes its goals. This chart reflects the most popular ways of measuring performance, each of which is discussed later in this chapter. It is important to note here that performance measurements feed back into the internal environment so that past performance of the organization is as- sessed by top managers in setting new goals and strategic direction for the future.

Procter & Gamble (P&G) provides an example of how these ideas translate into organization practice. CEO A. G. Lafley wanted to provide a framework for organizing the discussion about goals and strategic direction so he used the OGSM (Objectives, Goals, Strategies, and Measures) tool illustrated in Exhibit 2.2. Note that a broad objective such as “Be the operating TSR (total shareholder return) leader in North American tissue/towel and value creator for P&G” is translated into more specific goals and strategies, such as “Grow Bounty and Charmin margin.”6

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50 Part 2: Organization Purpose and Structural Design

In addition, the chart lists measures that managers will use to determine the success of their efforts. This is the essence of strategic management: setting goals, defining strategies for achieving the goals, and measuring the effectiveness of efforts.

The role of top management is important because managers can interpret the environment differently and develop different goals and strategies. Several years ago, in the midst of a U.S. sales slump, top executives at Walmart tried a new direc- tion. Instead of sticking with goals of strict operational efficiency and everyday low prices, they decided to court upscale customers with remodeled, less cluttered stores, organic foods, and trendy merchandise. Instead of offering everyday low prices, the retailer raised prices on many items and promoted price cuts on select merchan- dise. Walmart succeeded in meeting its goal of attracting more upscale clientele, but many of its core customers decided they’d start shopping at other discount and dol- lar store chains. Walmart’s sales took a sharp downturn. “I think we tried to stretch the brand a little too far,” said William Simon, head of the U.S. division. Now, man- agers are rethinking goals to try to recapture a winning formula.7

The choices top managers make about goals, strategies, and organization design have a tremendous impact on organizational effectiveness. Remember that goals and strategy are not fixed or taken for granted. Top managers and middle managers

Exhibit 2.2 Procter & Gamble’s Framework for Strategy Discussion

OBJECtIVES StratEGIES MEaSUrES

Improve the lives of families by providing consumer-preferred paper products for kitchen and bathroom

Be the operating TSR leader in North American tissue/towel and value creator for P&G

WHERE TO PLAY:

• Win in North America

• Grow Bounty and Charmin margin of leadership

• Win in super market and mass discount channels

• Build performance, sensory and value consumer segments

• Operating TSR progress

• Share and sales growth progress

• Profit growth progress

Efficiency measures:

• Capital efficiency

• Inventory turns

Consumer preference measures:

• Weighted purchase intent

• Trial, purchase and loyalty

Retailer feedback measures:

• Key business drivers (distribution, share of shelf, share of merchandising, etc.)

• Preferred vendor

GOALS

Year-on Year operating TSR> XX%

X% annual share and sales growth

X% annual gross & operating profit margin improvement

X% return on capital investments in plant equipment and inventory

HOW TO WIN:

1. Be lean

• Get plant/equipment capital spend to XX of sales

• Reduce inventory by XX%

2. Be the choice of consumers

• Superior base products, prices right

• Preferred product formats and designs

• Manage category growth

3. Be the choice of retailers

• Improve shelf availability and service

• Develop differentiated shopping solutions

• Win with the winners

Source: Adapted from A.G. Lafley and Roger Martin, “Instituting a Company-Wide Strategic Conversation at Procter & Gamble,” Strategy & Leadership 41, no. 4 (2013): 4–9; Table 6.1.

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Chapter 2: Strategy, Organization Design, and Effectiveness 51

must select goals for their respective units, and the ability to make good choices largely determines a firm’s success. Organization design is used to implement goals and strategy and also determines organization success.

Organizational Purpose All organizations, including Walmart, Procter & Gamble, Instagram, Google, Harvard University, the Catholic Church, the U.S. Department of Agriculture, the local laundry, and the neighborhood deli, exist for a purpose. This purpose may be referred to as the overall goal, or mission. Different parts of the organization establish their own goals and objectives to help meet the overall goal, mission, or purpose of the organization.

Strategic Intent

Many types of goals exist in organizations, and each type performs a different func- tion. To achieve success, however, organizational goals and strategies are focused with strategic intent. Strategic intent means that all the organization’s energies and resources are directed toward a focused, unifying, and compelling overall goal.8 Examples of ambitious goals that demonstrate strategic intent are Microsoft’s early goal to “Put a computer on every desk in every home,” Komatsu’s motto, “Encircle Caterpillar,” and Coca-Cola’s goal “To put a Coke within ‘arm’s reach’ of every consumer in the world.”9 Strategic intent provides a focus for management action. Three aspects related to strategic intent are the mission, core competence, and com- petitive advantage.

Mission. The overall goal for an organization is often called the mission—the orga- nization’s reason for existence. The mission describes the organization’s shared values and beliefs and its reason for being. The mission is sometimes called the official goals, which refers to the formally stated definition of business scope and outcomes the organization is trying to achieve. Official goal statements typically define business op- erations and may focus on values, markets, and customers that distinguish the organi- zation. Whether called a mission statement or official goals, the organization’s general statement of its purpose and philosophy is often written down in a policy manual or the annual report. Exhibit 2.3 shows the new mission statement for CVS Health. CVS defines its mission (or purpose, as shown in the exhibit) as “Helping people on their path to better health.” The statement also defines the company’s core values.

One of the primary purposes of a mission statement is to serve as a communication tool.10 The mission statement communicates to current and prospective employees, customers, investors, suppliers, and competitors what the organization stands for and what it is trying to achieve. A mission statement communicates legitimacy to internal and external stakeholders, who may join and be committed to the organization because they identify with its stated purpose and values. Most top leaders want employees, customers, competitors, suppliers, investors, and the local community to look on the organization in a favorable light, and the concept of legitimacy plays a critical role. CVS Caremark recently changed its name to CVS Health and redefined its purpose to reflect a broader health care commitment and the company’s vision to “drive innovations needed to shape the future of health.”11 In early 2014, CVS, which provides health clinics as well as

Briefcase as an organization manager, keep these guidelines in mind: Establish and commu- nicate organizational mission and goals. Communicate official goals to provide a statement of the orga- nization’s mission to external constituents. Communicate operating goals to provide internal direction, guidelines, and standards of perfor- mance for employees.

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52 Part 2: Organization Purpose and Structural Design

pharmacy and retail sales, announced that it would stop selling cigarettes and other tobacco products by October of that year. For a company involved in promoting health and wellness, managers say, selling tobacco products doesn’t make sense and hurts the company’s reputation. The decision is expected to cost an estimated $2 billion in sales. Analysts believe other pharmacies involved in providing health care will follow CVS Health’s lead because of the need to communicate legitimacy. Companies where managers are sincerely guided by mission statements that focus on a larger social purpose, such as Medtronic’s “To restore people to full life and health” or Liberty Mutual’s “Helping people live safer, more secure lives,” typically attract better employees, have better relationships with external parties, and perform better in the marketplace over the long term.12

Competitive advantage. The overall aim of strategic intent is to help the organization achieve a sustainable competitive advantage. Competitive advantage refers to what sets the organization apart from others and provides it with a

Exhibit 2.3 Mission Statement for CVS Health

CVSHealth OUR STRATEGY WE ARE

OUR PURPOSE

OUR VALUES

Reinventing pharmacy

A pharmacy innovation company

Helping people on their path to better health

Innovation Collaboration Caring Integrity Accountability

CV S

He al

th

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Chapter 2: Strategy, Organization Design, and Effectiveness 53

distinctive edge for meeting customer or client needs in the marketplace. Strategy necessarily changes over time to fit environmental conditions, and good managers pay close attention to trends that might require changes in how the company operates. Managers analyze competitors and the internal and external environments to find potential competitive openings and learn what new capabilities the organization needs to gain the upper hand against other companies in the industry.13 Competitive openings might be thought of as spaces that a company can potentially fill. This chapter’s BookMark suggests that instead of trying to compete in crowded markets where companies chew each other up for smaller and smaller chunks of market share (red oceans), smart managers steer their organizations toward vast blue oceans where there is more promise and less competition.

Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant By W. Chan Kim and Renée Mauborgne

Almost every book or article you read about strategy focuses on how to outpace rivals, beat the competition, and win at the expense of other companies. That’s why there are so many managers and companies out there fighting in the “red ocean” of cutthroat and bloody competition. In their popular book Blue Ocean Strategy, W. Chan Kim and Renée Mauborgne take a different approach: Create a new market where there is less competition. That is the essence of blue ocean strategy.

SOME CLaSSIC EXaMPLES OF BLUE OCEaN StratEGY Kim and Mauborgne’s book is based on more than 15 years of research into 150 strategic moves spanning more than a hundred years and 30 industries. Here are some classic ex- amples of how companies created uncontested market space.

• The Nintendo Wii. Rather than battle it out in the red ocean with Sony and Microsoft, Nintendo decided to create a gaming system for a different audience— women, adults, and families. The Wii was low on graphics but high on interactivity, just right for people who didn’t normally play video games. The Nintendo Wii invented a new type of gaming.

• Cirque du Soleil. This Canadian show cut the expense of a traditional circus—hauling around animals, and so on, and amped up the theatrical aspects of the show, enabling the organization to charge higher prices by appealing to a different market segment where there were no competitors.

• The New York Public Library (NYPL). With funding cut by 20 percent and competition intensifying, Paul Holdengräber, Director of Public Programs, made the NYPL one of the hottest venues in town by infusing glamour and theatre into traditional book readings. He brought in poets, politicians, rock stars, and writ- ers to host a dialogue on controversial topics such as obsessions, terrorism, and music downloading. He also moved the events from 6 p.m. to 7 p.m. when more people were free after work.

HOW COMPaNIES CrEatE BLUE OCEaNS Blue ocean strategy shifts the focus from win-lose to win- win, Kim and Mauborgne say. “New market spaces create a win for companies, societies, employees, and sometimes even for the competition. That’s the essence of blue ocean strategy.” Moreover, any company can create blue ocean strategies by:

• Reconstructing market boundaries. Paul Holdengräber at the NYPL created a blue ocean of new market space by changing the time of events and expanding the topics.

• Focusing on the big picture, not the numbers. Cirque du Soleil could have focused on the huge numbers of audience members they were losing by not having animals in the show, but that would have ignored the bigger picture.

• Reaching beyond existing demand. When Nintendo created the Wii, there was plenty of demand for games targeted toward male teenagers and young adults, but Nintendo chose to reach beyond that into the blue ocean of untapped customers.

Blue Ocean Strategy, by W. Chan Kim and Renée Mauborgne, is pub- lished by Harvard Business School Press.

BOOKMarK 2.0 hAvE You rEAd this book?

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54 Part 2: Organization Purpose and Structural Design

Core Competence. A company’s core competence is something the organization does especially well in comparison to its competitors. A core competence may be in the area of superior research and development, expert technological know-how, process efficiency, or exceptional customer service.14 Mimeo, a printing and copying company, for example, excels with core competencies of superb customer service and the application of technology to ensure internal process efficiency. Mimeo can handle rush jobs that larger companies can’t. At Apple, strategy focuses on core competencies of superior design and marketing skills.15 In each case, managers identified what their company does especially well and built the strategy around it. Amazon has developed a core competence in fast shipping that other retailers are now trying to copy.

In PractIce amazon

It’s hard to believe Amazon was once a struggling online bookseller. Today, it is “an existential threat” to every retailer, as Fiona Dias, executive vice president of GSI Commerce, put it. Amazon targets customers who want to find good deals and purchase products conveniently over the Internet. Those customers can find just about anything they want on Amazon.com. They will often pay less for it than they would anywhere else. And they can often get it as fast as if they went to the local store.

Amazon wants to provide “premium products at nonpremium prices.” To do that, it has developed an extensive network of third-party merchants—partners with whom it maintains close, mutually beneficial relationships, is constantly honing its operational efficiency, and has created one of the most finely tuned distribution systems around. Amazon capitalizes on its core competencies of wide selection, cost efficiency, and slick distribution.

Amazon is already offering same-day delivery in metropolitan areas, and Walmart is aiming to do the same. “Everybody in retail is terrified of Amazon, and they’re terrified of losing more wallet share to Amazon,” said an analyst with Forrester Research. If Walmart can pull it off, the company would essentially have more than 4,000 Walmart stores as distribution centers, giving it a strong advantage over Amazon. On the other hand, Amazon CEO Jeff Bezos says, “One of the big advantages of Amazon for consumers is that they can get one box with a lot of things in it from different categories.” In retail, the shipping wars have just begun.16

Operating Goals

The organization’s mission and overall goals provide a basis for developing more specific operating goals. Operating goals designate the ends sought through the actual operating procedures of the organization and explain what the organization is actually trying to do.17 Operating goals describe specific measurable outcomes and are often concerned with the short run. Operating goals typically pertain to the primary tasks an organization must perform.18 Specific goals for each primary task provide direction for the day-to-day decisions and activities within departments. Typical operating goals that define what an organization is trying to accomplish include performance goals, resource goals, market goals, employee development goals, productivity goals, and goals for innovation and change, as illustrated in Exhibit 2.4.

Overall Performance. Profitability reflects the overall performance of for-profit organizations. Profitability may be expressed in terms of net income, earnings per share, or return on investment. Other overall performance goals are growth and output volume. Growth pertains to increases in sales or profits over time. Volume pertains to total sales or the amount of products or services delivered. For example,

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Chapter 2: Strategy, Organization Design, and Effectiveness 55

during the 2013 holiday season, UPS had trouble meeting its performance goals for delivery of packages. While smaller shipping firms were able to adjust during peak demand times by using rented trucks and temporary drivers, large firms like UPS were stuck with unexpected late orders from Amazon, Kohl’s, and other partners and were limited in their options for shipping the goods to customers.19

Government and nonprofit organizations such as social service agencies or labor unions do not have goals of profitability, but they do have goals that attempt to specify the delivery of services to clients or members within specified expense levels. The Internal Revenue Service has a goal of providing accurate responses to 85 percent of taxpayer questions about new tax laws. Growth and volume goals also may be indicators of overall performance in nonprofit organizations. Expanding their services to new clients is a primary goal for many social service agencies, for example.

resources. Resource goals pertain to the acquisition of needed material and financial resources from the environment. They may involve obtaining financing for the construction of new plants, finding less expensive sources for raw materials, or hiring top-quality technology graduates. Starbucks recently formed an alliance with India’s Tata Group to obtain Indian premium Arabica coffee beans for use in Starbucks stores. Eventually, the alliance will also enable Starbucks to find prime locations for outlets in India, which can also be considered valuable resources.20 A new resource goal for Walmart is to hire every veteran who wants a job, provided the person left the military in the previous year and did not have a dishonorable discharge. “Let’s be clear: Hiring a veteran can be one of the best decisions any of us can make,” said William S. Simon, president and CEO of Walmart U.S. “These are leaders with discipline, training, and a passion for service.”21 For nonprofit organizations, resource goals might include recruiting dedicated volunteers and expanding the organization’s funding base.

Market. Market goals relate to the market share or market standing desired by the organization. Market goals are largely the responsibility of marketing, sales, and advertising departments. L’Oreal SA, the world’s largest cosmetics company, has a

Exhibit 2.4 Typical Operating Goals for an Organization

Overall Performance

Goals

Resource Goals

Market Goals

Employee Development

Goals Productivity Goals

Innovation and Change Goals

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56 Part 2: Organization Purpose and Structural Design

goal of doubling its current clientele, adding one billion consumers by 2020. As one step to achieve the goal, managers are making changes in marketing and selling approaches designed to win over more customers in Brazil. Women there are some of the biggest spenders on beauty products, but L’Oreal has had trouble adapting to the Brazilian market.22 Market goals can also apply to nonprofit organizations. Cincinnati Children’s Hospital Medical Center, not content with a limited regional role in health care, has gained a growing share of the national market by developing expertise in the niche of treating rare and complex conditions and relentlessly focusing on quality.23

Employee Development. Employee development pertains to the training, promotion, safety, and growth of employees. It includes both managers and workers. Strong employee development goals are one of the characteristics common to organizations that regularly show up on Fortune magazine’s list of “100 Best Companies to Work For.” Moreover, employee learning goals have been found to be related to higher levels of department performance.24 Wall Street banks have long been known for encouraging long work hours, but some are now taking a critical look at that hard-charging culture. Bank of America Merrill Lynch, for example, recently issued an internal memo saying junior bankers should have two weekends off a month. To expand employee development, the bank also intends to “make certain that junior bankers work on a wider variety of different assignments . . . and ensure that the development of core skills is an important factor in making staffing assignments.”25

Productivity. Productivity goals concern the amount of output achieved from avail- able resources. They typically describe the amount of resource inputs required to reach desired outputs and are thus stated in terms of “cost for a unit of produc- tion,” “units produced per employee,” or “resource cost per employee.” Illumina- tion Entertainment, the production company behind the hit movie “Hop,” has productivity goals that help the company make animated films at about half the cost of those made by larger studios. CEO Christopher Meledandri believes strict cost controls and successful animated films are not mutually exclusive, but it means Illumination’s 30 or so employees have to be highly productive.26

Innovation and Change. Innovation goals pertain to internal flexibility and readiness to adapt to unexpected changes in the environment. Innovation goals are often defined with respect to the development of specific new services, products, or production processes. Procter & Gamble started a program called Connect + Develop in 2001, with a goal of getting 50 percent of the company’s innovation through collaboration with people and organizations outside the company by 2010. The ambitious goal was met and exceeded, resulting in innovations such as Swiffer Dusters, Olay Regenerist, and Mr. Clean Magic Eraser.27

Successful organizations use a carefully balanced set of operating goals. Although profitability goals are important, some of today’s best companies recognize that a single-minded focus on bottom-line profits may not be the best way to achieve high performance. Innovation and change goals are increasingly important, even though they may initially cause a decrease in profits. Employee development goals are critical for helping to maintain a motivated, committed workforce.

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Chapter 2: Strategy, Organization Design, and Effectiveness 57

Goal Conflict and the Hybrid Organization

Organizations perform many activities and pursue many goals simultaneously to accomplish an overall mission. But who decides what mission and goals to strive for? Pursuing some goals means that others have to be delayed or set aside, which means managers often disagree about priorities. Employee development goals might conflict with productivity goals; goals for innovation might hurt profitability. As one real-life example of goal conflict, Bloomberg News’s goals for accurate journalistic reporting sometimes conflict with the business side’s goals for sales of financial data terminals.

In PractIce Bloomberg LP

Most newspapers and magazines have a news side and a business side, and the two often coexist in uneasy tension. The business side managers don’t want to run stories critical of major advertisers, for instance. At Bloomberg, the two units got along fairly well in the early years when the news service was too small to anger clients, but that has changed.

Bloomberg’s core business is selling financial data terminals, which provide about 85 percent of the company’s revenue. However, the company’s journalism brings credibility to the organization and the news division has more than doubled in size. Users of the data terminals mostly want short Twitter-like news of market-moving importance, though, not the in-depth articles that journalists want to report.

The potential conflicts are most troubling in China, where financial data revenue has been growing about 45 percent a year. Sales of Bloomberg’s data terminals dropped signifi- cantly after Bloomberg News’s tough reporting about events in China prompted officials to cancel subscriptions. One angry Chinese official said Bloomberg should be publishing only financial news in China, not political news. Editors ordered some stories removed from the company’s website, angering Bloomberg journalists. “It’s looking increasingly like as a media company, you have a choice in China: You either do news or you do business, but it’s hard to do both,” said James L. McGregor, a former chief of Dow Jones & Company in China.28

Bloomberg and many other media companies represent what is called a hybrid organization. The hybrid organization is an organization that mixes value systems and behaviors that represent two different sectors of society, which leads to tensions and conflict within the organization over goals and priorities.29 The goals and values of the two sides are sometimes mutually exclusive, so managers have to negotiate and come to some agreement on which direction the company will take. Organizations with a social mission, for example, may have to hire business-minded people to sell the organization’s services to provide additional income. The business- minded employees stress goals of sales, revenue, and efficiency while public service- minded employees stress goals of sacrifice and meeting social needs. When social welfare organizations have to achieve their social mission through commercial activities, managers are often caught between competing demands of market and social welfare mindsets. One group may champion for-profit priorities and the other champions the contribution to social needs. Another example of a hybrid organization is a biotechnology company that incorporates goals and mindsets of both bias-free scientific research for the sake of new knowledge versus research to develop and market potentially lucrative products. These differences in goal orientation can trigger manipulation, avoidance, or defiance on the part of one side versus the other unless managers can balance the conflicting demands.

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58 Part 2: Organization Purpose and Structural Design

One approach to resolving these conflicts is coalitional management, which involves building an alliance of people who support a manager’s goals and can influence other people to accept and work toward them.30 Managers talk to people across the organization to find out what challenges and opportunities they face. They learn not only who supports their goals but also who opposes them and why. They don’t let conflict over goals simmer and detract from goal accomplishment. It is the job of managers to break down boundaries and get people to negotiate and cooperate across groups and departments to reach agreement and get important goals accomplished. When appropriate, managers may give up on some goals and throw their support behind other managers. Building relationships, discussion, and negotiation are crucial skills for getting things done in hybrid organizations.

the Importance of Goals

Both official goals and operating goals are important for the organization, but they serve very different purposes. Official goals and mission statements describe a value system for the organization and set an overall purpose and vision; operating goals represent the primary tasks of the organization. Official goals legitimize the organi- zation; operating goals are more explicit and well defined.

Operating goals serve several specific purposes, as outlined in Exhibit 2.5. For one thing, goals provide employees with a sense of direction so that they know what they are working toward. This can help to motivate employees toward specific targets and important outcomes. Numerous studies have shown that specific high goals can significantly increase employee performance.31 A recent study verified that departments perform significantly better when employees are committed to the goals.32 People like having a focus for their activities and efforts. Jennifer Dulski,

Exhibit 2.5 Goal Types and Purposes

Mission, Of�cial Goals

Operating Goals • Provide employee

direction and motivation • Offer decision guidelines

• De�ne standards of performance

• Communicate purpose and values

• Bestow legitimacy

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Chapter 2: Strategy, Organization Design, and Effectiveness 59

currently president and COO of Change.org, a web platform for social change, talks about how she motivated people at a previous organization. “One quarter we had three big goals. I said, ‘If we hit all three, it’s the trifecta and we’re going to all go to the horse races.’ And I gave everybody $50 to bet with at the races. I learned as a teacher that everybody has a little kid inside them, and people really love these fun, silly things. They may not admit they love them, but they do.”33

Another important purpose of goals is to act as guidelines for employee behavior and decision making. Appropriate goals can act as a set of constraints on individual behavior and actions so that employees behave within boundaries that are acceptable to the organization and larger society.34 Google uses a system called Objectives and Key Results (OKRs). One manager, for example, established an objective to improve Google Blogger’s reputation, and he came up with easily measured results such as “Re-establish leadership by speaking at 3 industry events”; “Regularly participate in Twitter discussions re: Blogger products.” Everyone’s OKRs are public, from the top leaders on down. These aren’t used to determine promotions, but they can be used by employees to keep an eye on what they are accomplishing.

Goals help to define the appropriate decisions concerning organization structure, innovation, employee welfare, or growth. Finally, goals provide a standard for assessment. The level of organizational performance, whether in terms of profits, units produced, degree of employee satisfaction, level of innovation, or number of customer complaints, needs a basis for evaluation. Operating goals provide this standard for measurement.

two Frameworks for Selecting Strategy and Design To support and accomplish the organization’s strategic intent and keep people fo- cused in the direction determined by organizational mission, vision, and operating goals, managers have to select specific strategy and design options that can help the organization achieve its purpose and goals within its competitive environment. In this section, we examine a couple of practical approaches to selecting strategy and design. The questionnaire in this chapter’s “How Do You Fit the Design?” box will give you some insight into your own strategic management competencies.

A strategy is a plan for interacting with the competitive environment to achieve organizational goals. Some managers think of goals and strategies as interchangeable, but for our purposes goals define where the organization wants to go and strategies define how it will get there. For example, a goal might be to achieve 15 percent annual sales growth; strategies to reach that goal might include aggressive advertising to attract new customers, motivating salespeople to increase the average size of customer purchases, and acquiring other businesses that produce similar products. Strategies can include any number of techniques to achieve the goal. The essence of formulating strategies is choosing whether the organization will perform different activities than its competitors or will execute similar activities more efficiently than its competitors do.35

Two models for formulating strategies are the Porter model of competitive strat- egies and the Miles and Snow strategy typology. Each provides a framework for competitive action. After describing the two models, we discuss how the choice of strategies affects organization design.

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60 Part 2: Organization Purpose and Structural Design

Porter’s Competitive Strategies

Michael E. Porter studied a number of business organizations and proposed that managers can make the organization more profitable and less vulnerable by adopting either a differentiation strategy or a low-cost leadership strategy.36 Using a low-cost leadership strategy means managers choose to compete through lower costs, whereas with a differentiation strategy the organization competes through the ability to offer unique or distinctive products and services that can command a premium price. These two basic strategies are illustrated in Exhibit 2.6. Moreover, each strategy can vary in scope from broad to narrow.

Differentiation. With a differentiation strategy the organization attempts to distin- guish its products or services from others in the industry. Managers may use ad- vertising, distinctive product features, exceptional service, or new technology to achieve a product perceived as unique. This strategy usually targets customers who are not particularly concerned with price, so it can be quite profitable.

A differentiation strategy can reduce rivalry with competitors and fight off the threat of substitute products because customers are loyal to the company’s brand. However, managers must remember that successful differentiation strategies require a number of costly activities, such as product research and design and extensive advertising. Companies that pursue a differentiation strategy need strong market- ing abilities and creative employees who are given the time and resources to seek innovations. One good illustration of a company that benefits from a differentia- tion strategy is Apple. Apple has never tried to compete on price and likes being perceived as an “elite” brand. The company has built a loyal customer base by pro- viding innovative, stylish products and creating a prestigious image.

Briefcase as an organization manager, keep these guidelines in mind:

After goals have been defined, select strate- gies for achieving those goals. Define specific strategies based on Porter’s competitive strategies or Miles and Snow’s strategy typology.

Exhibit 2.6 Porter’s Competitive Strategies Differentiation Low-costLeadership

Focus on uniqueness Focus on ef�ciency,low cost

Example (broad scope): Apple

Example (broad scope): Walmart

Example (narrow scope): Edward

Jones Investments

Example (narrow scope): Allegiant Travel

Managers Choose Which to Emphasize

Source: Based on Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: The Free Press, 1988).

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Chapter 2: Strategy, Organization Design, and Effectiveness 61

HOW DO YOU FIt tHE DESIGN?

YOUr StratEGY/PErFOrMaNCE StrENGtH As a potential manager, what are your strengths concern- ing strategy formulation and implementation? To find out, think about how you handle challenges and issues in your school work or job. Then circle a or b for each of the fol- lowing items depending on which is more descriptive of your behavior. There are no right or wrong answers. Re- spond to each item as it best describes how you respond to work situations.

1. When keeping records, I tend to a. be very careful about documentation. b. be more haphazard about documentation.

2. If I run a group or a project, I a. have the general idea and let others figure out

how to do the tasks. b. try to figure out specific goals, time lines, and ex-

pected outcomes.

3. My thinking style could be more accurately described as a. linear thinker, going from A to B to C. b. thinking like a grasshopper, hopping from one idea

to another.

4. In my office or home things are a. here and there in various piles. b. laid out neatly or at least in reasonable order.

5. I take pride in developing a. ways to overcome a barrier to a solution. b. new hypotheses about the underlying cause of a

problem.

6. I can best help strategy by making sure there is a. openness to a wide range of assumptions and

ideas. b. thoroughness when implementing new ideas.

7. One of my strengths is a. commitment to making things work. b. commitment to a dream for the future.

8. I am most effective when I emphasize a. inventing original solutions. b. making practical improvements.

Scoring: For Strategic Formulator strength, score one point for each “a” answer circled for questions 2, 4, 6, and 8, and for each “b” answer circled for questions 1, 3, 5, and 7. For Strategic Implementer strength, score one point for each “b” answer circled for questions 2, 4, 6, and 8, and for each “a” answer circled for questions 1, 3, 5, and 7. Which of your two scores is higher and by how much? The higher score indicates your Strategy Strength.

Interpretation: Formulator and Implementer are two important ways managers bring value to strategic management and effectiveness. Managers with imple- menter strengths tend to work on operating goals and performance to make things more efficient and reliable. Managers with the formulator strength push toward out- of-the-box strategies and like to think about mission, vision, and dramatic breakthroughs. Both styles are es- sential to strategic management and organizational ef- fectiveness. Strategic formulators often use their skills to create whole new strategies and approaches, and strategic implementers often work with strategic improve- ments, implementation, and measurement.

If the difference between your two scores is 2 or less, you have a balanced formulator/implementer style and work well in both arenas. If the difference is 4–5, you have a moderately strong style and probably work best in the area of your strength. And if the difference is 7–8, you have a distinctive strength and almost certainly would want to contribute in the area of your strength rather than in the opposite domain.

Source: Adapted from Dorothy Marcic and Joe Seltzer, Organiza- tional Behavior: Experiences and Cases (South-Western, 1998), 284–287, and William Miller, Innovation Styles (Global Creativity Corporation, 1997).

Service firms can use a differentiation strategy as well. Trader Joe’s, started in 1967 as a typical convenience store, was quickly modified by founder Joe Coulombe into a novel business serving unique food and drink and expanded to 17 stores in southern California. Today, there are more than 370 Trader Joe’s nationwide, and people are clamoring for more. But managers are very, very careful about how they expand. TJ’s doesn’t carry any national brands, but instead offers innovative,

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62 Part 2: Organization Purpose and Structural Design

high quality, health-conscious food and beverage products at modest prices. About 80 percent of products carry TJ’s private label, and the company is secretive about who makes products for them. Many TJ’s stores carry only about 2,500 items, compared to a traditional supermarket that has more than 40,000, and the selection is constantly changing. What keeps people coming back is the novelty and sense of adventure—you never know what you’re going to find—and the friendly service you might expect at the mom-and-pop shop around the corner. Managers evaluate every decision with an eye to how it fits with the goal of maintaining a neighborhood store feel.37

Low-Cost Leadership. The low-cost leadership strategy tries to increase market share by keeping costs low compared to competitors. With a low-cost leadership strategy, the organization aggressively seeks efficient facilities, pursues cost reduc- tions, and uses tight controls to produce products or services more efficiently than its competitors. Low cost doesn’t necessarily mean low price, but in many cases cost leaders provide goods and services to customers at cheaper prices. For example, the CEO of Irish airline Ryanair said of the company’s strategy: “It’s the oldest, simplest formula: Pile ’em high and sell ’em cheap. . . . We want to be the Walmart of the airline business. Nobody will beat us on price. EVER.” Ryanair can offer low fares because it keeps costs at rock bottom, lower than any other airline in Europe. The company’s watchword is cheap tickets, not customer care or unique services.38

The low-cost leadership strategy is concerned primarily with stability rather than taking risks or seeking new opportunities for innovation and growth. A low- cost leadership position means a company can achieve higher profits than competi- tors because of its efficiency and lower operating costs. Cost leaders such as Ryanair can undercut competitors’ prices and still earn a reasonable profit. In addition, if substitute products or potential new competitors enter the picture, the low-cost pro- ducer is in a better position to prevent loss of market share.

Porter found that companies that did not consciously adopt a low-cost or differ- entiation strategy achieved below-average profits compared to those that used one of the strategies. Many Internet companies have failed because managers did not develop competitive strategies that would distinguish them in the marketplace.39 On the other hand, Google became highly successful with a coherent differentiation strategy that distinguished it from other search engines.

2the best business strategy is to make products and services as distinctive as possible to gain an edge in the marketplace. aNSWEr: Disagree. Differentiation, making the company’s products or services distinctive from others in the market, is one effective strategic approach. A low-cost leadership approach can be equally or even more effective depending on the organization’s strengths and the nature of competition in the industry.

AssEss Your AnswEr

Competitive Scope Can Be Broad or Narrow. With either strategy, the scope of competitive action can be either broad or narrow. That is, an organization can choose to compete in many market and customer segments or to focus on a specific market or buyer group. For example, Walmart uses a low-cost leadership strategy and competes in a broad market, selling to many market segments. A good example of a narrowly focused low-cost leadership strategy is Allegiant Travel Company.

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Chapter 2: Strategy, Organization Design, and Effectiveness 63

An example of a narrowly focused differentiation strategy is Edward Jones Investments, a St. Louis-based brokerage house. The company concentrates on building its business in rural and small-town America and providing clients with conservative, long-term investment advice. Management scholar and consultant Peter Drucker once said the distinctive safety-first orientation means Edward Jones delivers a product “that no Wall Street house has ever sold before: peace of mind.”41

Miles and Snow’s Strategy typology

Another strategy typology was developed from the study of business strategies by Raymond Miles and Charles Snow.42 The Miles and Snow typology is based on the idea that managers seek to formulate strategies that will be congruent with the external environment. Organizations strive for a fit among internal organization characteristics, strategy, and the external environment. The four strategies that can be developed are the prospector, the defender, the analyzer, and the reactor.

Prospector. The prospector strategy is to innovate, take risks, seek out new op- portunities, and grow. This strategy is suited to a dynamic, growing environment, where creativity is more important than efficiency. Nike, which innovates in both products and internal processes, exemplifies the prospector strategy. For example, the company has introduced a new line of shoes based on designs that can be pro- duced using recycled materials and limited amounts of toxic chemical-based glues.43

China’s Zhejiang Geely Holding Group is setting a prospector strategy for Volvo Car Corporation after acquiring the global automaker from Ford Motor Company. For many years Volvo focused on stability, seeking to hang on to customers who appreciated the brand’s reputation for safe, reliable family vehicles. But Li Shufu, the company’s new hard-charging Chinese owner, set a new course for the company, aiming to expand aggressively into the luxury car market and compete head-on with the likes of BMW and Mercedes. Li clashed with Volvo’s European CEO, Stefan Jacoby, who wanted to move more slowly away from the company’s tradition of modest style, but the two eventually agreed on an ambitious turnaround plan that

In PractIce allegiant travel Company

“We want to be considered the hometown airline of all the little cities around the country,” said Andrew Levy, president of Allegiant Travel Company. Allegiant flies just 64 jets and specializes in flying people from 75 small, underserved cities to 14 warm-weather tourist destinations such as Orlando, Las Vegas, and Honolulu.

Allegiant has achieved the lowest costs, fullest planes, and highest margins in the in- dustry and has been profitable in 39 of its last 41 quarters by serving small cities that competitors don’t serve. The focused low-cost leadership strategy means Allegiant faces competition on just 17 of its 203 routes. Managers believe in “attacking niche opportuni- ties.” For example, Allegiant moved in when other airlines left the shrinking cities of the Rust Belt and lures Canadian fliers just across the border to fly out of small U.S. airports. The air- line has now set its sights on Mexico, hoping to fly middle-class Mexicans from cities such as Zacatecas or Culiacán to tourist destinations such as Las Vegas in the United States.

Allegiant goes to extremes to meet its goals of low cost. It depends largely on word-of- mouth advertising rather than paying travel agents. It offers a no-frills base fare and charges for nearly everything else, from carry-on luggage to water. Managers also say they “only fly when we can make money.” The older, used planes the company flies guzzle gas, so they fly only on peak travel days when the flight is nearly full. “On Tuesdays, we look like a bankrupt airline,” Levy says, but “who wants to start their vacation on a Tuesday?”40

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64 Part 2: Organization Purpose and Structural Design

involves $10 billion in investment over a five-year period and a goal of doubling worldwide sales to 800,000 vehicles by 2020. Li says he wants Volvo to offer inno- vative, electrifying designs that turn heads and win new customers. China sales are a growing part of the auto business, and Li says Volvo has no future unless it caters to the flashier tastes of emerging rich consumers in that country.44 Li and Jacoby are continuing to work out their differing visions and management styles, but the pros- pector strategy to upgrade the product lineup and expand aggressively is on course. Online companies such as Facebook and Google also reflect a prospector strategy.

Defender. The defender strategy is almost the opposite of the prospector. Rather than taking risks and seeking out new opportunities, the defender strategy is concerned with stability or even retrenchment. This strategy seeks to hold on to current customers, but it neither innovates nor seeks to grow. The defender is concerned primarily with internal efficiency and control to produce reliable, high- quality products for steady customers. This strategy can be successful when the organization exists in a declining industry or a stable environment. Paramount Pictures has been using a defender strategy for several years.45 Paramount turns out a steady stream of reliable hits but few blockbusters. Managers shun risk and sometimes turn down potentially high-profile films to keep a lid on costs. This has enabled the company to remain highly profitable while other studios have low returns or actually lose money.

analyzer. The analyzer tries to maintain a stable business while innovating on the periphery. It seems to lie midway between the prospector and the defender. Some products will be targeted at stable environments in which an efficiency strategy designed to keep current customers is used. Others will be targeted at new, more dynamic environments, where growth is possible. The analyzer attempts to balance efficient production for current product or service lines with the creative development of new product lines. Amazon.com provides an example. The company’s current strategy is to defend its core business of selling books and other physical goods over the Internet, but also to build a business in digital media, including initiatives such as a digital book service, an online streaming video business, developing original content, and a digital music store to compete with Apple’s iTunes.46

reactor. The reactor strategy is not really a strategy at all. Rather, reactors respond to environmental threats and opportunities in an ad hoc fashion. With a reactor strategy, top management has not defined a long-range plan or given the organiza- tion an explicit mission or goal, so the organization takes whatever actions seem to meet immediate needs. Although the reactor strategy can sometimes be successful, it can also lead to failed companies. Some large, once highly successful companies are struggling because managers failed to adopt a strategy consistent with con- sumer trends. In recent years managers at the once successful and profitable book- store Barnes & Noble have been floundering to find the appropriate strategy. The Nook, introduced to compete with the Amazon Kindle, “looked good, worked well, and sold better than Barnes & Noble expected.” The problem was, when Apple introduced the iPad, managers at Barnes & Noble reacted by coming out with a competing multifunction device. It was a mistake. The Nook Media business had an operating loss of $475 million for the fiscal year that ended April 2013. “He drank too much of the digital Kool-Aid,” said one analyst of Barnes & Noble CEO William Lynch, who has since left the company.47

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Chapter 2: Strategy, Organization Design, and Effectiveness 65

The Miles and Snow typology has been widely used, and researchers have tested its validity in a variety of organizations, including hospitals, colleges, banking institutions, industrial products companies, and life insurance firms. In general, researchers have found strong support for the effectiveness of this typology for organization managers in real-world situations.48

The ability of managers to devise and maintain a clear competitive strategy is considered one of the defining factors in an organization’s success, but many man- agers struggle with this crucial responsibility.

How Strategies affect Organization Design

Choice of strategy affects internal organization characteristics. Organization design characteristics need to support the firm’s competitive approach. For example, a company wanting to grow and invent new products looks and “feels” different from a company that is focused on maintaining market share for long-established products in a stable industry. Exhibit 2.7 summarizes organization design characteristics associated with the Porter and Miles and Snow strategies.

Briefcase as an organization manager, keep these guidelines in mind: Design the organization to support the firm’s competitive strategy. With a low-cost lead- ership or defender strategy, select design characteristics associ- ated with an efficiency orientation. For a differ- entiation or prospector strategy, on the other hand, choose charac- teristics that encourage learning, innovation, and adaptation. Use a balanced mixture of characteristics for an analyzer strategy.

Porter’s Competitive Strategies Miles and Snow’s Strategy typology

Strategy: Differentiation

Organization Design:

• Learning orientation; acts in a flexible, loosely knit way, with strong horizontal coordination

• Strong capability in research?

• Values and builds in mechanisms for cus- tomer intimacy

• Rewards employee creativity, risk-taking, and innovation

Strategy: Low-Cost Leadership

Organization Design:

• Efficiency orientation; strong central authority; tight cost control, with frequent, detailed control reports

• Standard operating procedures

• Highly efficient procurement and distribu- tion systems

• Close supervision; routine tasks; limited employee empowerment

Strategy: Prospector

Organization Design:

• Learning orientation; flexible, fluid, decen- tralized structure

• Strong capability in research

Strategy: Defender

Organization Design:

• Efficiency orientation; centralized authority; tight cost control

• Emphasis on production efficiency; low overhead

• Close supervision; little employee empow- erment

Strategy: Analyzer

Organization Design:

• Balances efficiency and learning; tight cost control with flexibility and adaptability

• Efficient production for stable product lines; emphasis on creativity, research, risk-taking for innovation

Strategy: Reactor

Organization Design:

• No clear organizational approach; design characteristics may shift abruptly, depend- ing on current needs

Source: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press, 1980); Michael Treacy and Fred Wiersema, “How Market Leaders Keep Their Edge,” Fortune, (February 6, 1995), 88–98; Michael Hitt, R. Duane Ireland, and Robert E. Hoskisson, Strategic Management (St. Paul, MN.: West, 1995), 100–113; and Raymond E. Miles, Charles C. Snow, Alan D. Meyer, and Henry J. Coleman, Jr., “Organizational Strategy, Structure, and Process,” Academy of Management Review 3 (1978), 546–562.

Exhibit 2.7 Organization Design Outcomes of Strategy

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66 Part 2: Organization Purpose and Structural Design

With a low-cost leadership strategy, managers take a primarily mechanistic, efficiency approach to organization design, whereas a differentiation strategy calls for a more organic, learning approach. Recall from Chapter 1 that mechanistic organizations designed for efficiency have different characteristics from organic organizations designed for learning. A low-cost leadership strategy (efficiency) is associated with strong, centralized authority and tight control, standard operating procedures, and emphasis on efficient procurement and distribution systems. Employees generally perform routine tasks under close supervision and control and are not empowered to make decisions or take action on their own. A differentiation strategy, on the other hand, requires that employees be constantly experimenting and learning. Structure is fluid and flexible, with strong horizontal coordination. Empowered employees work directly with customers and are rewarded for creativity and risk-taking. The organization values research, creativity, and innovativeness over efficiency and standard procedures.

The prospector strategy requires characteristics similar to a differentiation strategy, and the defender strategy takes an efficiency approach similar to low-cost leadership. Because the analyzer strategy attempts to balance efficiency for stable product lines with flexibility and learning for new products, it is associated with a mix of characteristics, as listed in Exhibit 2.7. With a reactor strategy, managers have left the organization with no direction and no clear approach to design.

Other Contingency Factors affecting Organization Design

Strategy is one important factor that affects organization design. Ultimately, however, organization design is a result of numerous contingencies, which will be discussed throughout this book. The emphasis given to efficiency and control (mechanistic) versus learning and flexibility (organic) is determined by the contin- gencies of strategy, environment, size and life cycle, technology, and organizational culture. The organization is designed to “fit” the contingency factors, as illustrated in Exhibit 2.8.

In a stable environment, for example, the organization can have a traditional mechanistic structure that emphasizes vertical control, efficiency, specialization, standard procedures, and centralized decision making. However, a rapidly changing

Strategy Environment

Technology Size/Life Cycle

Culture

Organizational Structure and Design

The Right Mix of Design Characteristics Fits the Contingency Factors

Exhibit 2.8 Contingency Factors Affecting Organization Design

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Chapter 2: Strategy, Organization Design, and Effectiveness 67

environment may call for a more flexible, organic structure, with strong horizontal coordination and collaboration through teams or other mechanisms. Environment will be discussed in detail in Chapter 4 and Chapter 5. In terms of size and life cycle, young, small organizations are generally informal and have little division of labor, few rules and regulations, and ad hoc budgeting and performance systems. Large organizations such as Coca-Cola, Samsung, or General Electric, on the other hand, have an extensive division of labor, numerous rules and regulations, and standard procedures and systems for budgeting, control, rewards, and innovation. Size and stages of the life cycle will be discussed in Chapter 9.

Design must also fit the workflow technology of the organization. For example, with mass production technology, such as a traditional automobile assembly line, the organization functions best by emphasizing efficiency, formalization, special- ization, centralized decision making, and tight control. An e-business, on the other hand, would need to be more informal and flexible. Technology’s impact on design will be discussed in detail in Chapter 7 and Chapter 8. A final contingency that af- fects organization design is corporate culture. An organizational culture that values teamwork, collaboration, creativity, and open communication, for example, would not function well with a tight, vertical structure and strict rules and regulations. The role of culture is discussed in Chapter 10.

One responsibility of managers is to design organizations that fit the contin- gency factors of strategy, environment, size and life cycle, technology, and culture. Finding the right fit leads to organizational effectiveness, whereas a poor fit can lead to decline or even the demise of the organization.

assessing Organizational Effectiveness Understanding organizational goals and strategies, as well as the concept of fitting design to various contingencies, is a first step toward understanding organizational effectiveness. Organizational goals represent the reason for an organization’s ex- istence and the outcomes it seeks to achieve. The rest of this chapter explores the topic of effectiveness and how effectiveness is measured in organizations.

Definition

Recall from Chapter 1 that organizational effectiveness is the degree to which an organization realizes its goals. Effectiveness is a broad concept. It implicitly takes into consideration a range of variables at both the organizational and departmental levels. Effectiveness evaluates the extent to which multiple goals—whether official or operating—are attained. Efficiency is a more limited concept that pertains to the internal workings of the organization. Organizational efficiency is the amount of resources used to produce a unit of output.49 It can be measured as the ratio of in- puts to outputs. If one organization can achieve a given production level with fewer resources than another organization, it would be described as more efficient.50

Sometimes efficiency leads to effectiveness, but in other organizations efficiency and effectiveness are not related. An organization may be highly efficient but fail to achieve its goals because it makes a product for which there is no demand. Likewise, an organization may achieve its profit goals but be inefficient. Efforts to increase efficiency, particularly through severe cost cutting, can also sometimes make the

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68 Part 2: Organization Purpose and Structural Design

organization less effective. For example, one regional fast food chain wanting to increase efficiency decided to reduce food waste by not cooking any food until it was ordered. The move reduced the chain’s costs, but it also led to delayed service, irritated customers, and lower sales.51

Overall effectiveness is difficult to measure in organizations. Organizations are large, diverse, and fragmented. They perform many activities simultaneously, pursue multiple goals, and generate many outcomes, some intended and some unintended.52 Managers determine what indicators to measure in order to gauge the effectiveness of their organizations. Four possible approaches to measuring effectiveness are:

• The Goal Approach • The Resource-Based Approach • The Internal Process Approach • The Strategic Constituents Approach

Who Decides?

Key people in charge of the organization, such as top managers or board members, have to make a conscious decision about how they will determine the organiza- tion’s effectiveness. Just as people determine goals, they also determine when the organization is successful. Organizational effectiveness is a social construct, meaning that it is created and defined by an individual or group rather than existing indepen- dently in the external world.53 An analogy from baseball that clarifies the concept is the story of three umpires explaining how they call balls and strikes. The first says, “I call ’em as they are.” The second says, “I call ’em as I see ’em.” The third takes a social construct approach and says, “They ain’t nothin’ ’til I call ’em.”54 Similarly, organizational effectiveness is nothing until managers or stakeholders “call it.”

An employee might consider the organization is effective if it issues accurate paychecks on time and provides promised benefits. A customer might consider it effective if it provides a good product at a low price. A CEO might consider the organization effective if it is profitable. Effectiveness is always multidimensional, and thus assessments of effectiveness are typically multidimensional as well. Managers in businesses typically use profits and stock performance as indicators of effectiveness, but they also give credence to other measures, such as employee satisfaction, customer loyalty, corporate citizenship, innovativeness, or industry reputation.55

Managers often use indicators from more than one of the four approaches (goal, resource, internal process, strategic constituents) when measuring effectiveness. Exhibit 2.9 lists a sample of 15 indicators that managers of large, multinational organizations reported using to assess effectiveness. As you read the descriptions of the four approaches to measuring effectiveness in the following sections, try to decide which approach each of these 15 indicators falls under.56

As the items in Exhibit 2.9 reveal, indicators of effectiveness are both quantitative and qualitative, tangible and intangible. An indicator such as achieving sales targets or percentage of market share is easy to measure, but indicators such as employee engagement, quality, or customer satisfaction are less clear-cut and often have to be measured qualitatively.57 Relying solely on quantitative measurements can give managers a limited or distorted view of effectiveness. Albert Einstein is reported to have kept a sign in his office that read, “Not everything that counts can be counted, and not everything that can be counted counts.”58

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Chapter 2: Strategy, Organization Design, and Effectiveness 69

Four Effectiveness approaches As open systems, organizations bring in resources from the environment, and those resources are transformed into outputs delivered back into the environment, as shown in Exhibit 2.10. In addition, recall from Chapter 1 that organizations interact with a number of stakeholder groups inside and outside the organization. Four key approaches to measuring effectiveness look at different parts of the organization and measure indicators connected with outputs, inputs, internal activities, or key stakeholders, also called strategic constituents.59

Goal approach

The goal approach to effectiveness consists of identifying an organization’s output goals and assessing how well the organization has attained those goals.60 This is a logical approach because organizations do try to attain certain levels of output, profit, or client satisfaction. The goal approach measures progress toward the at- tainment of those goals.

Indicators. The important goals to consider are operating goals, because official goals (mission) tend to be abstract and difficult to measure. Operating goals reflect activities the organization is actually performing.61

Indicators tracked with the goal approach include:

• Profitability—the positive gain from business operations or investments after expenses are subtracted

• Market share—the proportion of the market the firm is able to capture relative to competitors

Exhibit 2.9 Some Indicators of Organizational Effectiveness Reported by Multinational Organizations

1. Meeting deadlines; on-time delivery

2. Timely material and equipment acquisition

3. Quality of product or service

4. Customer satisfaction/complaints

5. Market share compared to competitors

6. Employee training and development (number of hours)

7. Staying within budget

8. Shareholder satisfaction

9. Reduction in costs

10. Supply chain delays or improvements

11. Productivity; dollars spent for each unit of output

12. Employee engagement

13. Achieving sales targets

14. Product development cycle time (reduction in cycle time)

15. Number of hours/days and so on to complete tasks

Source: Based on “Table 1; Initial Items Derived from Interviews,” in Cristina B. Gibson, Mary E. Zellmer-Bruhn, and Donald P. Schwab, “Team Effectiveness in Multinational Organizations: Evaluation Across Contexts,” Group & Organizational Management 28, no. 4 (December 2003), 444–474.

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70 Part 2: Organization Purpose and Structural Design

• Growth—the ability of the organization to increase its sales, profits, or client base over time

• Social responsibility—how well the organization serves the interests of society as well as itself

• Product quality—the ability of the organization to achieve high quality in its products or services

Usefulness. The goal approach is used in business organizations because output goals can be readily measured. Some nonprofit organizations that aim to solve social problems also find the goal approach useful. For example, Every Child Succeeds is a public-private partnership funded primarily by United Way that aims to reduce infant mortality and improve maternal health in the area surrounding Cincinnati, Ohio. In the seven Ohio and Kentucky counties around the city, 8.3 out of every 1,000 newborns die before they reach their first birthday, on par with countries such as Lithuania and Brunei. Yet among the mothers enrolled in Every Child Succeeds, that statistic is only 2.8 percent, lower than in virtually every industrialized country. Using a rigorous model of performance measurement based on some of the management practices at P&G, social workers and nurses from 15 participating organizations, including two Cincinnati hospitals and several social service agencies, visit at-risk mothers in their homes and help them stop smoking, learn to eat better, control their diabetes or high blood pressure, and improve their health in other ways. Unlike many social improvement programs, Every Child Succeeds sets and measures a few narrow and specific goals organized under seven focus areas.62

In businesses as well as in nonprofit organizations such as Every Child Succeeds, identifying operating goals and measuring effectiveness are not always easy. Two problems that must be resolved are the issues of multiple goals and subjective

Suppliers

Creditors

Customers

Community

Employees

Organization

Internal Activities and

Processes

Resource Inputs

Internal Process Approach

Product and Service Outputs

Owners Government

Goal Approach

Strategic Constituents

Approach

Resource-Based Approach

Exhibit 2.10 Four Approaches to Measuring Organizational Effectiveness

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Chapter 2: Strategy, Organization Design, and Effectiveness 71

indicators of goal attainment. Since organizations have multiple and sometimes conflicting goals, effectiveness cannot be assessed by a single indicator. High achievement on one goal might mean low achievement on another. Moreover, there are department goals as well as overall organizational goals. The full assessment of effectiveness should take into consideration several goals simultaneously.

The other issue to resolve with the goal approach is how to identify operating goals for an organization and how to measure goal attainment. For business organizations, there are often objective indicators for certain goals, such as profit or growth. Every Child Succeeds can also use objective indicators for some goals, such as tracking how many infants are immunized or how many clients stop smoking during pregnancy. However, subjective assessment is needed for other goals, such as employee welfare, social responsibility, or client satisfaction. Top managers and other key people on the management team have to clearly identify which goals the organization will measure. Subjective perceptions of goal attainment must be used when quantitative indicators are not available. Managers rely on information from customers, competitors, suppliers, and employees, as well as their own intuition, when considering these goals.

resource-Based approach

The resource-based approach looks at the input side of the transformation process shown in Exhibit 2.10. It assumes organizations must be successful in obtaining and managing valued resources in order to be effective because strategically valuable resources give an organization a competitive edge.63 From a resource-based perspective, organizational effectiveness is defined as the ability of the organization, in either absolute or relative terms, to obtain scarce and valued resources and successfully integrate and manage them.64

Indicators. Obtaining and successfully managing resources is the criterion by which organizational effectiveness is assessed. In a broad sense, resource indicators of effectiveness encompass the following dimensions:65

• Bargaining position—the ability of the organization to obtain from its environ- ment scarce and valued resources, including tangible resources such as a prime location, financing, raw materials, and quality employees, and intangible assets such as a strong brand or superior knowledge

• The abilities of the organization’s decision makers to perceive and correctly in- terpret the real properties of the external environment and supply forces

• The abilities of managers to use tangible (e.g., supplies, people) and intangible (e.g., knowledge, corporate culture) resources and capabilities in day-to-day or- ganizational activities to achieve superior performance

• The ability of the organization to respond to changes in resource sectors of the environment

Usefulness. The resource-based approach is valuable when other indicators of performance are difficult to obtain. In many nonprofit and social welfare organizations, for example, it is hard to measure output goals or internal efficiency. The Shriners Hospitals for Children (SHC) system provides an example. The 22 Shriners Hospitals provide free treatment to thousands of children with orthopedic conditions, burns, spinal cord injuries, and cleft lip and palette conditions. For most

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72 Part 2: Organization Purpose and Structural Design

of its history, the SHC was highly successful in obtaining donations, the main source of funding for the hospitals’ operations. However, when the federal government launched a no-cost health insurance program for children of low-income families, Shriners began losing patients to traditional healthcare providers. With a decline in patient registrations, donations began to decline as well. Managers had to search for new ways to respond to the increased competition and obtain needed resources.66 Many for-profit organizations also use a resource-based approach because resources are critical to competitive success. For example, the British retail firm Marks & Spencer evaluates its effectiveness partly by looking at the company’s ability to obtain, manage, and maintain valued resources such as prime locations for stores, a strong brand, quality employees, and effective supplier relationships.67

Although the resource-based approach is valuable when other measures of ef- fectiveness are not available, it does have shortcomings. For one thing, the approach only vaguely considers the organization’s link to the needs of customers. A superior ability to acquire and use resources is important only if resources and capabilities are used to achieve something that meets a need in the environment. Critics have challenged that the approach assumes stability in the marketplace and fails to ad- equately consider the changing value of various resources as the competitive envi- ronment and customer needs change.68

Internal Process approach

In the internal process approach, effectiveness is measured as internal organizational health and efficiency. An effective organization has a smooth, well-oiled internal process. Employees are happy and satisfied. Department activities mesh with one another to ensure high productivity. This approach does not consider the external environment. The important element in effectiveness is what the organization does with the resources it has, as reflected in internal health and efficiency.

Indicators. One indicator of internal process effectiveness is economic efficiency. However, the best-known proponents of an internal process model are from the human relations approach to organizations. Such writers as Chris Argyris, Warren G. Bennis, Rensis Likert, and Richard Beckhard have all worked extensively with human resources in organizations and emphasize the connection between human resources and effectiveness.69 Results from a study of nearly 200 secondary schools showed that both human resources and employee-oriented processes were important in explaining and promoting effectiveness in those organizations.70

Internal process indicators include:71

• A strong, adaptive corporate culture and positive work climate • Confidence and trust between employees and management • Operational efficiency, such as using minimal resources to achieve outcomes • Undistorted horizontal and vertical communication • Growth and development of employees • Coordination among the organization’s parts, with conflicts resolved in the

interest of the larger organization

Usefulness. The internal process approach is important because the efficient use of resources and harmonious internal functioning are good ways to assess orga- nizational effectiveness. In the wake of the economic recession, companies such as DuPont, Campbell Soup, and UPS are looking for ways to be more efficient, such

Briefcase as an organization manager, keep these guidelines in mind: Use the goal approach, internal process ap- proach, and resource- based approach to obtain specific interpre- tations of organizational effectiveness in the areas of outputs, internal processes, and inputs. assess the satisfaction of strategic constituents or use the competing values model to obtain a broader picture of effectiveness.

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Chapter 2: Strategy, Organization Design, and Effectiveness 73

as using existing technology to accomplish more with less. At Campbell’s Maxton, North Carolina-based factory, hundreds of small changes and improvements, many suggested by employees, have increased operating efficiency to 85 percent of what managers believe is the maximum possible. UPS trucks carry devices that track how many left-turns against traffic its drivers have to make. By helping drivers optimize their routes with fewer left turns, the system will save UPS 1.4 million gallons of fuel per year.72

Today, most managers believe that committed, actively involved employees and a positive corporate culture are also important internal measures of effectiveness. The internal process approach also has shortcomings. Total output and the orga- nization’s relationship with the external environment are not evaluated. Another problem is that evaluations of internal health and functioning are often subjective because many aspects of inputs and internal processes are not quantifiable. Manag- ers should be aware that this approach alone represents a limited view of organiza- tional effectiveness. Following the merger of Burlington Northern Railroad and the Atchison, Topeka, and Santa Fe Railway, managers at BNSF Railway committed to creating an environment that provided overall organizational effectiveness and they combine an internal process approach to measuring effectiveness with other approaches.

In PractIce BNSF railway

When faced with merging two operating systems, management systems, and cultures into one cohesive organization, managers at BNSF knew they could let the culture develop natu- rally over time or be active participants in creating the culture they wanted. They chose to take a deliberate role in building a positive internal environment.

Indicators of internal effectiveness at BNSF are that people take pride in working at the railway and have opportunities for personal growth and development. Shared values include listening to customers and doing what it takes to meet their expectations. In addi- tion, managers focus employees on continuous improvement and provide a safe working environment.

Managers combine measures of internal process effectiveness with measures of how well BNSF meets goals for 100 percent on-time, damage-free customer service, accurate and timely information about their customer shipments, and giving customers the best value for their transportation dollar. Other goals are for shareholder returns that exceed other railroads and a return on invested capital that is greater than BNSF’s cost of capital.

Other stakeholders are considered as well. BNSF considers its ethical and legal commit- ments to the communities it serves, and well as its sensitivity to the natural environment in evaluating overall effectiveness.73

As this example illustrates, many organizations use more than one approach to measuring effectiveness because organizations pursue many different types of activities and serve many different interests.

Strategic Constituents approach

The strategic constituents approach is related to the stakeholder approach described in Chapter 1. Recall from Exhibit 1.6 that organizations have a variety of internal and external stakeholders that may have competing claims on what they want from the organization. Several important stakeholder groups are also shown at the top of Exhibit 2.10.

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74 Part 2: Organization Purpose and Structural Design

In reality, it is unreasonable to assume that all stakeholders can be equally satis- fied. The strategic constituents approach measures effectiveness by focusing on the satisfaction of key stakeholders, those who are critical to the organization’s ability to survive and thrive. The satisfaction of these strategic constituents can be assessed as an indicator of the organization’s performance.74

Indicators. The initial work on evaluating effectiveness on the basis of strategic constituents looked at 97 small businesses and 7 groups relevant to those organiza- tions. Members of each group were surveyed to determine the perception of effec- tiveness from each viewpoint.75 Each constituent group had a different criterion of effectiveness:

Strategic Constituent Group Effectiveness Criteria

Owners Financial return

Employees Pay, good supervision, worker satisfaction

Customers Quality of goods and services

Creditors Creditworthiness

Community Contribution to community affairs

Suppliers Satisfactory transactions

Government Obedience to laws and regulations

If an organization fails to meet the needs of several constituent groups, it is probably not meeting its effectiveness goals. Although these seven groups reflect constituents that nearly every organization has to satisfy to some degree, each organization might have a different set of strategic constituents. For example, inde- pendent software developers are key to the success of companies such as Facebook even though they are not necessarily customers, suppliers, or owners. CEO Mark Zuckerberg works hard to win over developers. At a developers’ conference, he unveiled a technology that lets websites install a Facebook “Like” button for free. Users can click on it to signal their interest in a piece of content. The user’s approval then shows up on his or her Facebook page with a link back to the site. The technol- ogy will drive traffic from Facebook to other websites, and in turn drive traffic back to Facebook.76

Usefulness. Research has shown that the assessment of multiple constituents is an accurate reflection of organizational effectiveness, especially with respect to orga- nizational adaptability.77 Moreover, both profit and nonprofit organizations care about their reputations and attempt to shape perceptions of their performance.78 The strategic constituents approach takes a broad view of effectiveness and exam- ines factors in the environment as well as within the organization. It looks at several criteria simultaneously—inputs, internal processes, and outputs—and acknowledges that there is no single measure of effectiveness.

The strategic constituents approach is popular because it is based on the under- standing that effectiveness is a complex, multidimensional concept and has no single measure.79 In the following section, we look at another popular approach that takes a multidimensional, integrated approach to measuring effectiveness.

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Chapter 2: Strategy, Organization Design, and Effectiveness 75

an Integrated Effectiveness Model The competing values model tries to balance a concern with various parts of the organization rather than focusing on one part. This approach to effectiveness acknowledges that organizations do many things and have many outcomes.80 It combines several indicators of effectiveness into a single framework.

The model is based on the assumption that there are disagreements and competing viewpoints about what constitutes effectiveness. Managers sometimes disagree over which are the most important goals to pursue and measure. One tragic example of conflicting viewpoints and competing interests comes from NASA. After seven astronauts died in the explosion of the space shuttle Columbia in February 2003, an investigative committee found deep organizational flaws at NASA, including ineffective mechanisms for incorporating dissenting opinions between scheduling managers and safety managers. External pressures to launch on time overrode safety concerns with the Columbia launch.81 Similarly, Congressional investigations of the 2010 Deepwater Horizon oil rig explosion and oil spill in the Gulf of Mexico found that BP engineers and managers made a number of decisions that were counter to the advice of key contractors, putting goals of cost control and timeliness ahead of concerns over well safety.82 BP and NASA represent how complex organizations can be, operating not only with different viewpoints internally but also from contractors, government regulators, Congress, and the expectations of the American public.

The competing values model takes into account these complexities. The model was originally developed by Robert Quinn and John Rohrbaugh to combine the diverse indicators of performance used by managers and researchers.83 Using a comprehensive list of performance indicators, a panel of experts in organizational effectiveness rated the indicators for similarity. Their analysis found underlying dimensions of effectiveness criteria that represented competing management values in organizations.

Indicators. The first value dimension pertains to organizational focus, which is whether dominant values concern issues that are internal or external to the firm. Internal focus reflects a management concern for the well-being and efficiency of employees, and external focus represents an emphasis on the well-being of the organization itself with respect to the environment. The second value dimension pertains to organization structure and whether stability or flexibility is the dominant structural consideration. Stability reflects a management value for efficiency and top-down control, whereas flexibility represents a value for learning and change.

The value dimensions of structure and focus are illustrated in Exhibit 2.11. The combination of dimensions provides four approaches to organizational effective- ness, which, though seemingly different, are closely related. In real organizations, these competing values can and often do exist together. Each approach reflects a different management emphasis with respect to structure and focus.84

A combination of external focus and flexible structure leads to an open systems emphasis. Management’s primary goals are growth and resource acquisition. The organization accomplishes these goals through the subgoals of flexibility, readiness, and a positive external evaluation. The dominant value is establishing a good relationship with the environment to acquire resources and grow. This emphasis is similar in some ways to the resource-based approach described earlier.

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76 Part 2: Organization Purpose and Structural Design

The rational goal emphasis represents management values of structural control and external focus. The primary goals are productivity, efficiency, and profit. The organization wants to achieve output goals in a controlled way. Subgoals that facilitate these outcomes are internal planning and goal setting, which are rational management tools. The rational goal emphasis is similar to the goal approach described earlier.

The internal process emphasis is in the lower-left section of Exhibit 2.11; it reflects the values of internal focus and structural control. The primary outcome is a stable organizational setting that maintains itself in an orderly way. Organizations that are well established in the environment and simply want to maintain their cur- rent position would reflect this emphasis. Subgoals include mechanisms for efficient communication, information management, and decision making. Although this part of the competing values model is similar in some ways to the internal process ap- proach described earlier, it is less concerned with human resources than with other internal processes that lead to efficiency.

The human relations emphasis incorporates the values of an internal focus and a flexible structure. Here, management concern is for the development of human resources. Employees are given opportunities for autonomy and development. Man- agement works toward the subgoals of cohesion, morale, and training opportuni- ties. Organizations adopting this emphasis are more concerned with employees than with the environment.

The four cells in Exhibit 2.11 represent opposing organizational values. Man- agers decide which values will take priority in the organization. The way two organizations are mapped onto the four approaches is shown in Exhibit 2.12.85 Organization A is a young organization concerned with finding a niche and becom- ing established in the external environment. Primary emphasis is given to flexibility, innovation, the acquisition of resources from the environment, and the satisfaction of external strategic constituents. This organization gives moderate emphasis to hu- man relations and even less emphasis to current productivity and profits. Satisfying and adapting to the environment are more important. The attention given to open systems values means that the internal process emphasis is practically nonexistent. Stability and equilibrium are of little concern.

Exhibit 2.11 Four Approaches to Effectiveness Values

FOCUS

STRUCTURE Flexibility

Control

Internal External

Human Relations Emphasis

Primary goal: human resource development

Subgoals: cohesion, morale, training

Internal Process Emphasis

Primary goal: stability, equilibrium

Subgoals: information management, communication

Open Systems Emphasis

Primary goal: growth and resource acquisition

Subgoals: �exibility, readiness, external evaluation

Rational Goal Emphasis

Primary goal: productivity, ef�ciency, pro�t

Subgoals: planning, goal setting

Source: Adapted from Robert E. Quinn and John Rohrbaugh, “A Spatial Model of Effectiveness Criteria: Toward a Com- peting Values Approach to Organizational Analysis,” Management Science 29 (1983), 363–377; and Robert E. Quinn and Kim Cameron, “Organizational Life Cycles and Shifting Criteria of Effectiveness: Some Preliminary Evidence,” Management Science 29 (1983), 33–51.

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Chapter 2: Strategy, Organization Design, and Effectiveness 77

Organization B, in contrast, is an established business in which the dominant value is productivity and profits. This organization is characterized by planning and goal setting. Organization B is a large company that is well established in the envi- ronment and is primarily concerned with successful production and profits. Flexibil- ity and human resources are not major concerns. This organization prefers stability and equilibrium to learning and innovation because it wants to maximize the value of its established customers.

FOCUS

STRUCTURE Flexibility

Control

ExternalInternal

Human Relations Emphasis

Internal Process Emphasis

Rational Goal Emphasis

Open Systems Emphasis

Organization A

Organization B

Exhibit 2.12 Effectiveness Values for Two Organizations

3the best measures of business performance are financial. aNSWEr: Disagree. If you can have only one type of measure of business performance, it might have to be financial. But diverse views of perfor- mance, such as using the competing values model, have proven to be more effective than financials alone because managers can understand and control the actions that cause business effectiveness. Financial num- bers alone provide narrow and limited information.

AssEss Your AnswEr

Usefulness. The competing values model makes two contributions. First, it integrates diverse concepts of effectiveness into a single perspective. It incorporates the ideas of output goals, resource acquisition, and human resource development as goals the or- ganization tries to accomplish. Second, the model calls attention to how effectiveness criteria are socially constructed from management values and shows how opposing values exist at the same time. Managers must decide which values they wish to pursue and which values will receive less emphasis. The four competing values exist simulta- neously, but not all will receive equal priority. For example, a new, small organization that concentrates on establishing itself within a competitive environment will give less emphasis to developing employees than to the external environment.

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78 Part 2: Organization Purpose and Structural Design

The dominant values in an organization often change over time as organizations experience new environmental demands, new top leadership, or other changes. For example, when Samsung Group managers shifted the company’s focus from quan- tity of sales to quality of products, it required a shift in dominant values.

In PractIce Samsung

Group

Samsung once pursued sales of quantity-driven, low-end products as a primary goal. Manag- ers emphasized stability, productivity, and efficiency. That all changed when Samsung Group chairman Kun-hee Lee visited a Los Angeles retailer in the early 1990s and found boxes of Samsung products gathering dust on back shelves while customers admired the cutting edge products from other manufacturers.

Lee returned to Korea, ordered $50 million worth of inventory destroyed, and declared that quality and innovation would be the new guiding principles. The new approach, which emphasizes employee empowerment and training, creativity, flexibility, and innovative re- sponse to the external environment, has been highly successful. By 2006, the consulting firm Interbrand ranked Samsung as the world’s most valuable electronics brand. By 2013, Samsung smartphones were challenging Apple for style and innovativeness.

When Samsung flipped its focus from quantity to quality, it needed a new emphasis on people. “People Come First” and “A Company Is Its People” are mottos that guide the com- pany, and talent management is emphasized to prepare a pool of next-generation leaders. New digital learning facilities and networking spaces have been created to foster creativity and innovation.86

The effectiveness values that guided Samsung in the past reflected a primarily internal process and rational goal emphasis. Managers valued stability, productivity, efficiency, and steady profits. However chairman Kun-hee Lee saw that profitability would not continue for long unless things changed. He shifted the organization to effectiveness values that reflect a primarily human resource and open systems em- phasis. Remember, all organizations are a mix of competing ideas, goals, and values. Goal emphasis and values change over time to meet new needs.

Design Essentials

■ Organizations exist for a purpose. Top managers decide the organization’s strategic intent, including a specific mission to be accomplished. The mission statement, or official goals, makes explicit the purpose and direction of an organization. Operating goals designate specific ends sought through actual operating procedures. Official and operating goals are a key element in organizations because they meet these needs—establishing legitimacy with external groups, providing employees with a sense of direction and motivation, and setting standards of performance.

■ Goal conflict is inevitable in organizations and managers sometimes have to negotiate to reach agreement about the important goals to pursue. The hybrid organization means an organization that mixes value systems and behaviors that represent two different sectors of society, which leads to tensions and conflict within the organization over goals and priorities.

■ Two other aspects related to strategic intent are competitive advantage and core competence. Competitive advantage refers to what sets the organization apart from others and provides it with a distinctive edge. A core competence is something the organization does extremely well compared to competitors. Managers look for competitive openings and develop strategies based on their core competencies.

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Chapter 2: Strategy, Organization Design, and Effectiveness 79

■ Strategies may include any number of techniques to achieve the stated goals. Two models for formulating strategies are Porter’s competitive strategies and Miles and Snow’s strategy typology. Organization design needs to fit the firm’s competitive approach to contribute to organizational effectiveness.

■ Assessing organizational effectiveness reflects the complexity of organizations as a topic of study. Effectiveness is a social construct, meaning that effectiveness criteria are created and decided upon by people. Different people will have dif- ferent criteria for what makes the organization “effective.” Managers have to decide how they will define and measure organizational effectiveness.

■ No easy, simple, guaranteed measure will provide an unequivocal assessment of effectiveness. Organizations must perform diverse activities well—from ob- taining resource inputs to delivering outputs—to be successful. Four approaches to measuring effectiveness are the goal approach, resource-based approach, in- ternal process approach, and strategic constituents approach. Effectiveness is multidimensional, so managers typically use indicators from more than one ap- proach and they use qualitative as well as quantitative measures.

■ No approach is suitable for every organization, but each offers some advantages that the others may lack. In addition, the competing values model balances a con- cern with various parts of the organization rather than focusing on one part. This approach acknowledges different areas of focus (internal, external) and structure (flexibility, stability) and allows managers to choose the values to emphasize.

KEY CONCEPtS

analyzer competing values model competitive advantage core competence defender differentiation strategy focus goal approach human relations emphasis

hybrid organization internal process approach internal process emphasis low-cost leadership strategy mission official goals open systems emphasis operating goals organizational goal

prospector rational goal emphasis reactor resource-based approach social construct strategic constituents approach strategic intent strategy structure

DISCUSSION QUEStIONS

1. Discuss the role of top management in setting organi- zational direction.

2. How might a company’s goals for employee development be related to its goals for innovation and change? To goals for productivity? Can you discuss ways these types of goals might conflict in an organization?

3. What is a goal for the class for which you are reading this text? Who established this goal? Discuss how the goal affects your direction and motivation.

4. What is the difference between a goal and a strategy as defined in the text? Identify both a goal and a strategy for a campus or community organization with which you are involved.

5. Discuss the similarities and differences in the strategies described in Porter’s competitive strategies and Miles and Snow’s typology.

6. Do you believe mission statements and official goal statements provide an organization with genuine legitimacy in the external environment? When a company such as CVS (discussed in the chapter) makes a decision to stop selling cigarettes because that action conflicts with its mission statement, what do you see as the impact on public opinion? On future business? Discuss.

7. Suppose you have been asked to evaluate the effective- ness of the police department in a medium-sized com- munity. Where would you begin, and how would you proceed? What effectiveness approach would you prefer?

8. What are the advantages and disadvantages of the resource-based approach versus the goal approach for measuring organizational effectiveness?

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80 Part 2: Organization Purpose and Structural Design

9. What are the similarities and differences between as- sessing effectiveness on the basis of competing values versus the strategic constituents approach? Explain.

10. A noted organization theorist once said, “Organi- zational effectiveness can be whatever top management defines it to be.” Discuss.

CHaPtEr 2 WOrKSHOP Identify Your Goal Preferences

Assume that you could design the perfect organization that reflected your values. What goals would receive priority in that organization?

Rank order the list of goals below from 1 to 10 to re- flect the goals you consider most important to least impor- tant in your perfect organization.

Goal Rank Order from 1 to 10

Employee Development

Organization Stability

Market Share Leader

Creativity-Innovation

Social Contribution

High Morale/Satisfaction

High Productivity

Rapid Growth/Adaptability

Profit Maximization

Within the Law/Ethical

Questions: 1. Look at the integrated effectiveness model in Exhibit 2.11

and Exhibit 2.12. Allocate each goal above to the quadrant you think it fits. Which quadrant of the model reflects your highest goal values? Which quadrant ranks lowest?

2. Compare your ranking to other students and look for com- mon themes. In what ways are your rankings different?

3. What organizational goals are important to you that are not on the list above? Where would you rank the missing goals?

CaSE FOr aNaLYSIS | the Venable Museum of art

Locals referred to it—affectionately or sarcastically—as the “venerable Venable.” Housed in the massive Romanesque- style former mansion of Horace and Margaret Venable, the 100-year-old Venable Museum of Art had, by 2010, reached a tipping point of institutional and financial distress. Considered a point of civic and cultural pride, the home and its extensive collection of art had been the generous gift to the city’s residents under terms of the legal wills of the childless industrial tycoon and his wife following their deaths in a 1910 motor-car accident.

The museum was established and controlled, as dic- tated in the will, by a Board of Directors comprised of old- moneyed families, friends of the Venables, whose seats on the board historically passed from one generation to the next. In accordance with Horace and Margaret’s desires to make their collections “accessible to all,” the museum was, for several decades, free to the public. In its opening

days and weeks, the rarefied opportunity for locals to “see inside the mansion,” as much as to see the art, lured scores of visitors who endured long lines to enter the city’s most palatial residence. Once the newness had worn off, how- ever, the museum settled into a reputation as the cultural domain of the “la-DE-dah art elite.”

Over the decades, the cost of conserving the collec- tion, and the mounting expenses of up-keep for the man- sion and the gardens and grounds, spurred the Board to create an annual fund-raising gala that allowed society to admire the art and each other. Later, the necessity of ad- mission fees to the museum added modestly to the overall financial situation, but visitor numbers remained stagnant and the majority of locals never ventured inside. I always felt like, if I didn't drive up in a Mercedes, the staff didn’t care whether or not I came. They were cold to the point of rudeness, explained one long-time city resident.

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Chapter 2: Strategy, Organization Design, and Effectiveness 81

Problems at the museum became public knowledge. Hirings and firings occurred at the whim of the Board, and on one occasion, the entire staff was fired without warn- ing. The approaching 2010 centennial was marred by con- troversy and lawsuits over whether to sell a large portion of the collection in order to keep the museum afloat.

The media and legal commotion over losing a collection that a majority of the city’s residents had never seen sparked a generous outpouring of private financial support. During the campaign to Save the Venerable Venable, the Board, in an effort to impress potential donors, actively sought, and received, the support of an adjacent private university with promises to build a collaborative partnership.

By 2013, with improved financial means to move the museum into a second century, the venerable Board, com- posed of member names stretching five generations, faced an organizational culture shock and a new and emboldened set of stakeholders. Under pressure to define the future di- rection of the museum and in preparation for selecting a new director, the Board hired two business students to con- duct person-to-person interviews of stakeholders about the future vision and goals for the museum and the relation- ship of the university to the museum.

Excerpts from some of the more powerful comments by interviewees are listed below: a major new private donor: The museum has a repu- tation as an elitist, unfriendly institution, contrary to the intent of Horace and Margaret Venable. My wife and I gave money with the expectation that the museum would, at last, embrace the vision of its benefactors of bringing the art to everyone. In order to accomplish this, the museum must have an educational component and promote visits from public schools in the area, and particularly serve the inner-city children who don't have access to art and who live within a mile of the museum. The snobbish, elitist at- mosphere that extends from the Board through the ranks of the museum staff must be changed.

a board member: I've heard rumors that some people want to open this museum to scores of public school tours and after-school programs. I realize that school children need access to art and I sympathize with that need. But this is not a typical museum structure, it’s a house that was constructed almost 120 years ago and has a variety of deli- cate surfaces and structural refinements that must be pre- served and treasured for future generations. The upkeep of this building is tremendous with our current level of visi- tation. When you add several thousand school kids each year, the traffic through the building, the noise level within the building, compromises the structure and takes away from the experience of viewing great art. I can see creating

educational programs that go out to the schools, but not bringing huge school groups here; and certainly not serving as some sort of after-school day care. No. I cannot see that.

a university administrator: The important thing is to add lively contemporary exhibits that will attract both uni- versity students and community adults and provide new insight and dialogue about current events. We can bring attention to the museum and spur dialogue by having an occasional controversial exhibit, such as Islamic art, and exhibits that appeal to Hispanics and African-Americans. This approach would entail bringing in traveling exhibi- tions from major museums and loaning out portions of the Venable collection in exchange.

Head of the art history department: The key thing is that the museum will not have the artistic resources or the financial resources to serve the community at large. We have a wonderful opportunity to integrate the museum with the academic faculty and make it a teaching institu- tion. It can be a major resource for both undergraduate and graduate students in art education and in art history. Using the collections inside and the structure itself as a classroom, we can also work with engineering students, architecture students, and students in the liberal arts. This is a unique opportunity that will distinguish our art history depart- ment's mission from others in the country.

a faculty member of the art history department: The best use of the museum's relationship with the Univer- sity is to concentrate on training PhD level students in art history and to support scholarly research. I strongly urge the museum to focus on graduate education, which would increase the stature of the University nationally. Graduate students would be involved in the design of exhibits that would fit their research. Trying to make the museum popu- lar on campus or in the community will waste our limited resources. Our PhD students will be sought after by art his- tory departments throughout the country, adding also to the prestige of the Venable Museum of Art.

Head of the university’s new department of pub- lic history: It is imperative, upon selection of the new museum director, that the Board relinquish some of its power in the rethinking of the current collection and the selection and design of future exhibits to trained museum professionals—not art history experts. The professional expertise of the director and the staff; their knowledge of best practices in the field; their cognizance of trends and innovations in the museum field, will ultimately determine the success or failure of this museum.

You have been invited to interview for the position of museum director and must now consider how you would answer questions that might arise during the interview process and how you would move the museum forward if you took the job.

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82 Part 2: Organization Purpose and Structural Design

CaSE FOr aNaLYSIS | Covington Corrugated Parts & Services87

Larisa Harrison grimaced as she tossed her company’s latest quarterly earnings onto the desk. When sales at Virginia-based Covington Corrugated Parts & Services surged past the $10 million mark some time back, Larisa was certain the company was well positioned for steady growth. Today Covington, which provides precision ma- chine parts and service to the domestic corrugated box and paperboard industry, still enjoys a dominant market share, but sales and profits are showing clear signs of stagnation.

More than two decades ago, Larisa’s grandfather loaned her the money to start the business and then handed over the barn on what had been the family’s Shenandoah Valley farm to serve as her first factory. He had been a progressive thinker compared to many of his contemporaries who scoffed at the idea of a woman running a machine parts plant, and he saw no reason why a smart, ambitious 27-year-old woman couldn’t run anything she wanted to. His old-fashioned friends no longer scoffed when Larisa became one of the major em- ployers in the local area. Today, Covington operates from a 50,000 square-foot factory located near I-81 just a few miles from that old family barn. The business allowed Larisa to real- ize what had once seemed an almost impossible goal: She was making a good living without having to leave her close-knit extended family and rural roots. She also felt a sense of satisfac- tion at employing about 150 people, many of them neighbors. They were among the most hard-working, loyal workers you’d find anywhere. However, many of her original employees were now nearing retirement. Replacing those skilled workers was going to be difficult, she realized from experience. The area’s brightest and best young people were much more likely to move away in search of employment than their parents had been. Those who remained behind just didn’t seem to have the work ethic Larisa had come to expect in her employees.

Other problems were looming as well. Covington’s market share, once at a formidable 70 percent, was slip- ping fast, brought about not only by the emergence of new direct competitors but also by changes in the indus- try. The box and paperboard industry had never been par- ticularly recession resistant, with demand fluctuating with manufacturing output. The rocky economy had hurt the whole industry, including Covington’s largest customers. Added to that, alternative shipping products, such as flex- ible plastic films and reusable plastic containers, were be- coming more prevalent. It remained to be seen how much of a dent they’d make in the demand for boxes and paper- board. Even more worrying, consolidation in the industry had wiped out hundreds of the smaller U.S. plants that Covington once served, with many of the survivors either opening overseas facilities or entering into joint ventures abroad. The surviving manufacturers were investing in higher quality machines from Germany that broke down less frequently, thus requiring fewer of Covington’s parts.

Covington was clearly at a crossroads, and its manag- ers were arguing about which direction the company should take. If Covington wanted to grow, business as usual wasn’t going to work. But no one could seem to agree on the best way to achieve growth. The marketing manager was push- ing for moving into new products and services, perhaps even serving other industries, while the director of finance believed the plant needed to become more efficient, even lay off em- ployees, and offer customers the lowest cost. Larisa cringed as she heard that statement because her focus was always on what was best for her employees. The finance director added that efficiency and profitability should be the key criteria by which Covington measured its performance, whereas the marketing manager vehemently argued that the company would be effective only if it focused on new customers and customer satisfaction in the changing industry environment, which would mean taking some financial risks. “I know ‘cor- rugated’ is in our name,” he said, “but we’ve already moved beyond that to servicing other types of paperboard-making equipment. Why not become the all-around provider, serving any manufacturer that makes containers and packing materi- als, whether it’s paper, plastic, or whatever?” It was truly an ambitious idea, but he was so fired up about it that he had investigated possible acquisitions and partnership opportuni- ties. The finance director was livid. “If anyone is looking into mergers and acquisitions, it should be me, not the market- ing manager,” she had shouted at the most recent managers’ meeting. Meanwhile, the vice president of manufacturing presented a plan for expanding market share by exporting parts globally, which set both the marketing manager and the finance director off. “Why haven’t we even heard about this before now?” the marketing manager asked. “I’m not saying I disagree with it, but communication in this place is atro- cious. I never even got a copy of the last finance report.” The director of finance quickly shot back with a charge that the marketing manager didn’t seem to care about profit and loss anyway so why should he need a copy of the report.

As Larisa considered the chaos into which the most recent meeting had degenerated, she thought back to her days in grad- uate school and realized that organization design was part of the problem. Covington had succeeded for two decades with a loose, even haphazard structure, because everyone seemed fo- cused on building the business. People simply did what needed to be done. However, the company had never been under threat before. “Perhaps we just aren’t as well organized as we need to be to handle the challenges Covington is facing,” she thought. As she watched the last shift workers walk to their cars, Larisa pulled out a report that a consultant friend had developed for her a few months ago. The report emphasized:

• Covington rated very high on employee morale. • Covington was rated low on innovation and change. • The Covington culture emphasized production efficiency.

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Chapter 2: Strategy, Organization Design, and Effectiveness 83

• The Covington culture was not intensely focused on developing new customers.

• Each department did its job well, but collaboration across departments was rated low to medium.

• Price competition would probably intensify as the cus- tomer base grew smaller.

• The industry would continue to change toward fewer paperboard machines and toward higher quality im- ported machines.

Larisa scribbled a few notes on a pad: How should we decide what strategy to pursue? Who should have authority and responsibility for what? How do we improve communications? What criteria should we use to measure performance and ensure accountability?

Larisa knew that as soon as she or her team could determine some answers, she would sleep at least a little better.

NOtES

1. Evelyn M. Rusli, “Instagram Pictures Itself Making Money,” The Wall Street Journal Online, September 8, 2013, http:// online.wsj.com/news/articles/SB10001424127887324577304 579059230069305894 (accessed February 17, 2014).

2. Christopher Weaver and Louise Radnofsky, “Federal Health Site Stymied by Lack of Direction,” The Wall Street Journal Online, October 28, 2013, http://online.wsj.com/news/ articles/SB1000142405270230468250457915804353771933 8 (accessed February 18, 2014).

3. Amitai Etzioni, Modern Organizations (Englewood Cliffs, NJ: Prentice Hall, 1964), 6.

4. John P. Kotter, “What Effective General Managers Really Do,” Harvard Business Review, November–December 1982, 156–167; Henry Mintzberg, The Nature of Managerial Work (New York: Harper & Row, 1973); and Henry Mintzberg, Managing (San Francisco: Berrett-Kohler Publishers, 2009).

5. Charles C. Snow and Lawrence G. Hrebiniak, “Strategy, Distinctive Competence, and Organizational Performance,” Administrative Science Quarterly 25 (1980), 317–335; and Robert J. Allio, “Strategic Thinking: The Ten Big Ideas,” Strategy & Leadership 34, no. 4 (2006), 4–13.

6. Based on A. G. Lafley and Roger Martin, “Instituting a Com- pany-Wide Strategic Conversation at Procter & Gamble,” Strategy & Leadership 41, no. 4 (2013), 4–9.

7. Miguel Bustillo, “Corporate News—Boss Talk: Wal-Mart’s U.S. Chief Aims for Turnaround,” The Asian Wall Street Journal, March 22, 2011, 22; and Miguel Bustillo, “Wal-Mart Tries to Recapture Mr. Sam’s Winning Formula,” The Wall Street Journal Online, February 22, 2011, http://online.wsj .com/article/SB100014240527487038039045761527531117 88930.html (accessed July 17, 2012).

8. Gary Hamel and C. K. Prahalad, “Strategic Intent,” Harvard Business Review July–August 2005, 148–161.

9. Ibid. 10. Barbara Bartkus, Myron Glassman, and R. Bruce McAfee,

“Mission Statements: Are They Smoke and Mirrors?” Busi- ness Horizons, November–December 2000, 23–28; and Mark Suchman, “Managing Legitimacy: Strategic and Institutional Approaches,” Academy of Management Review 20, no. 3 (1995), 571–610.

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12. Bill George, “The Company’s Mission Is the Message,” Strategy + Business, Issue 33 (Winter 2003), 13–14; and Jim Collins and Jerry Porras, Built to Last: Successful Habits of Visionary Companies (New York: Harper Business, 1994).

13. Hamel and Prahalad, “Strategic Intent.”

14. Arthur A. Thompson, Jr. and A. J. Srickland III, Strategic Management: Concepts and Cases, 6th ed. (Homewood, IL: Irwin, 1992); and Briance Mascarenhas, Alok Baveja, and Mamnoon Jamil, “Dynamics of Core Competencies in Leading Multinational Companies,” California Management Review 40, no. 4 (Summer 1998), 117–132.

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17. Charles Perrow, “The Analysis of Goals in Complex Organi- zations,” American Sociological Review 26 (1961), 854–866.

18. Johannes U. Stoelwinde and Martin P. Charns, “The Task Field Model of Organization Analysis and Design,” Human Relations 34 (1981), 743–762; and Anthony Raia, Managing by Objectives (Glenview, IL: Scott Foresman, 1974).

19. Henrich Greve, “UPS’s Christmas Failure Delivers a Powerful Lesson About Alliances,” Strategy + Business Blog, January 16, 2014, http://www.strategy-business.com/blog /UPSs-Christmas-Failure-Delivers-a-Powerful-Lesson-about -Alliances?gko=e33d3 (accessed February 19, 2014).

20. Paul Beckett, Vibhuti Agarwal, and Julie Jargon, “Starbucks Brews Plan to Enter India,” The Wall Street Journal Online, January 14, 2011, http://online.wsj.com/article/SB1000142405274870358340 4576079593558838756.html (accessed July 16, 2011).

21. James Dao, “Wal-Mart Plans to Hire Any Veteran Who Wants a Job,” The New York Times, January 14, 2013, http://www .nytimes.com/2013/01/15/us/wal-mart-to-announce-extensive- plan-to-hire-veterans.html?_r=0 (accessed February 19, 2014).

22. Christina Passariello, “To L’Oreal, Brazil’s Women Need Fresh Style of Shopping,” The Wall Street Journal, January 21, 2011, B1.

23. Reed Abelson, “Managing Outcomes Helps a Children’s Hos- pital Climb in Renown,” The New York Times, September 15, 2007, C1.

24. Robert L. Porter and Gary P. Latham, “The Effect of Employee Learning Goals and Goal Commitment on Departmental Performance,” Journal of Leadership & Organizational Studies 20, no. 1 (2013), 62–68.

25. William Alden and Sydney Ember, “Wall St. Shock: Take a Day Off, Even a Sunday,” The New York Times, January 11, 2014, A1.

26. Brooks Barnes, “Animation Meets Economic Reality,” The New York Times, April 4, 2011, B1.

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84 Part 2: Organization Purpose and Structural Design

27. A. G. Lafley and Ram Charan, The Game Changer: How You Can Drive Revenue and Profit Growth with Innovation (New York: Crown Business, 2008); Larry Huston and Nabil Sakkab, “Connect and Develop; Inside Procter & Gamble’s New Model for Innovation,” Harvard Business Review, March 2006, 58–66; G. Gil Cloyd, “P&G’s Secret: Innovating Inno- vation,” Industry Week, December 2004, 26–34; and “P&G Sets Two New Goals for Open Innovation Partnerships,” Press Release (October 28, 2010), Procter & Gamble website, http://www.pginvestor.com/phoenix.zhtml?c=104574&p=irol- newsArticle&ID=1488508 (accessed July 15, 2011).

28. Amy Chozick, Nathaniel Popper, Edward Wong, and David Carr, “At Bloomberg, Signs of Change in News Mission,” The New York Times, November 25, 2013, A1.

29. This discussion is based on Anne-Claire Pache and Filipe Santos, “Inside the Hybrid Organization: Selective Coupling as a Response to Competing Institutional Logics,” Academy of Management Journal 56, no. 4 (2013), 972–1011.

30. Stephen Friedman and James K. Sebenius, “Organization Transformation: The Quiet Role of Coalitional Leader- ship,” Ivey Business Journal, January–February 2009, www. iveybusinessjournal.com/topics/leadership/ organizational- transformation-the-quiet-role-of-coalitional-leadership (accessed January 27, 2012); and Gerald R. Ferris et al., “ Political Skill in Organizations,” Journal of Management, June 2007, 290–320.

31. See studies reported in Gary P. Latham and Edwin A. Locke, “Enhancing the Benefits and Overcoming the Pitfalls of Goal Setting,” Organizational Dynamics 35, no. 4 (2006), 332–340.

32. Porter and Latham, “The Effect of Employee Learning Goals and Goal Commitment on Departmental Performance.”

33. Adam Bryant, “Tell Me the Problem and 3 Ways to Solve It” (an interview with Jennifer Dulski, Corner Office column), The New York Times, December 1, 2013, BU2.

34. James D. Thompson, Organizations in Action (New York: McGraw Hill, 1967), 83–98.

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39. Michael E. Porter, “Strategy and the Internet,” Harvard Business Review, March 2001, 63–78; and John Magretta, “Why Busi- ness Models Matter,” Harvard Business Review, May 2002, 86.

40. Jack Nicas, “Allegiant Air: The Tardy, Gas-Guzzling, Most Prof- itable Airline in America,” The Wall Street Journal, June 4, 2013, http://online.wsj.com/article/SB1000142412788732442390457 8525310460541592.html (accessed September 16, 2013).

41. Richard Teitelbaum, “The Wal-Mart of Wall Street,” Fortune, October 13, 1997, 128–130.

42. Raymond E. Miles and Charles C. Snow, Organizational Strat- egy, Structure, and Process (New York: McGraw-Hill, 1978).

43. Nicholas Casey, “New Nike Sneaker Targets Jocks, Greens, Wall Street,” The Wall Street Journal, February 15, 2008, B1.

44. Norihiko Shirouzu, “Chinese Begin Volvo Overhaul,” The Wall Street Journal, June 7, 2011, B1.

45. Geraldine Fabrikant, “The Paramount Team Puts Profit Over Splash,” The New York Times, June 30, 2002, Section 3, 1, 15.

46. Greg Bensinger, “Amazon Revenue, Spending Grow Apace,” The Wall Street Journal, April 26, 2013, B4; and Mylene Mangalindan, “Slow Slog for Amazon’s Digital Media— Earnings Today May Provide Data on What Works,” The Wall Street Journal, April 23, 2008, B1.

47. Susan Berfield, “The End: Barnes & Noble in Silicon Valley,” Bloomberg Businessweek, July 25, 2013, http://www .businessweek.com/articles/2013-07-25/the-end-barnes-and- noble-in-silicon-valley (accessed February 20, 2014).

48. “On the Staying Power of Defenders, Analyzers, and Prospec- tors: Academic Commentary by Donald C. Hambrick,” Acad- emy of Management Executive 17, no. 4 (2003), 115–118.

49. Etzioni, Modern Organizations, 8; and Gary D. Sandefur, “ Efficiency in Social Service Organizations,” Administration and Society 14 (1983), 449–468.

50. Richard M. Steers, Organizational Effectiveness: A Behavioral View (Santa Monica, CA: Goodyear, 1977), 51.

51. Michael Hammer, “The 7 Deadly Sins of Performance Mea- surement (and How to Avoid Them),” MIT Sloan Manage- ment Review 48, no. 3 (Spring 2007), 19–28.

52. Karl E. Weick and Richard L. Daft, “The Effectiveness of Interpretation Systems,” in Kim S. Cameron and David A. Whetten, eds., Organizational Effectiveness: A Comparison of Multiple Models (New York: Academic Press, 1982).

53. This discussion is based on Robert D. Herman and David O. Renz, “Advancing Nonprofit Organizational Effectiveness Research and Theory,” Nonprofit Management and Leader- ship 18, no. 4 (Summer 2008), 399–415; Eric J. Walton and Sarah Dawson, “Managers’ Perceptions of Criteria of Or- ganizational Effectiveness,” Journal of Management Studies 38, no. 2 (March 2001), 173–199; and K. S. Cameron and D. A. Whetton, “Organizational Effectiveness: One Model or Several?” in Organizational Effectiveness: A Comparison of Multiple Models, K. S. Cameron and D. A. Whetton, eds., (New York: Academic Press, 1983), 1–24.

54. Story told in Herman and Renz, “Advancing Nonprofit Organizational Effectiveness Research and Theory.”

55. Graham Kenny, “From the Stakeholder Viewpoint: Designing Measurable Objectives,” Journal of Business Strategy 33, no. 6 (2012), 40–46.

56. Most of these indicators are from Cristina B. Gibson, Mary E. Zellmer-Bruhn, and Donald P. Schwab, “Team Effectiveness in Multinational Organizations: Evaluation Across Contexts,” Group & Organizational Management 28, no. 4 (December 2003), 444–474.

57. Herman and Renz, “Advancing Nonprofit Organizational Effectiveness Research and Theory”; Y. Baruch and N. Ramalho, “Communalities and Distinctions in the Measurement of Organizational Performance and Effective- ness Across For-Profit and Nonprofit Sectors,” Nonprofit and Voluntary Sector Quarterly 35, no. 1 (2006), 39–65; A. M. Parhizgari and G. Ronald Gilbert, “Measures of Or- ganizational Effectiveness: Private and Public Sector Perfor- mance,” Omega; The International Journal of Management Science 32 (2004), 221–229; David L. Blenkhorn and Brian Gaber, “The Use of ‘Warm Fuzzies’ to Assess Organizational

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Chapter 2: Strategy, Organization Design, and Effectiveness 85

Effectiveness,” Journal of General Management, 21, no. 2 (Winter 1995), 40–51; and Scott Leibs, “Measuring Up,” CFO (June 2007), 63–66.

58. Reported in David H. Freedman, “What’s Next: The Dash- board Dilemma,” Inc., November 1, 2006, http://www.inc .com/magazine/20061101/column-freedman.html (accessed July 14, 2011).

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71. J. Barton Cunningham, “Approaches to the Evaluation of Or- ganizational Effectiveness,” Academy of Management Review 2 (1977), 463–474; and Beckhard, Organization Development.

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Barry M. Staw and L. L. Cummings, eds., Research in Orga- nizational Behavior (Greenwich, CT: JAI Press, 1984), 235– 286; and Rosabeth Moss Kanter and Derick Brinkerhoff, “Organizational Performance: Recent Developments in Mea- surement,” Annual Review of Sociology 7 (1981), 321–349.

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86

Organization Structure

Information-Sharing Perspective on Structure Centralized Versus Decentralized • Vertical Information Sharing • Horizontal Information Sharing and Collaboration • Relational Coordination

Organization Design Alternatives Required Work Activities • Reporting Relationships • Departmental Grouping Options

Functional, Divisional, and Geographic Designs Functional Structure • Functional Structure with Horizontal Linkages • Divisional Structure • Geographic Structure

Matrix Structure Conditions for the Matrix • Strengths and Weaknesses

Horizontal Structure Characteristics • Strengths and Weaknesses

Virtual Networks and Outsourcing How the Structure Works • Strengths and Weaknesses

Hybrid Structure

Applications of Structural Design Structural Alignment • Symptoms of Structural Deficiency

Design Essentials

Learning Objectives After reading this chapter you should be able to: 1. Define the three key components of

organization structure. 2. Explain the vertical and horizontal information-

sharing concepts of structure. 3. Understand the role of task forces and teams

in organization structure. 4. Identify departmental grouping options, such

as functional, divisional, and matrix. 5. Understand the strengths and weaknesses of

various structural forms. 6. Explain new horizontal and virtual network

structural forms. 7. Describe the symptoms of structural deficiency

within an organization.

Fundamentals of Organization Structure3Chapter

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Chapter 3: Fundamentals of Organization Structure 87

Before reading this chapter, please check whether you agree or disagree with each of the following statements:

1 A popular form of organizing is to have employees work on what they want in whatever department they choose so that motivation and enthusiasm stay high. I AGREE I DISAGREE

2 Committees and task forces whose members are from different departments are often worthless for getting things done. I AGREE I DISAGREE

3 Top managers are smart to maintain organizational control over the activities of key work units rather than contracting out some work unit tasks to other firms. I AGREE I DISAGREE

Carlos Ghosn brought Nissan back from the brink of bankruptcy in the late 1990s, but his skills at restructuring were put to the test once again when Japan’s Number 2 automaker began showing surprisingly weak profit and declining market share in 2013. Top executives pinpointed the cause. It wasn’t in the design studio or on the factory floor, they say, or even in the planning office. The problem was the organization structure, with one chief operating officer overseeing a rapidly expanding number of opportunities and investments around the globe. In the new structure, three executive vice presidents will oversee planning and execution. They will work closely together from the beginning, which will enable them to spot problems quickly, balance resources, and coordinate investments among regions. The primary goal of the new structure is to improve coordination so that problems can be solved quickly. The goals are achievable, Ghosn says, with the right management structure in place so that people are collaborating. “We need a management team that delivers,” he said.1

Organization structure is one factor that helps companies execute their strategies and achieve their goals. Lack of coordination and collaboration is a tremendous problem for many organizations today, as it was at Nissan. The World Bank, for example, recently conducted a survey of employees that revealed a “terrible” environment for collaboration at the huge economic development institution that works in more than 100 countries.2 Many companies use structural innovations such as teams and matrix designs to achieve the coordination and flexibility they need. Teams, for example, are part of the strategy used by the Federal Bureau of Investigation (FBI) to combat terrorism. Like other organizations, the FBI must find ways to accomplish more with limited resources. One innovation was the creation of Flying Squads, which are teams of volunteer agents and support staff from various offices who are ready to spring into action when minimally staffed FBI offices around the world request assistance.3 Jeff Bezos of Amazon organizes around the concept of the “two-pizza team.” The company, he said, should be organized into autonomous groups of fewer than 10 people—small enough that, when working late, the team could be fed with two pizzas.4

Because of the complexity of today’s environment, many organizations are more complex and amorphous than they used to be. Wyeth Pharmaceuticals formed a joint venture with Accenture called the Alliance for Clinical Data Excellence designed to “bring together the best of both Wyeth and Accenture” for managing Wyeth’s entire clinical testing operation—from protocol design to patient recruitment to site

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88 Part 2: Organization Purpose and Structural Design

monitoring.5 Accenture doesn’t have a formal headquarters, no official branches, no permanent offices. The company’s chief technologist is located in Germany, its head of human resources is in Chicago, the chief financial officer is in Silicon Valley, and most of its consultants are constantly on the move.6 Wyeth and Accenture reflect the structural trend among organizations toward outsourcing, alliances, and virtual networking.

Still other firms continue to be successful with traditional functional structures that are coordinated and controlled through the vertical hierarchy. Organizations use a wide variety of structural alternatives to help them achieve their purpose and goals, and nearly every firm needs to undergo reorganization at some point to help meet new challenges. Structural changes are needed to reflect new strategies or respond to changes in other contingency factors introduced in Chapters 1 and 2: environment, technology, size and life cycle, and culture.

Purpose of This Chapter

This chapter introduces basic concepts of organization structure and shows how to design structure as it appears on the organization chart. First, we define structure and provide an overview of structural design. Next, an information- sharing perspective explains how to design vertical and horizontal linkages to provide needed information flow and coordination. The chapter then presents basic design options, followed by strategies for grouping organizational activities into functional, divisional, matrix, horizontal, virtual network, or hybrid structures. The final section examines how the application of basic structures depends on the organization’s situation (various contingencies) and outlines the symptoms of structural misalignment.

Organization Structure The following three key components define organization structure:

1. Organization structure designates formal reporting relationships, including the number of levels in the hierarchy and the span of control of managers and supervisors.

2. Organization structure identifies the grouping together of individuals into de- partments and of departments into the total organization.

3. Organization structure includes the design of systems to ensure effective com- munication, coordination, and integration of efforts across departments.7

These three elements of structure pertain to both vertical and horizontal aspects of organizing. For example, the first two elements are the structural framework, which is the vertical hierarchy.8 The third element pertains to the pattern of interactions among organizational employees. An ideal structure encourages employees to pro- vide horizontal information and coordination where and when it is needed.

Organization structure is reflected in the organization chart. It isn’t possible to see the internal structure of an organization the way we might see its manufac- turing tools, offices, website, or products. Although we might see employees going about their duties, performing different tasks, and working in different locations, the only way to actually see the structure underlying all this activity is through the organization chart. The organization chart is the visual representation of a whole set of underlying activities and processes in an organization. Exhibit 3.1 shows a simple organization chart for a traditional organization. An organization chart can

Briefcase As an organization manager, keep these guidelines in mind: Develop organization charts that describe task responsibilities, reporting relationships, and the grouping of individuals into depart- ments. provide suf- ficient documentation so that all people within the organization know to whom they report and how they fit into the total organization picture.

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Chapter 3: Fundamentals of Organization Structure 89

be quite useful in understanding how a company works. It shows the various parts of an organization, how they are interrelated, and how each position and depart- ment fits into the whole.

The concept of an organization chart, showing what positions exist, how they are grouped, and who reports to whom, has been around for centuries.9 For example, diagrams outlining church hierarchy can be found in medieval churches in Spain. However, the use of the organization chart for business stems largely from the Indus- trial Revolution. As we discussed in Chapter 1, as work grew more complex and was performed by greater numbers of work- ers, there was a pressing need to develop ways of managing and controlling orga- nizations. The growth of the railroads provides an example. After the collision of two passenger trains in Massachu- setts in 1841, the public demanded bet- ter control of the operation. As a result, the board of directors of the Western Railroad took steps to outline “definite responsibilities for each phase of the company’s business, drawing solid lines of authority and command for the rail- road’s administration, maintenance, and operation.”10

Exhibit 3.2 shows an interesting example of an early organization chart created by Daniel McCallum for the Erie Railroad in 1855. Faced with finan- cial strain and slumping productivity, McCallum created charts to explain the railroad’s operations to investors and to show the division of responsibilities for superintendents along hundreds of miles

CEO

Vice President Manufacturing

Director Human Resources

Vice President Finance

Chief Accountant

Budget Analyst

Plant Superintendent

Training Specialist

Maintenance Superintendent

Benets Administrator

Exhibit 3.1 A Sample Organization Chart

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Exhibit 3.2 Organization Chart for the Erie Railroad, 1855

Source: Erie Railroad Organization Chart of 1855. Library of Congress, Haer, N.Y.

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90 Part 2: Organization Purpose and Structural Design

of rail lines. McCallum divided the railroad into geographic divisions of manageable size, with each division headed by a superintendent.11

The type of organization structure that gradually grew out of these efforts in the late nineteenth and early twentieth centuries was one in which the CEO was placed at the top, and there was a clear hierarchy of authority extending to everyone else arranged in layers down below, as illustrated in Exhibit 3.1. The thinking and deci- sion making are done by those at the top, and the physical work is performed by employees who are organized into distinct, functional departments. This structure was quite effective and became entrenched in business, nonprofit, and military or- ganizations for most of the twentieth century. However, this type of vertical struc- ture is not always effective, particularly in rapidly changing environments. Over the years organizations have developed other structural designs, many of them aimed at increasing horizontal coordination and communication and encouraging adapta- tion to external changes. This chapter’s BookMark suggests that new approaches to organizing and managing people are crucial for companies to attain durable com- petitive advantages in the twenty-first century.

1A popular form of organizing is to have employees work on what they want in whatever department they choose so that motivation and enthusiasm stay high. ANSWER: Disagree. A small number of firms have tried this approach with some success, but a typical organization needs to structure its work activi- ties, positions, and departments in a way that ensures work is accomplished and coordinated to meet organizational goals. Many managers try to give some consideration to employee choices as a way to keep enthusiasm high.

AssEss Your AnswEr

Information-Sharing Perspective on Structure The organization should be designed to provide both vertical and horizontal information flow as necessary to accomplish the organization’s overall goals. If the structure doesn’t fit the information requirements of the organization, people either will have too little information or will spend time processing information that is not vital to their tasks, thus reducing effectiveness.12 However, there is an inherent tension between vertical and horizontal mechanisms in an organization. Whereas vertical linkages are designed primarily for control, horizontal linkages are designed for coordination and collaboration, which usually means reducing control.

Centralized Versus Decentralized

One question is the level at which decisions are made in the organization, because that determines where information is needed. Centralization and decentralization pertain to the hierarchical level at which decisions are made. Centralization means that decision authority is located near the top of the organization. With decentralization, decision authority is pushed downward to lower organization levels.

Organizations can choose whether to orient toward a traditional organization designed for efficiency, which emphasizes vertical communication and control (a mechanistic design, as described in Chapter 1), or toward a contemporary

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Chapter 3: Fundamentals of Organization Structure 91

flexible learning organization, which emphasizes horizontal communication and coordination (an organic design). Exhibit 3.3 compares organizations designed for efficiency with those designed for learning and adaptation. An emphasis on efficiency and control is associated with specialized tasks, a hierarchy of authority, rules and regulations, formal reporting systems, few teams or task forces, and centralized decision making. Emphasis on learning and adaptation is associated with shared tasks; a relaxed hierarchy; few rules; face-to-face communication; many teams and task forces; and informal, decentralized decision making.

Organizations may have to experiment to find the correct degree of centralization or decentralization to meet their needs. For example, a study by William Ouchi found that three large school districts that shifted to a more flexible, decentralized

The Future of Management By Gary Hamel with Bill Breen

Management breakthroughs such as the principles of sci- entific management, divisionalized organization structure, and using brand managers for horizontal coordination have created more sustained competitive advantage than any hot new product or service innovation, says Gary Hamel in The Future of Management, written with Bill Breen. Wait a minute—haven’t those ideas been around since—well, forever? Exactly the point, says Hamel. In fact, he points out that many of today’s managers are running twenty-first- century organizations using ideas, practices, and structural mechanisms invented a century or more ago. At that time, the principles of vertical hierarchy, specialization, bureau- cratic control, and strong centralization were radical new approaches developed to solve the problem of inefficiency. They are too static, regimented, and binding today when the pace of change continues to accelerate. Today’s orga- nizations, Hamel argues, have to become “as strategically adaptable as they are operationally efficient.”

SOME STRUCTURAL INNOVATORS Hamel suggests that the practice of management must undergo a transformation akin to that which occurred with the Industrial Revolution and the advent of scientific man- agement. Here, from The Future of Management, are a few examples that offer glimpses of what is possible when man- agers build structure around principles of community, cre- ativity, and information sharing rather than strict hierarchy:

• Whole Foods Market. Teams are the basic organiza- tional unit at Whole Foods, and they have a degree of autonomy nearly unprecedented in the retail indus- try. Each store is made up of eight or so self-directed

teams that oversee departments such as fresh pro- duce, prepared foods, dairy, or checkout. Teams are responsible for all key operating decisions, including pricing, ordering, hiring, and in-store promotions.

• W. L. Gore. W. L. Gore’s innovation was to organize work so that good things happen whether managers are “in control” or not. Gore, best known for Gore-Tex fabric, lets employees decide what they want to do. There are no management layers, few titles, and no organization charts. As at Whole Foods, the core operating units are small teams, but at Gore people can choose which teams to work on and say no to requests from anyone. Gore also builds in strong accountability—people are reviewed by at least 20 of their peers every year.

• Visa. Everybody’s heard of Visa, but few people know anything about the organization behind the brand. Visa is the world’s first almost-entirely virtual com- pany. In the early 1970s, a group of banks formed a consortium that today has grown into a global net- work of 21,000 financial institutions and more than 1.3  billion cardholders. The organization is largely self- organizing, continually evolving as conditions change.

HOW TO BE A MANAGEMENT INNOVATOR Most companies have a system for product innovation, but Hamel notes that few have a well-honed process for man- agement innovation. The Future of Management provides detailed steps managers can take to increase the chances of a breakthrough in management thinking. Hamel consid- ers the rise of modern management and organization de- sign the most important innovation of the twentieth century. It is time now, though, for twenty-first-century ideas.

The Future of Management, by Gary Hamel with Bill Breen, is pub- lished by Harvard Business School Press.

BookMark 3.0 hAvE You rEAd this book?

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92 Part 2: Organization Purpose and Structural Design

structure, giving school principals more autonomy, responsibility, and control over resources, performed better and more efficiently than large districts that were highly centralized.13 Government leaders in Great Britain hope the same thing will happen when they decentralize the country’s National Health Service. The system is undergoing the most radical restructuring since it was founded in 1948, with a key part of the plan to shift control of the multibillion dollar annual healthcare budget to doctors at the local level. Leaders believe decentralization will cut costs, simplify and streamline procedures, and reduce inefficiency by “putting power in the hands of patients and clinicians.”14

Even Japanese companies such as Toyota, which have a strong tradition of centralization, are seeing the power of decentralization for promoting a sense of ownership.

Exhibit 3.3 The Relationship of Organization Design to Efficiency Versus Learning Outcomes

In PractIce toyota

“We didn’t have to go back to Japan for approval on everything,” said Randy Stephens, the chief engineer at the Toyota Technical Center near Ann Arbor, Michigan, where the new ver- sion of the Avalon was designed and engineered. “We might go back to review the status of the project, but there is a feeling of ownership of this car here.”

The new version of the Avalon, designed and engineered in Michigan and built in Ken- tucky, is being promoted as the company’s most American vehicle ever. It is the first pro- totype not developed in Japan, and it is testing how well Toyota can decentralize decision making to the company’s subsidiaries. Following four years of crisis related to safety issues and recalls, Toyota managers have been gradually rebuilding a stronger company, which includes delegating responsibilities more globally.

The company was strongly criticized for its need to coordinate every decision regard- ing the safety issues and recalls from headquarters. Executives have since overhauled the quality control process and decentralized more decision making to regional managers in charge of safety in North America, Europe, and Asia.15

Although many decisions will still rest with executives at headquarters, Toyota has real- ized that some decisions need to be made close to the action. Regional managers believe the problems Toyota went through have given top executives freedom to take risks they might not have taken otherwise.16

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Dominant Structural Approach

Vertical Organization Designed for Eff iciency

(Mechanistic)

Horizontal Organization Designed for Learning

(Organic)

Horizontal structure is dominant • • • • •

Shared tasks, empowerment Relaxed hierarchy, few rules Horizontal communication, face-to-face Many teams and task forces Decentralized decision making

Vertical structure is dominant • • • • •

Specialized tasks Strict hierarchy, many rules Vertical communication and reporting systems Few teams, task forces, or integrators Centralized decision making

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Chapter 3: Fundamentals of Organization Structure 93

However, not every organization should decentralize all decisions. Within many companies, there is often a “tug of war between centralization and decentralization” as top executives want to centralize some operations to eliminate duplication, while business managers want to maintain decentralized control.17 Managers are always searching for the best combination of vertical control and horizontal collaboration, centralization and decentralization, for their own situations.18

Vertical Information Sharing

Organization design should facilitate the communication among employees and de- partments that is necessary to accomplish the organization’s overall task. Managers create information linkages to facilitate communication and coordination among organizational elements. Vertical linkages are used to coordinate activities between the top and bottom of an organization and are designed primarily for control of the organization. Employees at lower levels should carry out activities consistent with top-level goals, and top executives must be informed of activities and accomplish- ments at the lower levels. Organizations may use any of a variety of structural de- vices to achieve vertical linkage, including hierarchical referral, rules and plans, and formal management information systems.19

Hierarchical Referral. The first vertical device is the hierarchy, or chain of com- mand, which is illustrated by the vertical lines in Exhibit 3.1. If a problem arises that employees don’t know how to solve, it can be referred up to the next level in the hierarchy. When the problem is solved, the answer is passed back down to lower levels. The lines of the organization chart act as communication channels.

Rules and Plans. The next linkage device is the use of rules and plans. To the extent that problems and decisions are repetitious, a rule or procedure can be established so employees know how to respond without communicating directly with their manager. Rules and procedures provide a standard information source enabling employees to be coordinated without actually communicating about every task. At PepsiCo’s Gemesa cookie business in Mexico, for example, managers carefully brief production workers on goals, processes, and procedures so that employees them- selves do most of the work of keeping the production process running smoothly, enabling the plants to operate with fewer managers.20 Plans also provide standing information for employees. The most widely used plan is the budget. With carefully designed and communicated budget plans, employees at lower levels can be left on their own to perform activities within their resource allotment.

Vertical Information Systems. A vertical information system is another strategy for increasing vertical information capacity. Vertical information systems include the periodic reports, written information, and computer-based communications dis- tributed to managers. Information systems make communication up and down the hierarchy more efficient.

In today’s world of corporate financial scandals and ethical concerns, many top managers are considering strengthening their organization’s linkages for vertical in- formation and control. The other major issue in organizing is to provide adequate horizontal linkages for coordination and collaboration.

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94 Part 2: Organization Purpose and Structural Design

Horizontal Information Sharing and Collaboration

Horizontal communication overcomes barriers between departments and provides opportunities for coordination and collaboration among employees to achieve unity of effort and organizational objectives. Collaboration means a joint effort between people from two or more departments to produce outcomes that meet a common goal or shared purpose and that are typically greater than what any of the individu- als or departments could achieve working alone.21 To understand the value of col- laboration, consider the 2011 U.S. mission to raid Osama bin Laden’s compound in Pakistan. The raid could not have succeeded without close collaboration between the Central Intelligence Agency (CIA) and the U.S. military. There has traditionally been little interaction between the nation’s intelligence officers and its military of- ficers, but the war on terrorism has changed that mindset. During planning for the bin Laden mission, military officers spent every day for months working closely with the CIA team in a remote, secure facility on the CIA campus. “This is the kind of thing that, in the past, people who watched movies thought was possible, but no one in the government thought was possible,” one official later said of the collab- orative mission.22

Horizontal linkage refers to communication and coordination horizontally across organizational departments. Its importance is articulated by comments made by Lee Iacocca when he took over Chrysler Corporation in the 1980s. The following quote might be three decades old, but it succinctly captures a problem that still occurs in organizations all over the world:

What I found at Chrysler were thirty-five vice presidents, each with his own turf. . . . I couldn’t believe, for example, that the guy running engineering departments wasn’t in constant touch with his counterpart in manufacturing. But that’s how it was. Everybody worked independently. I took one look at that system and I almost threw up. That’s when I knew I was in really deep trouble. . . . Nobody at Chrysler seemed to understand that interaction among the different functions in a company is absolutely critical. People in engineering and manufacturing almost have to be sleeping together. These guys weren’t even flirting!23

During his tenure at Chrysler, Iacocca pushed horizontal coordination to a high level. All the people working on a specific vehicle project—designers, engineers, and manufacturers, as well as representatives from marketing, finance, purchasing, and even outside suppliers—worked together on a single floor so they could easily com- municate. Horizontal linkage mechanisms often are not drawn on the organization chart, but nevertheless are a vital part of organization structure. Small organizations usually have a high level of interaction among all employees, but in a large orga- nization such as Chrysler, Microsoft, or Toyota, providing mechanisms to ensure horizontal information sharing is critical to effective collaboration, knowledge shar- ing, and decision making.24 For example, poor coordination and lack of informa- tion sharing has been blamed for delaying Toyota’s decisions and response time to quality and safety issues related to sticky gas petals, faulty brakes, and other prob- lems.25 The following devices are structural alternatives that can improve horizon- tal coordination and information flow.26 Each device enables people to exchange information.

Briefcase As an organization manager, keep these guidelines in mind: provide vertical and horizontal information linkages to integrate diverse departments into a coherent whole. achieve vertical link- age through hierarchy referral, rules and plans, and vertical information systems. achieve hori- zontal linkage through cross-functional infor- mation systems, liaison roles, task forces, full- time integrators, and teams.

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Chapter 3: Fundamentals of Organization Structure 95

Information Systems. A significant method of providing horizontal linkage in today’s organizations is the use of cross-functional information systems. Comput- erized information systems enable managers or frontline workers throughout the organization to routinely exchange information about problems, opportunities, ac- tivities, or decisions. For example, at Veterans Administration (VA) hospitals around the country, a sophisticated system called Vista enables people all across the organi- zation to access complete patient information and provide better care. By enabling close coordination and collaboration, technology helped transform the VA into one of the highest-quality, most cost-effective medical providers in the United States.27

Some organizations also encourage employees to use the company’s information systems to build relationships all across the organization, aiming to support and en- hance ongoing horizontal coordination across projects and geographical boundaries. CARE International, one of the world’s largest private international relief organiza- tions, enhanced its personnel database to make it easy for people to find others with congruent interests, concerns, or needs. Each person in the database has listed past and current responsibilities, experience, language abilities, knowledge of foreign countries, emergency experiences, skills and competencies, and outside interests. The database makes it easy for people working across borders to seek each other out, share ideas and information, and build enduring horizontal connections.28

Liaison Roles. A higher level of horizontal linkage is direct contact between man- agers or employees affected by a problem. One way to promote direct contact is to create a special liaison role. A liaison person is located in one department but has the responsibility for communicating and achieving coordination and collaboration with another department. Liaison roles often exist between engineering and manu- facturing departments because engineering has to develop and test products to fit the limitations of manufacturing facilities. An engineer’s office might be located in the manufacturing area so the engineer is readily available for discussions with man- ufacturing supervisors about engineering problems with the manufactured products. A research and development person might sit in on sales meetings to coordinate new product development with what sales people think customers are wanting.

Task Forces. Liaison roles usually link only two departments. When linkage in- volves several departments, a more complex device such as a task force is required. A task force is a temporary committee composed of representatives from each or- ganizational unit affected by a problem.29 Each member represents the interest of a department or division and can carry information from the meeting back to that department.

Task forces are an effective horizontal linkage device for temporary issues. They solve problems by direct horizontal collaboration and reduce the information load on the vertical hierarchy. Typically, they are disbanded after their tasks are accomplished. Organizations have used task forces for everything from organizing the annual com- pany picnic to solving expensive and complex manufacturing problems. One example comes from Georgetown Preparatory School in North Bethesda, Maryland, which used a task force made up of teachers, administrators, coaches, support staff, and outside consultants to develop a flu preparedness plan. When the H1N1 flu threat hit several years ago, Georgetown was much better equipped than most educational institutions to deal with the crisis because they had a plan in place.30

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96 Part 2: Organization Purpose and Structural Design

2Committees and task forces whose members are from different departments are often worthless for getting things done. ANSWER: Disagree. The point of cross-functional committees and task forces is to share information to coordinate their departmental activities. Meeting, talking, and disagreeing are the work of the committee. These groups should not try to “get things done” in the sense of being efficient.

Full-time Integrator. A stronger horizontal linkage device is to create a full-time position or department solely for the purpose of coordination. A full-time integrator frequently has a title, such as product manager, project manager, program manager, or brand manager. Unlike the liaison person described earlier, the integrator does not report to one of the functional departments being coordinated. He or she is located outside the departments and has the responsibility for coordinating several departments. The brand manager for Planters Peanuts, for example, coordinates the sales, distribution, and advertising for that product.

The integrator can also be responsible for an innovation or change project, such as coordinating the design, financing, and marketing of a new product. An organi- zation chart that illustrates the location of project managers for new product de- velopment is shown in Exhibit 3.4. The project managers are drawn to the side to

AssEss Your AnswEr

Finance Department

Engineering Department

Purchasing Department

Marketing Department

Project Manager–

New Product A

Project Manager–

New Product B

Project Manager–

New Product C

Financial Accountant Product

Designer Buyer

Buyer

Buyer

Market Researcher

Advertising Specialist

Market Planner

Budget Analyst Draftsperson

Electrical Designer

Management Accountant

President

Exhibit 3.4 Project Manager Location in the Structure

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Chapter 3: Fundamentals of Organization Structure 97

indicate their separation from other departments. The arrows indicate project mem- bers assigned to the new product development. New Product A, for example, has a financial accountant assigned to keep track of costs and budgets. The engineer- ing member provides design advice, and purchasing and manufacturing members represent their areas. The project manager is responsible for the entire project. He or she sees that the new product is completed on time, is introduced to the market, and achieves other project goals. The horizontal lines in Exhibit 3.4 indicate that project managers do not have formal authority over team members with respect to giving pay raises, hiring, or firing. Formal authority rests with the managers of the functional departments, who have direct authority over subordinates within their departments.

Integrators need excellent people skills. Integrators in most companies have a lot of responsibility but little authority. The integrator has to use expertise and persua- sion to achieve coordination. He or she spans the boundary between departments and must be able to get people together, maintain their trust, confront problems, and resolve conflicts and disputes in the interest of the organization.31

Teams. Project teams tend to be the strongest horizontal linkage mechanism. Teams are permanent task forces and are often used in conjunction with a full- time integrator. When activities among departments require strong coordination and collaboration over a long period of time, a cross-functional team is often the solution. Special project teams may be used when organizations have a large-scale project, a major innovation, or a new product line. JetBlue Airways put together a special project team made up of crew schedulers, systems operators, dispatch- ers, reservations agents, and other employees to revise how the airline handles and recovers from “irregular operations,” such as severe weather. How effectively airlines manage and recover from these events dramatically affects performance and customer satisfaction, but effectiveness requires close coordination. At the first team meeting, leaders presented a simulated emergency and asked the team to map out how they would respond. As team members went through the process, they began to spot problems. The goal of the team is to work out solutions to help JetBlue improve both regular on-time performance and its recovery time from ma- jor events.32

Many of today’s companies use virtual cross-functional teams. A virtual team is one that is made up of organizationally or geographically dispersed members who are linked primarily through advanced information and communications tech- nologies. Members frequently use the Internet and collaboration software to work together rather than meet face to face.33 IBM’s virtual teams, for instance, collabo- rate primarily via internal websites using wiki technology.34 At Nokia, virtual team members working in several different countries across time zones and cultures have a virtual work space that members can access 24 hours a day. In addition, Nokia provides an online resource where virtual workers are encouraged to post photos and share personal information.35

An illustration of how teams provide strong horizontal coordination is shown in Exhibit 3.5. Wizard Software Company develops and markets software for various web, desktop, and mobile applications, from games and social media products to financial services. Wizard uses teams to coordinate each product line across the re- search, programming, and marketing departments, as illustrated by the dashed lines and shaded areas in the exhibit. Members from each team meet at the beginning of each day as needed to resolve problems concerning customer needs, backlogs,

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98 Part 2: Organization Purpose and Structural Design

programming changes, scheduling conflicts, and any other problem with the product line. Are you cut out for horizontal teamwork? Complete the questionnaire in the “How Do You Fit the Design?” box to assess your feelings about working on a team.

Exhibit 3.6 summarizes the mechanisms for achieving horizontal linkages. These devices represent alternatives that managers can select to increase horizontal coordi- nation and collaboration in any organization. The higher-level devices provide more horizontal information capacity, although the cost to the organization in terms of time and human resources is greater. If horizontal communication is insufficient, departments will find themselves out of synchronization and will not contribute to

Exhibit 3.5 Teams Used for Horizontal Coordination at Wizard Software Company

Marketing Vice President

Social Media Sales Manager

Security Products Sales Manager

Security Products International

Manager

Advertising Manager

Customer Service Manager

Procurement Supervisor

Research Vice President

Social Media Basic Research

Supervisor

Applications and Testing

Supervisor

Security Products Research

Supervisor

Programming Vice President

Social Media Chief Programmer

Security Products Chief Programmer

President

Social Media Products

Team

Security Products

Team

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Chapter 3: Fundamentals of Organization Structure 99

HOW DO YOU FIT THE DESIGN?

THE PLEASURE/PAIN OF WORkING ON A TEAM Your approach to your job or schoolwork may indicate whether you thrive on a team. Answer the following questions about your work preferences. Please answer whether each item is Mostly True or Mostly False for you.

Mostly True

Mostly False

1. I prefer to work on a team rather than do individual tasks.

2. Given a choice, I try to work by myself rather than face the hassles of group work.

3. I enjoy the personal interaction when working with others.

4. I prefer to do my own work and let others do theirs.

5. I get more satisfaction from a group victory than an individual victory.

6. Teamwork is not worthwhile when people do not do their share.

7. I feel good when I work with others, even when we disagree.

8. I prefer to rely on myself rather than others to do a job or assignment.

Scoring: Give yourself one point for each odd- numbered item you marked as Mostly True and one point for each even-numbered item you marked Mostly False. Your score indicates your preference for teamwork versus individual work. If you scored 2 or fewer points, you definitely prefer individual work. A score of 7 or above suggests that you prefer working in teams. A score of 3–6 indicates comfort working alone and in a team.

Interpretation: Teamwork can be either frustrating or motivating depending on your preference. On a team you will lose some autonomy and have to rely on others who may be less committed than you. On a team you have to work through other people and you lose some con- trol over work procedures and outcomes. On the other hand, teams can accomplish tasks far beyond what an individual can do, and working with others can be a major source of satisfaction. If you definitely prefer individual work, then you would likely fit better in a functional struc- ture within a vertical hierarchy or in the role of individual contributor. If you prefer teamwork, then you are suited to work in the role of a horizontal linkage, such as on a task force or as an integrator, and would do well in a horizontal or matrix organization structure.

Source: Based on Jason D. Shaw, Michelle K. Duffy, and Eric M. Stark, “Interdependence and Preference for Group Work: Main and Congru- ence Effects on the Satisfaction and Performance of Group Mem- bers,” Journal of Management 26, no. 2 (2000), 259–279.

the overall goals of the organization. When the amount of horizontal coordination needed is high, managers should select higher-level mechanisms.

Relational Coordination

The highest level of horizontal coordination illustrated in Exhibit 3.6 is relational coordination. Relational coordination refers to “frequent, timely, problem-solving communication carried out through relationships of shared goals, shared knowl- edge, and mutual respect.”36 Relational coordination isn’t a device or mechanism like the other elements listed in Exhibit 3.6, but rather is part of the very fabric and culture of the organization. In an organization with a high level of relational

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100 Part 2: Organization Purpose and Structural Design

coordination, people share information freely across departmental boundaries, and people interact on a continuous basis to share knowledge and solve problems. Co- ordination is carried out through a web of ongoing positive relationships rather than because of formal coordination roles or mechanisms.37 Employees coordinate and collaborate directly with each other across units.

Building relational coordination into the fabric of the organization requires the active role of managers. Managers invest in training people in the skills needed to interact with one another and resolve cross-functional conflicts, build trust and credibility by showing they care about employees, and intentionally foster relation- ships based on shared goals rather than emphasizing goals of the separate depart- ments. People are given freedom from strict work rules so they have the flexibility to interact and contribute wherever they are needed, and rewards are based on team efforts and accomplishments. Frontline supervisors have small spans of control so they can develop close working relationships with subordinates and coach and men- tor employees. Managers also create specific cross-functional roles that promote coordination across boundaries. Southwest Airlines provides a good illustration.

Airlines face many challenges, but one that they face hundreds of times on a daily basis is getting airplanes loaded and off the ground safely and on time. Flight departure is a highly complex process. It involves numerous employees from various departments—such as ticket agents, pilots, flight attendants, baggage handlers, gate agents, mechanics, ramp agents, and fuel attendants—performing multiple tasks within a limited time period, under uncertain and ever-changing conditions. If all these groups aren’t tightly coordinated, a suc- cessful on-time departure is difficult to achieve.

In PractIce Southwest

airlines

Exhibit 3.6 Ladder of Mechanisms for Horizontal Linkage and Coordination

Amount of Work Process Coordination Required

D eg

re e

of D

ep ar

tm en

ta l

Se pa

ra tio

n

Low

Low

High

High

Relational Coordination

Teams

Full-time Integrators

Liaison Roles

Information Systems

Task Forces

Eff ect

ive Ho

rizo nta

l D esi

gn

Excessive coordination

Organizational “silos”

(coordination not required)

Sources: Based on Exhibit 1 in Nicolay Worren, “Hitting the Sweet Spot Between Separation and Integration in Organi- zation Design,” People & Strategy 34, no. 1 (2011), 24–30; and Richard L. Daft, Organization Theory and Design, 11th ed. (Cincinnati, OH: Cengage/Southwestern), 106.

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Chapter 3: Fundamentals of Organization Structure 101

Southwest Airlines has the shortest turnaround time in the business, partly because managers promote relational coordination to achieve superior on-time performance and a high level of customer satisfaction. In any airline, there can be serious disagreements among employees about who is to blame when a flight is delayed, so Southwest managers created what they call team delay. Rather than searching for who is to blame when some- thing goes wrong, the team delay is used to point out problems in coordination between various groups. Emphasis on the team focuses everyone on the shared goals of on-time de- parture, accurate baggage handling, and customer satisfaction. Because delay becomes a team problem, people are motivated to work closely together and coordinate their activities rather than looking out for themselves and trying to avoid or shift blame. Supervisors work closely with employees, but their role is less “being the boss,” more facilitating learning and helping people do their jobs. Southwest uses a small supervisory span of control—about one supervisor for every eight or nine frontline employees—so that supervisors have the time to coach and assist employees, who are viewed as internal customers.38

By using practices that facilitate relational coordination, Southwest managers ensure that all the departments involved in flight departure are tightly coordinated. When relational coordination is high, people share information and coordinate their activities without having to have bosses or formal mechanisms telling them to do so.

U.S. Lieutenant General David M. Rodriguez, the first commander of the International Security Assistance Force Joint Command and deputy commander of U.S. forces in Afghanistan, fostered relational coordination among U.S. and Afghan military leaders as well as low-ranking commanders, civilian leaders, and others. His operations center had the feel of a newsroom, in which people eagerly talked to one another and shared their knowledge. Guidelines from high-ranking officers got bottom-up refinement from captains and sergeants. Rodriguez understood that people have to “work together and figure out how to maximize the effectiveness of the team.” He worked hard to build relationships based on mutual trust, respect, and shared goals and commitments. “We ask them to hold us accountable and we attempt to hold them accountable in a type of shared responsibility,” Rodriguez said in an interview.39 Whether in the military or in business, trust grows and knowledge and collaboration result when leaders build solid relationships.

Organization Design Alternatives The overall design of organization structure indicates three things: required work activities, reporting relationships, and departmental groupings.

Required Work Activities

Departments are created to perform tasks considered strategically important to the company. In a typical manufacturing company, for example, work activities fall into a range of functions that help the organization accomplish its goals, such as a hu- man resource department to recruit and train employees, a purchasing department to obtain supplies and raw materials, a production department to build products, and a sales department to sell products. As organizations grow larger and more complex, managers find that more functions need to be performed. Organizations

Briefcase As an organization manager, keep these guidelines in mind: recognize that the strongest horizontal linkage mechanisms are more costly in terms of time and hu- man resources but are necessary when the or- ganization needs a high degree of horizontal co- ordination to achieve its goals. When very high levels of coordination and knowledge shar- ing are needed, build relational coordination into the culture of the organization.

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102 Part 2: Organization Purpose and Structural Design

typically define new positions, departments, or divisions as a way to accomplish new tasks deemed valuable by the organization. For example, British oil giant BP added a new safety division in the wake of the Deepwater Horizon oil spill.

Reporting Relationships

Once required work activities and departments are defined, the next question is how these activities and departments should fit together in the organizational hierarchy. Reporting relationships, often called the chain of command, are repre- sented by vertical lines on an organization chart. The chain of command should be an unbroken line of authority that links all persons in an organization and shows who reports to whom. In a large organization such as General Electric, BP, L’Oreal, or Microsoft, 100 or more charts might be needed to identify reporting re- lationships among thousands of employees. The definition of departments and the drawing of reporting relationships define how employees are to be grouped into departments.

Departmental Grouping Options

Options for departmental grouping, including functional grouping, divisional grouping, multifocused grouping, horizontal grouping, and virtual network group- ing, are illustrated in Exhibit 3.7. Departmental grouping affects employees because they share a common supervisor and common resources, are jointly responsible for performance, and tend to identify and collaborate with one another.40

Functional grouping places together employees who perform similar functions or work processes or who bring similar knowledge and skills to bear. For example, all marketing people work together under the same supervisor, as do all manufacturing employees, all human resources people, and all engineers. For an Internet company, all the people associated with maintaining the website might be grouped together in one department. In a scientific research firm, all chemists may be grouped in a department different from biologists because they represent different disciplines.

Divisional grouping means people are organized according to what the organiza- tion produces. All the people required to produce toothpaste—including personnel in marketing, manufacturing, and sales—are grouped together under one executive. In huge corporations, such as Time Warner Corporation, some product or service lines may represent independent businesses, such as Warner Brothers Entertainment (movies and videos), Time Inc. (publisher of magazines such as Sports Illustrated, Time, and People), and Turner Broadcasting (cable television networks).

Multifocused grouping means an organization embraces two or more structural grouping alternatives simultaneously. These structural forms are often called matrix or hybrid. They will be discussed in more detail later in this chapter. An organiza- tion may need to group by function and product division simultaneously or might need to combine characteristics of several structural options.

Horizontal grouping means employees are organized around core work processes, the end-to-end work, information, and material flows that provide value directly to customers. All the people who work on a core process are brought together in a group rather than being separated into functional departments. At field offices of the U.S. Occupational Safety and Health Administration, for example, teams of workers representing various functions respond to complaints from American

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Chapter 3: Fundamentals of Organization Structure 103

Exhibit 3.7 Structural Design Options for Grouping Employees into Departments

Functional Grouping

Divisional Grouping

Horizontal Grouping

Virtual Network Grouping

Multifocused Grouping

Engineering

Product Division 1

Marketing

Product Division 2

Marketing

Human Resources

Product Division 1

Core Process 1

Product Division 2

Core Process 2

CEO

CEO

CEO

CEO

Manufacturing

Product Division 3

Manufacturing

ManufacturingDistribution

MarketingAccounting

Finance

Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, IL: Scott Foresman, 1988), 68.

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104 Part 2: Organization Purpose and Structural Design

workers regarding health and safety issues, rather than having the work divided up among specialized employees.41

Virtual network grouping is the most recent approach to departmental grouping. With this grouping, the organization is a loosely connected cluster of separate com- ponents. In essence, departments are separate organizations that are electronically connected for the sharing of information and completion of tasks. Departments can be spread all over the world rather than located together in one geographic location.

The organizational forms described in Exhibit 3.7 provide the overall options within which the organization chart is drawn and the detailed structure is designed. Each structural design alternative has significant strengths and weaknesses, to which we now turn.

Functional, Divisional, and Geographic Designs Functional grouping and divisional grouping are the two most common approaches to structural design.

Functional Structure

In a functional structure, also called a U-form (unitary), activities are grouped to- gether by common function from the bottom to the top of the organization.42 All engineers are located in the engineering department, and the vice president of engi- neering is responsible for all engineering activities. The same is true in marketing, R&D, and manufacturing. An example of the functional organization structure was shown in Exhibit 3.1 earlier in this chapter.

With a functional structure, all human knowledge and skills with respect to specific activities are consolidated, providing a valuable depth of knowledge for the organization. This structure is most effective when in-depth expertise is criti- cal to meeting organizational goals, when the organization needs to be controlled and coordinated through the vertical hierarchy, and when efficiency is important. The structure can be quite effective if there is little need for horizontal coordi- nation. Exhibit 3.8 summarizes the strengths and weaknesses of the functional structure.

Strengths Weaknesses

1. Allows economies of scale within functional departments

2. Enables in-depth knowledge and skill development

3. Enables organization to accomplish functional goals

4. Is best with only one or a few products

1. Slow response time to environmental changes

2. May cause decisions to pile on top; hierarchy overload

3. Leads to poor horizontal coordination among departments

4. Results in less innovation 5. Involves restricted view of organizational

goals

Source: Based on Robert Duncan, “What Is the Right Organization Structure?” Organizational Dynamics (Winter 1979), 59–80.

Exhibit 3.8 Strengths and Weaknesses of Functional Organization Structure

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Chapter 3: Fundamentals of Organization Structure 105

One strength of the functional structure is that it promotes economy of scale within functions. Economy of scale results when all employees are located in the same place and can share facilities. Producing all products in a single plant, for example, enables the plant to acquire the latest machinery. Constructing only one facility instead of separate facilities for each product line reduces duplication and waste. The functional structure also promotes in-depth skill development of em- ployees. Employees are exposed to a range of functional activities within their own department.43 One interesting example comes from India, where Dr. Devi Shetty runs a hospital that performs open heart surgery for about 10 percent of the cost charged by hospitals in the United States, without reduced quality, by applying stan- dardized operating procedures and principles of mass production.

You might not want to think about going on the assembly line when you go in for heart surgery, but Dr. Devi Shetty, who was Mother Teresa’s cardiac surgeon in the early 1990s, offers cutting-edge medical care at a fraction of the cost charged in the United States by applying the principles of Henry Ford’s mass production. By driving huge volumes, Dr. Shetty drives down costs.

“What health care needs is process innovation, not product innovation,” Dr. Shetty says. When services can be broken down into explicit steps, employees can follow set rules and procedures while they do the same function over and over, in line with a trend toward lean services that looks at how to design service work to improve both quality and efficiency. “In healthcare, you can’t do one thing and reduce the price,” Dr. Shetty says. “We have to do 1,000 small things.”

When services can be standardized, a tight, centralized functional structure can be effective. Because doctors perform so many heart surgeries, they get better and better at what they do. The hospital reports a 1.4 percent mortality rate within 30 days of one of the most common procedures, compared with an average of 1.9 percent in the United States.44

The functional structure works just fine for Narayana Hrudayalaya Hospital. The organization has chosen to stay medium-sized and focus on a few procedures.

The main weakness of the functional structure is a slow response to environ- mental changes that require coordination across departments. The vertical hier- archy becomes overloaded. Decisions pile up, and top managers do not respond fast enough. Other disadvantages of the functional structure are that innovation is slow because of poor coordination, and each employee has a restricted view of overall goals.

Functional Structure with Horizontal Linkages

Some organizations perform very effectively with a functional structure, and orga- nizing by functions is still the prevalent approach to organization design.45 How- ever, in today’s fast-moving world, very few companies can be successful with a strictly functional structure. For example, Watershed Asset Management is orga- nized by functions such as legal, accounting, and investment, but to ensure coor- dination and collaboration, founder Meridee A. Moore has everyone sit in one big open room. “There’s not much that is distilled or screened,” she says. “When we’re working on something, there’s a lot of back and forth.”46 For a small organization,

In PractIce Narayana hrudayalaya hospital

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106 Part 2: Organization Purpose and Structural Design

this informal coordination works fine, but as organizations grow larger, they typi- cally need stronger mechanisms for horizontal linkage.

Managers improve horizontal coordination by using information systems, liaison roles, full-time integrators or project managers (illustrated in Exhibit 3.4), task forces, or teams (illustrated in Exhibit 3.5), and by creating the conditions that encourage relational coordination. One interesting use of horizontal linkages oc- curred at Karolinska Hospital in Stockholm, Sweden, which had 47 functional de- partments. Even after top executives cut that down to 11, coordination was still inadequate. The top executive team set about reorganizing workflow at the hospital around patient care. Instead of bouncing a patient from department to department, Karolinska now envisions the illness to recovery period as a process with “pit stops” in admissions, X-ray, surgery, and so forth. The most interesting aspect of the ap- proach is the new position of nurse coordinator. Nurse coordinators serve as full- time integrators, troubleshooting transitions within or between departments. The improved horizontal coordination dramatically improved productivity and patient care at Karolinska.47 The hospital is effectively using horizontal linkages to over- come some of the disadvantages of the functional structure.

Divisional Structure

With a divisional structure, also called an M-form (multidivisional) or a decentralized form, separate divisions can be organized with responsibility for individual prod- ucts, services, product groups, major projects or programs, divisions, businesses, or profit centers.48 This structure is sometimes also called a product structure or stra- tegic business unit structure. The distinctive feature of a divisional structure is that grouping is based on organizational outputs. For example, LEGO Group shifted from a functional structure to a divisional structure with three product divisions: DUPLO, with its big bricks for the youngest children; LEGO construction toys; and a third category for other forms of LEGO quality play materials such as buildable jewelry. Each division contained the functional departments necessary for that toy line.49 United Technologies Corporation (UTC), which is among the 50 largest U.S. industrial firms, has numerous divisions, including Carrier (air conditioners and heating), Otis (elevators and escalators), Pratt & Whitney (aircraft engines), and Sikorsky (helicopters).50 The Chinese online-commerce company Taobao is divided into three divisions that provide three different types of services: linking individual buyers and sellers; a marketplace for retailers to sell to consumers; and a service for people to search across Chinese shopping websites.51

Organizations tend to shift from functional to divisional structures as they be- come more complex.52 The difference between a divisional structure and a functional structure is illustrated in Exhibit 3.9. The functional structure can be redesigned into separate product groups, and each group contains the functional departments of R&D, manufacturing, accounting, and marketing. Coordination is maximized across functional departments within each product group. The divisional structure promotes flexibility and change because each unit is smaller and can adapt to the needs of its environment. Moreover, the divisional structure decentralizes decision making because the lines of authority converge at a lower level in the hierarchy. The functional structure, by contrast, is centralized because it forces decisions all the way to the top before a problem affecting several functions can be resolved.

Briefcase As an organization manager, keep these guidelines in mind: When designing overall organization structure, choose a functional structure when ef- ficiency is important, when in-depth knowl- edge and expertise are critical to meeting organizational goals, and when the organiza- tion needs to be con- trolled and coordinated through the vertical hi- erarchy. Use a divisional structure in a large organization with mul- tiple product lines and when you wish to give priority to product goals and coordination across functions.

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Chapter 3: Fundamentals of Organization Structure 107

Exhibit 3.9 Reorganization from Functional Structure to Divisional Structure at Info-Tech

Functional Structure

Divisional Structure

Info-Tech President

Of�ce Automation

Virtual Reality

Electronic Publishing

R D& R D& R D&Mfg Mfg MfgAcct Acct AcctMkt Mkt Mkt

Info-Tech President

Manufacturing MarketingAccountingR D&

Strengths and weaknesses of the divisional structure are summarized in Exhibit 3.10. The divisional organization structure is excellent for achieving coor- dination across functional departments. It works well when organizations can no longer be adequately controlled through the traditional vertical hierarchy and when goals are oriented toward adaptation and change. Giant, complex organizations such as General Electric, Time Warner, and Johnson & Johnson are subdivided into a series of smaller, self-contained organizations for better control and coordination. In these large, complex companies, the units are sometimes called divisions, busi- nesses, or strategic business units. Johnson & Johnson is organized into three major divisions: Consumer Products, Medical Devices and Diagnostics, and Pharmaceu- ticals, yet within those three major divisions are 250 separate operating units in 57  countries.53 Some U.S. government organizations also use a divisional structure to better serve the public. One example is the Internal Revenue Service, which wanted to be more customer oriented. The agency shifted its focus to informing, educat- ing, and serving the public through four separate divisions serving distinct taxpayer groups—individual taxpayers, small businesses, large businesses, and tax-exempt

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108 Part 2: Organization Purpose and Structural Design

organizations. Each division has its own budget, personnel, policies, and planning staffs that are focused on what is best for each particular taxpayer segment.54

The divisional structure has several strengths.55 This structure is suited to fast change in an unstable environment and provides high product or service visibility. Since each product line has its own separate division, customers are able to contact the correct division and achieve satisfaction. Coordination across functions is excel- lent. Each product can adapt to requirements of individual customers or regions. The divisional structure typically works best in organizations that have multiple products or services and enough personnel to staff separate functional units. Deci- sion making is pushed down to the divisions. Each division is small enough to be quick on its feet, responding rapidly to changes in the market.

One disadvantage of using divisional structuring is that the organization loses economies of scale. Instead of 50 research engineers sharing a common facility in a functional structure, 10 engineers may be assigned to each of five product divi- sions. The critical mass required for in-depth research is lost, and physical facilities have to be duplicated for each product line. Another problem is that product lines become separate from each other, and coordination across product lines can be dif- ficult. As a Johnson & Johnson executive once said, “We have to keep reminding ourselves that we work for the same corporation.”56

Some companies that have a large number of divisions have had real problems with cross-unit coordination. Sony lost the digital music player business to Apple partly because of poor coordination. With the introduction of the iPod, Apple quickly captured 60 percent of the U.S. market versus 10 percent for Sony. The digital music business depends on seamless coordination. Sony’s Walkman didn’t even recognize some of the music sets that could be made with the company’s SonicStage software and thus didn’t mesh well with the division selling music downloads.57 Unless effec- tive horizontal mechanisms are in place, a divisional structure can hurt overall per- formance. One division may produce products or programs that are incompatible with products sold by another division, as at Sony. Customers can become frustrated when a sales representative from one division is unaware of developments in other divisions. Task forces and other horizontal linkage devices are needed to coordinate across divisions. A lack of technical specialization is also a problem in a divisional structure. Employees identify with the product line rather than with a functional specialty. R&D personnel, for example, tend to do applied research to benefit the product line rather than basic research to benefit the entire organization.

Strengths Weaknesses

1. Suited to fast change in unstable environment

2. Leads to customer satisfaction because product responsibility and contact points are clear

3. Involves high coordination across functions

4. Allows units to adapt to differences in products, regions, customers

5. Best in large organizations with several products

6. Decentralizes decision making

1. Eliminates economies of scale in functional departments

2. Leads to poor coordination across product lines

3. Eliminates in-depth competence and technical specialization

4. Makes integration and standardization across product lines difficult

Source: Based on Robert Duncan, “What Is the Right Organization Structure?” Organizational Dynamics (Winter 1979).

Exhibit 3.10 Strengths and Weaknesses of Divisional Organization Structure

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Chapter 3: Fundamentals of Organization Structure 109

Poor coordination and collaboration among divisions are blamed for Microsoft’s late entry into the profitable smartphone and tablet markets. Top managers are trying to change that with a massive, but tricky, reorganization.

Microsoft is having a hard time keeping pace with Apple and Google. While those companies were bringing hot new products to market, Microsoft “became a high-tech equivalent of a Detroit car-maker, bringing flashier models of the same old thing off the assembly line.” One big reason is that the company’s divisions have long been at war with one another. Potential innovative technologies for tablets and smartphones were killed, delayed, or derailed by in- fighting and power plays. Steven A. Ballmer, the former longtime CEO of Microsoft, said, “To execute, we’ve got to move from multiple Microsofts to one Microsoft.”

Top executives are implementing a major reorganization that dissolves the existing eight product divisions in favor of four units based on broad themes that will, it is hoped, encour- age greater collaboration and teamwork. The goal, said Ballmer, is to organize things so as “to drive a cross-company team for success.” Whereas each division once had its own finance and marketing departments, those functions have been centralized to force groups to work more closely together to create complete products where all the hardware, software, and services work together. Each major initiative will have a high-level corporate champion who will be a direct report to the CEO, to ensure the proper flow of information and to keep everyone pulling in the same direction.

In a telephone interview, Qi Lu, the head of Bing and Microsoft’s other Internet initia- tives, said the old structure was similar to baseball, in that it gave individual players oppor- tunities to perform. A better model for the new Microsoft, he says, is football: “You have to huddle before every play.”58

It remains to be seen if Microsoft’s long-feuding divisions can huddle and put the good of the whole above their individual goals. The company’s problems be- came so worrisome that in early October 2013, three of the top 20 shareholders began lobbying the board to pressure Bill Gates to step down as chairman of the company he co-founded 38 years ago.59 Microsoft will likely use a variety of struc- tural mechanisms to encourage greater collaboration across the organization’s four broad units and try to put the spark back in the company.

The problem of coordination and collaboration is also amplified in the interna- tional arena because organizational units are differentiated not only by goals and work activities, but also by geographical distance, time differences, cultural values, and perhaps language. How can managers ensure that needed coordination and collabo- ration will take place in their company, both domestically and globally? Coordination is the outcome of information and cooperation. Managers can design systems and structures, as described earlier, to promote horizontal coordination and collaboration.

Geographic Structure

Another basis for structural grouping is the organization’s users or customers. The most common structure in this category is geography. Each region of the country may have distinct tastes and needs. Each geographic unit includes all functions re- quired to produce and market products or services in that region. Large nonprofit organizations such as the Girl Scouts of the USA, Habitat for Humanity, Make- A-Wish Foundation, and the United Way of America frequently use a type of

In PractIce Microsoft

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110 Part 2: Organization Purpose and Structural Design

geographic structure, with a central headquarters and semiautonomous local units. The national organization provides brand recognition, coordinates fund-raising services, and handles some shared administrative functions, while day-to-day con- trol and decision making is decentralized to local or regional units.60 World Bank, mentioned in the chapter opening, uses a complex type of geographic divisional structure, organized country by country and region by region. Because of poor coordination and collaboration across regions, Jim Yong Kim, who took over as president in 2012, has planned a sweeping reorganization, overlaying the structure with 14 “global practices,” including agriculture, energy, and education, that cut across the bank’s different projects, funds, and geographies. The goal is to encour- age greater coordination and collaboration.61

For multinational corporations, self-contained units are created for different countries and parts of the world. Exhibit 3.11 shows an example of a geographic structure for a cosmetics company. This structure focuses managers and employ- ees on specific geographic regions and sales targets. Walmart Stores are organized by geographic regions, such as Walmart Japan, Walmart India, Walmart Brazil, Walmart China, and Walmart Asia. Until recently, U.S. operations were organized largely by function, but managers restructured U.S. operations into three geographic divisions, West, South, and North, making the U.S. organization more like how Walmart operates internationally. Using a geographic structure helps the company expand into new markets and use resources more efficiently.62

The strengths and weaknesses of a geographic divisional structure are similar to the divisional organization characteristics listed in Exhibit 3.10. The organiza- tion can adapt to the specific needs of its own region, and employees identify with regional goals rather than with national goals. Horizontal coordination within a region is emphasized rather than linkages across regions or to the national office. For example, Jim Yong Kim, president of World Bank, said, “When we asked techni- cal people how much time they spent supporting other regions, the answer was less than 1 percent.”

CEO

Asia/Paci�cBrazil Western Europe/Middle EastAmericas

North America

Latin America

Japan

Australia

Exhibit 3.11 Geographic Structure for Cosmetics Company

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Chapter 3: Fundamentals of Organization Structure 111

Matrix Structure Sometimes, an organization’s structure needs to be multifocused in that both prod- uct and function or product and geography are emphasized at the same time. One way to achieve this is through the matrix structure.63 The matrix can be used when both technical expertise and product innovation and change are important for meet- ing organizational goals. The matrix structure often is the answer when organiza- tions find that the functional, divisional, and geographic structures combined with horizontal linkage mechanisms will not work.

The matrix is a strong form of horizontal linkage. The unique characteristic of the matrix organization is that both product divisions and functional structures (horizontal and vertical) are implemented simultaneously, as shown in Exhibit 3.12. The product managers and functional managers have equal authority within the organization, and employees report to both of them. The matrix structure is simi- lar to the use of full-time integrators or product managers described earlier in this

Director of Product Operations

Design Vice President

Manufacturing Vice President

President

Marketing Vice President Controller

Procurement Manager

Product Manager A

Product Manager B

Product Manager C

Product Manager D

Exhibit 3.12 Dual-Authority Structure in a Matrix Organization

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112 Part 2: Organization Purpose and Structural Design

chapter (Exhibit 3.4), except that in the matrix structure the product managers (horizontal) are given formal authority equal to that of the functional managers (vertical).

Conditions for the Matrix

A dual hierarchy may seem an unusual way to design an organization, but the matrix is the correct structure when the following conditions are present:64

• Condition 1. Pressure exists to share scarce resources across product lines. The organization is typically medium-sized and has a moderate number of product lines. It feels pressure for the shared and flexible use of people and equipment across those products. For example, the organization is not large enough to as- sign engineers full-time to each product line, so engineers are assigned part-time to several products or projects.

• Condition 2. Environmental pressure exists for two or more critical outputs, such as for in-depth technical knowledge (functional structure) and frequent new products (divisional structure). This dual pressure means a balance of power is needed between the functional and product sides of the organization, and a dual-authority structure is needed to maintain that balance.

• Condition 3. The environmental domain of the organization is both complex and uncertain. Frequent external changes and high interdependence between de- partments require a large amount of coordination and information processing in both vertical and horizontal directions.

Under these three conditions, the vertical and horizontal lines of authority must be given equal recognition. A dual-authority structure is thereby created so the bal- ance of power between them is equal.

Referring again to Exhibit 3.12, assume the matrix structure is for a clothing manufacturer. Product A is footwear, product B is outerwear, product C is sleepwear, and so on. Each product line serves a different market and customers. As a medium- sized organization, the company must effectively use people from manufacturing, design, and marketing to work on each product line. There are not enough designers to warrant a separate design department for each product line, so the designers are shared across product lines. Moreover, by keeping the manufacturing, design, and marketing functions intact, employees can develop the in-depth expertise to serve all product lines efficiently.

The matrix formalizes horizontal teams along with the traditional vertical hi- erarchy and tries to give equal balance to both. However, the matrix may shift one way or the other. Many companies have found a balanced matrix hard to imple- ment and maintain because one side of the authority structure often dominates. As a consequence, two variations of matrix structure have evolved—the functional matrix and the product matrix. In a functional matrix, the functional bosses have primary authority and the project or product managers simply coordinate prod- uct activities. In a product matrix, by contrast, the project or product managers have primary authority and functional managers simply assign technical person- nel to projects and provide advisory expertise as needed. For many organizations, one of these approaches works better than the balanced matrix with dual lines of authority.65

Briefcase As an organization manager, keep these guidelines in mind: Consider a matrix struc- ture when the organiza- tion needs to give equal priority to both products and functions because of dual pressures from customers in the envi- ronment. Use either a functional matrix or a product matrix if the balanced matrix with dual lines of authority is not appropriate for your organization.

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Chapter 3: Fundamentals of Organization Structure 113

All kinds of organizations have experimented with the matrix, including hospi- tals, consulting firms, banks, insurance companies, government agencies, and many types of industrial firms.66 This structure has been used successfully by global organi- zations such as Ford Motor, Procter & Gamble (P&G), Unilever, and Dow Chemical, which fine-tuned the matrix to suit their own particular goals and culture.

Strengths and Weaknesses

The matrix structure is best when environmental change is high and when goals reflect a dual requirement, such as for both product and functional goals. The dual- authority structure facilitates communication and coordination to cope with rapid environmental change and enables an equal balance between product and func- tional bosses. The matrix facilitates discussion and adaptation to unexpected prob- lems. It tends to work best in organizations of moderate size with a few product lines. The matrix is not needed for only a single product line, and too many product lines make it difficult to coordinate both directions at once. Exhibit 3.13 summa- rizes the strengths and weaknesses of the matrix structure based on what we know of organizations that use it.67

One strength of the matrix is that it enables an organization to meet dual de- mands from customers in the environment. Resources (people, equipment) can be flexibly allocated across different products, and the organization can adapt to changing external requirements.68 This structure also provides an opportunity for employees to acquire either functional or general management skills, depending on their interests.

One disadvantage of the matrix is that some employees experience dual author- ity, reporting to two bosses and sometimes juggling conflicting demands. This can be frustrating and confusing, especially if roles and responsibilities are not clearly defined by top managers.69 Employees working in a matrix need excellent interper- sonal and conflict-resolution skills, which may require special training in human re- lations. The matrix also forces managers to spend a great deal of time in meetings.70

Strengths Weaknesses

1. Achieves coordination necessary to meet dual demands from customers

2. Flexible sharing of human resources across products

3. Suited to complex decisions and frequent changes in unstable environment

4. Provides opportunity for both functional and product skill development

5. Best in medium-sized organizations with multiple products

1. Causes participants to experience dual authority, which can be frustrating and confusing

2. Means participants need good interpersonal skills and extensive training

3. Is time consuming; involves frequent meetings and conflict-resolution sessions

4. Will not work unless participants understand it and adopt collegial rather than vertical-type relationships

5. Requires great effort to maintain power balance

Source: Based on Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics (Winter 1979), 429.

Exhibit 3.13 Strengths and Weaknesses of Matrix Organization Structure

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114 Part 2: Organization Purpose and Structural Design

Many people working in matrix structures say they spend two days a week in meet- ings and only 50 percent of the content is relevant to them or their jobs.71 If manag- ers do not adapt to the information and power sharing required by the matrix, the system will not work. Managers must collaborate with one another rather than rely on vertical authority in decision making. The successful implementation of one ma- trix structure occurred at a steel company in Great Britain.

As far back as anyone could remember, the steel industry in England was stable and certain. Then in the 1980s and 1990s, excess European steel capacity, an economic downturn, the emergence of the mini mill electric arc furnace, and competition from steelmakers in Germany and Japan forever changed the steel industry. By the turn of the century, traditional steel mills in the United States, such as Bethlehem Steel and LTV Corporation, were facing bankruptcy. Mittal Steel in Asia and Europe’s leading steelmaker, Arcelor, started acquir- ing steel companies to become world steel titans (the two merged in 2006 to become ArcelorMittal). The survival hope of small traditional steel manufacturers was to sell special- ized products. A small company could market specialty products aggressively and quickly adapt to customer needs. Complex process settings and operating conditions had to be rapidly changed for each customer’s order—a difficult feat for the titans.

Englander Steel employed 2,900 people, made 400,000 tons of steel a year (about 1 percent of Arcelor’s output), and was 180 years old. For 160 of those years, a functional structure worked fine. As the environment became more turbulent and competitive, however, Englander Steel managers realized they were not keeping up. Fifty percent of Englander’s orders were behind schedule. Profits were eroded by labor, material, and energy cost in- creases. Market share declined.

In consultation with outside experts, the president of Englander Steel saw that the com- pany had to walk a tightrope. It had to specialize in a few high-value-added products tailored for separate markets, while maintaining economies of scale and sophisticated technology within functional departments. The dual pressure led to an unusual solution for a steel com- pany: a matrix structure.

Englander Steel had four product lines: open-die forgings, ring-mill products, wheels and axles, and sheet steel. A business manager was given responsibility for and authority over each line, which included preparing a business plan and developing targets for production costs, product inventory, shipping dates, and gross profit. The managers were given author- ity to meet those targets and to make their lines profitable. Functional vice presidents were responsible for technical decisions. Functional managers were expected to stay abreast of the latest techniques in their areas and to keep personnel trained in new technologies that could apply to product lines. With 20,000 recipes for specialty steels and several hundred new recipes ordered each month, functional personnel had to stay current. Two functional departments—field sales and industrial relations—were not included in the matrix because they worked independently. The final design was a hybrid matrix structure with both matrix and functional relationships, as illustrated in Exhibit 3.14.

Implementation of the matrix was slow. Middle managers were confused. Meetings to coordinate orders across functional departments seemed to be held every day. After about a year of training by external consultants, Englander Steel was on track. Ninety percent of the orders were now delivered on time and market share recovered. Both productivity and profitability increased steadily. The managers thrived on matrix involvement. Meetings to co- ordinate product and functional decisions provided a growth experience. Middle managers began including younger managers in the matrix discussions as training for future manage- ment responsibility.72

In PractIce englander

Steel

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Chapter 3: Fundamentals of Organization Structure 115

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116 Part 2: Organization Purpose and Structural Design

This example illustrates the correct use of a matrix structure. The dual pres- sure to maintain economies of scale and to market four product lines gave equal emphasis to the functional and product hierarchies. Through continuous meet- ings for coordination, Englander Steel achieved both economies of scale and flexibility.

Horizontal Structure A recent approach to organizing is the horizontal structure, which organizes em- ployees around core processes. Organizations typically shift toward a horizontal structure during a procedure called reengineering. Reengineering, or business process reengineering, basically means the redesign of a vertical organization along its hori- zontal workflows and processes. A process refers to an organized group of related tasks and activities that work together to transform inputs into outputs that create value for customers.73 Examples of processes include order fulfillment, new product development, and customer service. Reengineering changes the way managers think about how work is done. Rather than focusing on narrow jobs structured into dis- tinct functional departments, they emphasize core processes that cut horizontally across the organization and involve teams of employees working together to serve customers.

A good illustration of process is provided by claims handling at Progressive Casualty Insurance Company. In the past, a customer would report an accident to an agent, who would pass the information to a customer service representative, who, in turn, would pass it to a claims manager. The claims manager would batch the claim with others from the same territory and assign it to an adjuster, who would schedule a time to inspect the vehicle damage. Today, adjusters are organized into teams that handle the entire claims process from beginning to end. One member handles claim- ant calls to the office while others are stationed in the field. When an adjuster takes a call, he or she does whatever is possible over the phone. If an inspection is needed, the adjuster contacts a team member in the field and schedules an appointment im- mediately. Progressive now measures the time from call to inspection in hours rather than the 7 to 10 days it once took.74

When a company is reengineered to a horizontal structure, all employees throughout the organization who work on a particular process (such as claims handling or order fulfillment) have easy access to one another so they can com- municate and coordinate their efforts. The horizontal structure virtually eliminates both the vertical hierarchy and old departmental boundaries. This structural ap- proach is largely a response to the profound changes that have occurred in the workplace and the business environment over the past 15 to 20 years. Technologi- cal progress emphasizes computer- and Internet-based integration and coordina- tion. Customers expect faster and better service, and employees want opportunities to use their minds, learn new skills, and assume greater responsibility. Organiza- tions mired in a vertical mindset have a hard time meeting these challenges. Thus, numerous organizations have experimented with horizontal mechanisms such as cross-functional teams to achieve coordination across departments or task forces to accomplish temporary projects. Increasingly, organizations are shifting away from hierarchical, function-based structures to structures based on horizontal processes.

Briefcase As an organization manager, keep these guidelines in mind: Consider a horizontal structure when cus- tomer needs and de- mands change rapidly and when learning and innovation are critical to organizational success. Carefully determine core processes and train managers and em- ployees to work within the horizontal structure.

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Chapter 3: Fundamentals of Organization Structure 117

Characteristics

An illustration of a company reengineered into a horizontal structure appears in Exhibit 3.15. Such an organization has the following characteristics:75

• Structure is created around cross-functional core processes rather than tasks, functions, or geography. Thus, boundaries between departments are obliterated. Ford Motor Company’s Customer Service Division, for example, has core pro- cess groups for business development, parts supply and logistics, vehicle service and programs, and technical support.

• Self-directed teams, not individuals, are the basis of organizational design and performance. Schwa, a restaurant in Chicago that serves elaborate multicourse meals, is run by a team. Members rotate jobs so that everyone is sometimes a chef; sometimes a dishwasher; sometimes a waiter; or sometimes the person who answers the phone, takes reservations, or greets customers at the door.76

• Process owners have responsibility for each core process in its entirety. For Ford’s parts supply and logistics process, for example, a number of teams may work on jobs such as parts analysis, purchasing, material flow, and distribution, but a process owner is responsible for coordinating the entire process.

• People on the team are given the skills, tools, motivation, and authority to make decisions central to the team’s performance. Team members are cross-trained to perform one another’s jobs, and the combined skills are sufficient to complete a major organizational task.

Exhibit 3.15 A Horizontal Structure

Customer

CustomerTesting

Distribution

New Product Development Process

Procurement and Logistics Process

Team 1

Team 1

Team 2

Team 2

Team 3

Team 3

Product PlanningResearch

Material FlowPurchasing

Process Owner

Market Analysis

Analysis

Top Management

Team

Process Owner

Sources: Based on Frank Ostroff, The Horizontal Organization (New York: Oxford University Press, 1999); John A. Byrne, “The Horizontal Corporation,” BusinessWeek, December 20, 1993, 76–81; and Thomas A. Stewart, “The Search for the Organization of Tomorrow,” Fortune, May 18, 1992, 92–98.

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118 Part 2: Organization Purpose and Structural Design

• Teams have the freedom to think creatively and respond flexibly to new chal- lenges that arise.

• Customers drive the horizontal corporation. Effectiveness is measured by end- of-process performance objectives (based on the goal of bringing value to the customer), as well as customer satisfaction, employee satisfaction, and financial contribution.

• The culture is one of openness, trust, and collaboration, focused on continuous improvement. The culture values employee empowerment, responsibility, and well-being.

General Electric’s Salisbury, North Carolina, plant shifted to a horizontal struc- ture to improve flexibility and customer service.

General Electric’s plant in Salisbury, North Carolina, which manufactures electrical lighting panel boards for industrial and commercial purposes, used to be organized functionally and vertically. Because no two GE customers have identical needs, each panel board has to be configured and built to order, which frequently created bottlenecks in the standard produc- tion process. In the mid-1980s, faced with high product-line costs, inconsistent customer service, and a declining market share, managers began exploring new ways of organizing that would emphasize teamwork, responsibility, continuous improvement, empowerment, and commitment to the customer.

By the early 1990s, GE Salisbury had made the transition to a horizontal structure that links sets of multiskilled teams who are responsible for the entire build-to-order process. The new structure is based on the goal of producing lighting panel boards “of the highest possible quality, in the shortest possible cycle time, at a competitive price, with the best possible service.” The process consists of four linked teams, each made up of 10 to 15 members representing a range of skills and functions. A production-control team serves as process owner (as illustrated earlier in Exhibit 3.15) and is responsible for order receipt, planning, coordination of production, purchasing, working with suppliers and customers, tracking inventory, and keeping all the teams focused on meeting objectives. The fabrica- tion team cuts, builds, welds, and paints the various parts that make up the steel box that will house the electrical components panel, which is assembled and tested by the electrical components team. The electrical components team also handles shipping. A maintenance team takes care of heavy equipment maintenance that cannot be performed as part of the regular production process. Managers have become associate advisors who serve as guides and coaches and bring their expertise to the teams as needed.

The key to success of the horizontal structure is that all the operating teams work in con- cert with each other and have access to the information they need to meet team and process goals. Teams are given information about sales, backlogs, inventory, staffing needs, produc- tivity, costs, quality, and other data, and each team regularly shares information about its part of the build-to-order process with the other teams. Joint production meetings, job rota- tion, and cross-training of employees are some of the mechanisms that help ensure smooth integration. The linked teams assume responsibility for setting their own production targets, determining production schedules, assigning duties, and identifying and solving problems.

Productivity and performance have dramatically improved with the horizontal structure. Bottlenecks in the workflow, which once wreaked havoc with production schedules, have been virtually eliminated. A six-week lead time has been cut to two-and-a-half days. More subtle but just as important are the increases in employee and customer satisfaction that GE Salisbury has realized since implementing its new structure.77

In PractIce Ge

Salisbury

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Chapter 3: Fundamentals of Organization Structure 119

Strengths and Weaknesses

As with all structures, the horizontal structure has both strengths and weaknesses, as listed in Exhibit 3.16.

The most significant strength of the horizontal structure is enhanced coordi- nation, which can dramatically increase the company’s flexibility and response to changes in customer needs. The structure directs everyone’s attention toward the customer, leading to greater customer satisfaction as well as improvements in pro- ductivity, speed, and efficiency. In addition, because there are no boundaries be- tween functional departments, employees take a broader view of organizational goals rather than being focused on the goals of a single department. The horizontal structure promotes an emphasis on teamwork and cooperation so that team mem- bers share a commitment to meeting common objectives. Finally, the horizontal structure can improve the quality of life for employees by giving them opportunities to share responsibility, make decisions, and contribute significantly to the organiza- tion. Employees are typically enthusiastic about their involvement in bigger proj- ects rather than narrow departmental tasks. At Lockheed Martin’s Missiles and Fire Control division’s Pike County Operations in Troy, Alabama, all employees work in self-directed teams that set performance goals and make decisions related to as- sembling and testing advanced missile systems. Teams at Pike County Operations have contributed to 100 percent on-time delivery with zero customer rejects for the division.78

A weakness of the horizontal structure is that it can harm rather than help or- ganizational performance unless managers carefully determine which core processes are critical for bringing value to customers. Simply defining the processes around which to organize can be difficult. In addition, shifting to a horizontal structure is complicated and time consuming because it requires significant changes in culture, job design, management philosophy, and information and reward systems. Tradi- tional managers may balk when they have to give up power and authority to serve instead as coaches and facilitators of teams. Employees have to be trained to work effectively in a team environment. Finally, because of the cross-functional nature of

Strengths Weaknesses

1. Promotes flexibility and rapid response to changes in customer needs

2. Directs the attention of everyone toward the production and delivery of value to the customer

3. Each employee has a broader view of organizational goals

4. Promotes a focus on teamwork and collaboration

5. Improves quality of life for employees by offering them the opportunity to share responsibility, make decisions, and be accountable for outcomes

1. Determining core processes is difficult and time consuming

2. Requires changes in culture, job design, management philosophy, and information and reward systems

3. Traditional managers may balk when they have to give up power and authority

4. Requires significant training of employees to work effectively in a horizontal team environment

5. Can limit in-depth skill development

Sources: Based on Frank Ostroff, The Horizontal Organization: What the Organization of the Future Looks Like and How It Delivers Value to Customers (New York: Oxford University Press, 1999); and Richard L. Daft, Organization Theory and Design, 6th ed. (Cincinnati, OH: South-Western, 1998), 253.

Exhibit 3.16 Strengths and Weaknesses of Horizontal Structure

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120 Part 2: Organization Purpose and Structural Design

work, a horizontal structure can limit in-depth knowledge and skill development unless measures are taken to give employees opportunities to maintain and build technical expertise.

Virtual Networks and Outsourcing Recent developments in organization design extend the concept of horizontal coor- dination and collaboration beyond the boundaries of the traditional organization. The most widespread design trend in recent years has been the outsourcing of vari- ous parts of the organization to outside partners.79 Outsourcing means to contract out certain tasks or functions, such as manufacturing, human resources, or credit processing, to other companies.

All sorts of organizations are jumping on the outsourcing bandwagon. The Ohio State University is outsourcing its parking system. The City of Maywood, California, decided to outsource everything from street maintenance to policing and public safety. The budget for the police department used to be nearly $8 million. Now the city pays about half that to the Los Angeles County Sheriff’s Department, and residents say service has improved.80 The U.S. military is also increasingly us- ing private military company contractors to handle just about everything except the core activity of fighting battles and securing defensive positions. Kellogg Brown & Root, a subsidiary of the Halliburton Corporation, for instance, builds and main- tains military bases and provides catering and cleaning services. In the business world, Hitachi once made all its own televisions with Hitachi-made components, but the company now outsources manufacturing and gets key components from outside suppliers. Wachovia Corporation transferred administration of its human resources programs to Hewitt Associates, and British food retailer J. Sainsbury’s lets Accenture handle its entire information technology department. About 20 percent of drug manufacturer Eli Lilly & Company’s chemistry work is done in China by start-up labs such as Chem-Explorer, and companies such as India’s Wipro, France’s S.R. Teleperformance, and the U.S.-based Convergys manage call center and tech- nical support operations for big computer and cell phone companies around the world.81 The pharmaceuticals company Pfizer is using an innovative approach that lets some employees pass off certain parts of their jobs to an outsourcing firm in India with a click of a button. Rather than shifting entire functions to contractors, this “personal outsourcing” approach allows people to shift only certain tedious and time-consuming tasks to be handled by the outsourcing partner while they fo- cus on higher-value work.82

Once, a company’s units of operation “were either within the organization and ‘densely connected’ or they were outside the organization and not connected at all,” as one observer phrased it.83 Today, the lines are so blurred that it can be difficult to tell what is part of the organization and what is not. IBM handles back-office operations for many large companies, but it also outsources some of its own activi- ties to other firms, which in turn may farm out some of their functions to still other organizations.84

A few organizations carry outsourcing to the extreme to create a virtual network structure. With a virtual network structure, sometimes called a modular structure, the firm subcontracts most of its major functions or processes to separate companies and coordinates their activities from a small headquarters organization.85

Briefcase As an organization manager, keep these guidelines in mind: Use a virtual network structure for extreme flexibility and rapid response to changing market conditions. Focus on key activities that give the organiza- tion its competitive ad- vantage and outsource other activities to care- fully selected partners.

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Chapter 3: Fundamentals of Organization Structure 121

How the Structure Works

The virtual network organization may be viewed as a central hub surrounded by a network of outside specialists. For example, Philip Rosedale runs LoveMachine from his home and coffee shops around San Francisco. LoveMachine makes soft- ware that lets employees send Twitter-like messages to say “Thank you,” or “Great job!” When the message is sent, everyone in the company gets a copy, which builds morale, and the basic software is free to companies that want to use it. LoveMachine has no full-time development staff, but instead works with a network of freelanc- ers who bid on jobs such as creating new features and fixing glitches. Rosedale also contracts out payroll and other administrative tasks.86

With a network structure, rather than being housed under one roof or located within one organization, services such as accounting, design, manufacturing, mar- keting, and distribution are outsourced to separate companies or individuals that are connected electronically to a central office. Organizational partners located in different parts of the world may use networked computers or the Internet to exchange data and information so rapidly and smoothly that a loosely connected network of suppliers, manufacturers, and distributors can look and act like one seamless company. The virtual network form incorporates a free-market style to replace the traditional vertical hierarchy. Subcontractors may flow into and out of the system as needed to meet changing needs. The Georgia town of Sandy Springs is run almost entirely by subcontractors.

In PractIce Sandy Springs, Georgia

The Atlanta suburb of Sandy Springs has 94,000 residents but just seven city employees, including the city manager, John F. McDonough. The entire city is run from a generic, one- story industrial park, where the seven employees paid by the city work alongside those paid by outside contractors, and no one knows the difference.

If you go to get a business license, for example, you’ll talk to someone who works for Severn Trent, a multinational company based in Coventry, England. To get a building permit, you’ll talk with an employee of the Collaborative of Boston, Massachusetts. If you’ve got a problem with your trash collection, you’ll need to have a word with someone who works for URS Corporation, based in San Francisco, California. Of course, as far as you know, all of these people work for the city of Sandy Springs. Even the city’s courts and administrative work are handled by outside contractors. The city does have its own police force and fire department, but the 911 call center is operated by an outside contractor, IXP, with headquar- ters in Cranbury, New Jersey.

Sandy Springs isn’t the most outsourced city in the United States. That distinction still belongs to Maywood, California, which has only one employee and runs everything else through contracts. One city council member in Maywood says the approach has driven up the cost of running the town. “Let’s say a tree falls on a car,” the council member said. “Previously, we had an employee who would deal with it. Now you have to make an appoint- ment and they’ll come when they can. They’re not our people to control anymore.” The city manager of Sandy Springs says they have sidestepped such issues. The key, he explains, is in the fine art of drafting the right contracts.87

When a business chooses to use a network structure, the hub maintains control over processes in which it has world-class or difficult-to-imitate capabilities and then transfers other work activities—along with the control over them—to other organizations. These partner organizations organize and accomplish their work using their own ideas, assets, and tools.88 The idea is that a firm can concentrate

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122 Part 2: Organization Purpose and Structural Design

on what it does best and contract out everything else to companies with distinctive competence in those specific areas, enabling the organization to do more with less.89 The “heart-healthy” food company Smart Balance, for example, was able to innovate and expand rapidly by using a virtual network approach. Smart Balance has only about 67 employees, but 400 people are working for the company through various contractors and subcontractors. Each morning, full-time employees and virtual workers exchange a flurry of e-mail messages and phone calls to update each other on what took place the day before and what needs to happen today. Executives spend much of their time managing relationships.90

With a network structure such as that used by the city of Sandy Springs or at Smart Balance, it is difficult to answer the question “Where is the organization?” in traditional terms. The different organizational parts are drawn together contractually and coordinated electronically, creating a new form of organization. Much like build- ing blocks, parts of the network can be added or taken away to meet changing needs.91 Exhibit 3.17 illustrates a simplified network structure for a business such as Smart Balance, showing some of the functions that can be outsourced to other companies.

Strengths and Weaknesses

Exhibit 3.18 summarizes the strengths and weaknesses of the virtual network struc- ture.92 One of the major strengths is that the organization, no matter how small, can be truly global, drawing on resources worldwide to achieve the best quality and price and then selling products or services worldwide just as easily through subcontractors. The network structure also enables a new or small company to develop products or services and get them to market rapidly without huge investments in factories, equip- ment, warehouses, or distribution facilities. The ability to arrange and rearrange re- sources to meet changing needs and best serve customers gives the network structure extreme flexibility and rapid response. New technologies can be developed quickly by tapping into a worldwide network of experts. The organization can continually redefine itself to meet changing product or market opportunities. A final strength is

Core focuses on product

development and marketing

Research and Testing Labs

Information Technology

Services

Manufacturing Companies

Marketing Firm

Exhibit 3.17 Example of a Virtual Network Structure

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Chapter 3: Fundamentals of Organization Structure 123

reduced administrative overhead. Large teams of staff specialists and administrators are not needed. Managerial and technical talent can be focused on key activities that provide competitive advantage while other activities are outsourced.

The virtual network structure also has a number of weaknesses. The primary weakness is a lack of control. The network structure takes decentralization to the extreme. Managers do not have all operations under their jurisdiction and must rely on contracts, coordination, and negotiation to hold things together. This also means increased time spent managing relationships with partners and resolving conflicts. K’Nex Brands LP, a family-owned toy company near Philadelphia, brought most of the production of its plastic building toys back to its factory in the United States from subcontractors in China, for instance, to maintain greater control over quality and materials. The safety of toys made in overseas factories is a growing concern for parents, and as wages and transportation costs rise in China, K’Nex managers saw a competitive advantage in bringing production back in-house.93

Exhibit 3.18 Strengths and Weaknesses of Virtual Network Structure

Strengths Weaknesses

1. Enables even small organizations to obtain talent and resources worldwide

2. Gives a company immediate scale and reach without huge investments in factories, equipment, or distribution facilities

3. Enables the organization to be highly flexible and responsive to changing needs

4. Reduces administrative overhead costs

1. Managers do not have hands-on control over many activities and employees

2. Requires a great deal of time to manage relationships and potential conflicts with contract partners

3. There is a risk of organizational failure if a partner fails to deliver or goes out of business

4. Employee loyalty and corporate culture might be weak because employees feel they can be replaced by contract services

Sources: Based on R.E. Miles and C.C. Snow, “The New Network Firm: A Spherical Structure Built on a Human Investment Philosophy,” Organizational Dynamics (Spring 1995), 5–18; Gregory G. Dess, Abdul M. A. Rasheed, Kevin J. McLaughlin, and Richard L. Priem, “The New Corporate Architecture,” Academy of Management Executive 9, no. 3 (1995), 7–20; N. Anand and R.L. Daft, “What Is the Right Organization Design?” Organizational Dynamics 36, no. 4 (2007), 329–344; and H.W. Chesbrough and D.J. Teece, “Organizing for Innovation: When Is Virtual Virtuous?” Harvard Business Review, August 2002, 127–134.

3Top managers are smart to maintain organizational control over the activities of key work units rather than contracting out some work unit tasks to other firms. ANSWER: Disagree. Virtual networks and outsourcing forms of orga- nization design have become popular because they offer increased flexibility and more rapid response in a fast-changing environment. Outsourced departments can be added or dropped as conditions change. Keeping control over all activities in-house might be more comfortable for some managers, but it discourages flexibility.

AssEss Your AnswEr

A problem of equal importance is the risk of failure if one organizational part- ner fails to deliver, has a plant burn down, or goes out of business. Managers in the headquarters organization have to act quickly to spot problems and find new arrangements. Finally, from a human resource perspective, employee loyalty can be weak in a network organization because of concerns over job security. Employees

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124 Part 2: Organization Purpose and Structural Design

may feel that they can be replaced by contract services. In addition, it is more dif- ficult to develop a cohesive corporate culture. Turnover may be higher because emo- tional commitment between the organization and employees is low. With changing products, markets, and partners, the organization may need to reshuffle employees at any time to get the correct mix of skills and capabilities.

Hybrid Structure As a practical matter, many structures in the real world do not exist in the pure forms we have outlined in this chapter. Most large organizations, in particular, often use a hybrid structure that combines characteristics of various approaches tailored to specific strategic needs. Most companies combine characteristics of functional, divisional, geographic, horizontal, or network structures to take advantage of the strengths of various structures and avoid some of the weaknesses. Hybrid structures tend to be used in rapidly changing environments because they offer the organiza- tion greater flexibility.

One type of hybrid that is often used is to combine characteristics of the func- tional and divisional structures. When a corporation grows large and has sev- eral products or markets, it typically is organized into self-contained divisions of some type. Functions that are important to each product or market are decentral- ized to the self-contained units. However, some functions that are relatively stable and require economies of scale and in-depth specialization are also centralized at headquarters. For example, Starbucks has a number of geographic divisions, but functions such as marketing, legal, and supply chain operations are centralized.94 Sun Petroleum Products Corporation (SPPC) reorganized to a hybrid structure to be more responsive to changing markets. The hybrid organization structure adopted by SPPC is illustrated in part 1 of Exhibit 3.19. Three major product divisions—fuels, lubricants, and chemicals—were created, each serving a different market and requir- ing a different strategy and management style. Each product-line vice president is now in charge of all functions for that product, such as marketing, planning, supply and distribution, and manufacturing. However, activities such as human resources, legal, technology, and finance were centralized as functional departments at head- quarters in order to achieve economies of scale. Each of these departments provides services for the entire organization.95

A second hybrid approach that is increasingly used today is to combine charac- teristics of functional, divisional, and horizontal structures. Ford Motor Company’s Customer Service Division, a global operation made up of 12,000 employees serv- ing nearly 15,000 dealers, provides an example of this type of hybrid. Beginning in 1995, when Ford launched its “Ford 2000” initiative aimed at becoming the world’s leading automotive firm in the twenty-first century, top executives grew increas- ingly concerned about complaints regarding customer service. They decided that the horizontal model offered the best chance to gain a faster, more efficient, integrated approach to customer service. Part 2 of Exhibit 3.19 illustrates a portion of the Customer Service Division’s hybrid structure. Several horizontally aligned groups, made up of multiskilled teams, focus on core processes such as parts supply and logistics (acquiring parts and getting them to dealers quickly and efficiently), ve- hicle service and programs (collecting and disseminating information about repair problems), and technical support (ensuring that every service department receives updated technical information). Each group has a process owner who is responsible for seeing that the teams meet overall objectives. Ford’s Customer Service Division

Briefcase As an organization manager, keep these guidelines in mind: Implement hybrid struc- tures, when needed, to combine characteristics of functional, divisional, and horizontal struc- tures. Use a hybrid structure in complex environments to take advantage of the strengths of various structural characteris- tics and avoid some of the weaknesses.

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Chapter 3: Fundamentals of Organization Structure 125

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126 Part 2: Organization Purpose and Structural Design

retained a functional structure for its finance, strategy and communications, and human resources departments. Each of these departments provides services for the entire division.96

In a huge organization such as Ford, managers may use a variety of structural characteristics to meet the needs of the total organization. Like many large organi- zations, for example, Ford also outsources some of its activities to other firms. A hybrid structure is often preferred over the pure functional, divisional, horizontal, or virtual network structure because it can provide some of the advantages of each and overcome some of the disadvantages.

Applications of Structural Design Each type of structure is applied in different situations and meets different needs. In describing the various structures, we touched briefly on conditions such as environmental stability or change and organizational size that are related to structure. Each form of structure—functional, divisional, matrix, horizontal, network, hybrid— represents a tool that can help managers make an organization more effective, depending on the demands of its situation.

Structural Alignment

Ultimately, the most important decision that managers make about structural design is to find the right balance between vertical control and horizontal coordination, depending on the needs of the organization. Vertical control is associated with goals of efficiency and stability, while horizontal coordination is associated with learning, innovation, and flexibility. Exhibit 3.20 shows a simplified continuum that illus- trates how structural approaches are associated with vertical control versus hori- zontal coordination. The functional structure is appropriate when the organization needs to be coordinated through the vertical hierarchy and when efficiency is im- portant for meeting organizational goals. The functional structure uses task special- ization and a strict chain of command to gain efficient use of scarce resources, but it does not enable the organization to be flexible or innovative. At the opposite end of the scale, the horizontal structure is appropriate when the organization has a high need for coordination among functions to achieve innovation and promote learn- ing. The horizontal structure enables organizations to differentiate themselves and respond quickly to changes, but at the expense of efficient resource use. The virtual network structure offers even greater flexibility and potential for rapid response by allowing the organization to add or subtract pieces as needed to adapt and meet changing needs from the environment and marketplace. Exhibit 3.20 also shows how other types of structure defined in this chapter—functional with horizontal linkages, divisional, and matrix—represent intermediate steps on the organization’s path to efficiency or innovation and learning. The exhibit does not include all pos- sible structures, but it illustrates how organizations attempt to balance the needs for efficiency and vertical control with innovation and horizontal coordination. In addition, as described in the chapter, many organizations use a hybrid structure to combine characteristics of various structural types.

Briefcase As an organization manager, keep these guidelines in mind: Find the correct balance between vertical control and horizontal coordina- tion to meet the needs of the organization. Consider a structural reorganization when symptoms of structural deficiency are observed.

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Chapter 3: Fundamentals of Organization Structure 127

Symptoms of Structural Deficiency

Top executives periodically evaluate organization structure to determine whether it is appropriate to changing needs. Managers try to achieve the best fit between internal reporting relationships and the needs of the external environment. As a general rule, when organization structure is out of alignment with organization needs, one or more of the following symptoms of structural deficiency appear.97

• There is an absence of collaboration among units. Organization structure should encourage collaboration when and where it is needed to meet organizational goals. It should enable resolution of conflicting departmental needs and goals into a single set of goals for the entire organization. When departments act at cross-purposes or are under pressure to achieve departmental goals at the expense of organizational goals, the structure is often at fault. Horizontal linkage mechanisms are not adequate.

• Decision making is delayed or lacking in quality. Decision makers may be overloaded because the hierarchy funnels too many problems and decisions to them. Delegation to lower levels may be insufficient. Another cause of poor-quality decisions is that information may not reach the correct people. Information linkages in either the vertical or horizontal direction may be inadequate to ensure decision quality.

• The organization does not respond innovatively to a changing environment. One reason for lack of innovation is that departments are not coordinated horizontally. The identification of customer needs by the marketing department and the identification of technological developments in the research department must be coordinated. Organization structure also has to specify departmental responsibilities that include environmental scanning and innovation.

Exhibit 3.20 Relationship of Structure to Organization’s Need for Efficiency Versus Learning

Dominant Structural Approach

Functional Structure

Horizontal: Coordination, learning, innovation, �exibility (organic)

Vertical: Control, ef�ciency, stability, reliability (mechanistic)

Functional with cross-functional

teams, integrators

Divisional Structure

Matrix Structure

Horizontal Structure

Virtual Network Structure

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128 Part 2: Organization Purpose and Structural Design

• Employee performance declines and goals are not being met. Employee performance may decline because the structure doesn’t provide clear goals, responsibilities, and mechanisms for coordination and collaboration. The structure should reflect the complexity of the market environment yet be straightforward enough for employees to effectively work within.

Design Essentials

■ Organization structure must accomplish two things for the organization. It must provide a framework of responsibilities, reporting relationships, and groupings, and it must provide mechanisms for linking and coordinating organizational elements into a coherent whole. The structure is reflected on the organization chart. Linking the organization into a coherent whole requires the use of information systems and linkage devices in addition to the organization chart.

■ Organization structure can be designed to provide vertical and horizontal information linkages based on the information processing required to meet the organization’s overall goal. Managers can choose whether to orient toward a traditional organization designed for efficiency, which emphasizes vertical linkages such as hierarchy, rules and plans, and formal information systems (a mechanistic design), or toward a contemporary organization designed for learning and adaptation, which emphasizes horizontal communication and coordination (an organic design). Vertical linkages are not sufficient for most organizations today. Organizations provide horizontal linkages through cross-functional information systems, liaison roles, temporary task forces, full-time integrators, and teams, and by creating the conditions to enable relational coordination.

■ Alternatives for grouping employees and departments into overall structural design include functional grouping, divisional grouping, multifocused grouping, horizontal grouping, and virtual network grouping. The choice among functional, divisional, and horizontal structures determines where coordination and integration will be greatest. With functional and divisional structures, managers also use horizontal linkage mechanisms to complement the vertical dimension and achieve integration of departments and levels into an organizational whole. With a horizontal structure, activities are organized horizontally around core work processes.

■ A virtual network structure extends the concept of horizontal coordination and collaboration beyond the boundaries of the organization. Core activities are performed by a central hub while other functions and activities are outsourced to contract partners.

■ The matrix structure attempts to achieve an equal balance between the vertical and horizontal dimensions of structure. Most organizations do not exist in these pure forms, using instead hybrid structures that incorporate characteristics of two or more types of structure.

■ Ultimately, managers attempt to find the correct balance between vertical control and horizontal coordination. Signs of structural misalignment include lack of collaboration, delayed decision making, lack of innovation, and poor employee performance.

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Chapter 3: Fundamentals of Organization Structure 129

■ Finally, an organization chart is only so many lines and boxes on a piece of paper. The purpose of the organization chart is to encourage and direct employees into activities and communications that enable the organization to achieve its goals. The organization chart provides the structure, but employees provide the behavior. The chart is a guideline to encourage people to work together, but management must implement the structure and carry it out.

kEY CONCEPTS

centralization collaboration decentralization departmental grouping divisional grouping divisional structure functional grouping functional matrix functional structure horizontal grouping horizontal linkage

horizontal structure hybrid structure integrator liaison role matrix structure multifocused grouping organization structure outsourcing process product matrix reengineering

relational coordination symptoms of structural deficiency task force teams vertical information system vertical linkages virtual network grouping virtual network structure virtual team

DISCUSSION QUESTIONS

1. What is the definition of organization structure? Does organization structure appear on the organization chart? Explain.

2. When is a functional structure preferable to a divi- sional structure?

3. Large corporations tend to use hybrid structures. Why? 4. What are the primary differences in structure between

a traditional, mechanistic organization designed for ef- ficiency and a more contemporary, organic organiza- tion designed for learning?

5. What is the difference between a task force and a team? Between liaison role and integrating role? Which of these provides the greatest amount of horizontal coordination?

6. As a manager, how would you create an organization with a high degree of relational coordination?

7. What conditions usually have to be present before an organization should adopt a matrix structure?

8. The manager of a consumer products firm said, “We use the brand manager position to train future execu- tives.” Why do you think the brand manager position is considered a good training ground? Discuss.

9. Why do companies using a horizontal structure have cultures that emphasize openness, employee empower- ment, and responsibility? What do you think a man- ager’s job would be like in a horizontally organized company?

10. Describe the virtual network structure. What are the advantages and disadvantages of using this struc- ture compared to performing all activities in-house within an organization?

CHAPTER 3 WORkBOOk You and Organization Structure98

To better understand the importance of organization struc- ture in your life, do the following assignment.

Select one of the following situations to organize:

• A copy and print shop • A travel agency • A sports rental (such as Jet Skis or snowmobiles) in a

resort area • A bakery

Background Organization is a way of gaining some power against ran- dom forces in the environment. The environment provides the organization with inputs, which include raw materials, human resources, and financial resources. There is a service or product to produce that involves technology. The output goes to clients, a group that must be nurtured. The com- plexities of the environment and the technology determine the complexity of the organization.

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130 Part 2: Organization Purpose and Structural Design

Planning Your Organization 1. Write down the mission or purpose of the organization

in a few sentences. 2. What are the specific tasks to be completed to accom-

plish the mission? 3. Based on the specifics in question 2, develop an organi-

zation chart. Each position in the chart will perform a specific task or is responsible for a certain outcome.

4. You are into your third year of operation, and your busi- ness has been very successful. You want to add a second location a few miles away. What issues will you face

running the business at two locations? Draw an organi- zation chart that includes the two business locations.

5. Twenty years later you have 75 business locations in five states. What are the issues and problems that have to be dealt with through organizational struc- ture? Draw an organization chart for this organiza- tion, indicating such factors as who is responsible for customer satisfaction, how you will know if customer needs are met, and how information will flow within the organization.

CASE FOR ANALYSIS | C & C Grocery Stores, Inc.99

The first C & C Grocery store was started in 1947 by Doug Cummins and his brother Bob. Both were veterans who wanted to run their own business, so they used their savings to start the small grocery store in Charlotte, North Carolina. The store was immediately successful. The location was good, and Doug Cummins had a winning personality. Store employees adopted Doug’s informal style and “serve the customer” attitude. C & C’s increasing circle of customers enjoyed an abundance of good meats and produce.

By 1997, C & C had over 200 stores. A standard physical layout was used for new stores. Company head- quarters moved from Charlotte to Atlanta in 1985. The organization chart for C & C is shown in Exhibit 3.21. The central offices in Atlanta handled personnel, merchan- dising, financial, purchasing, real estate, and legal affairs for the entire chain. For management of individual stores, the organization was divided by regions. The southern, southeastern, and southwestern regions each had about 70 stores. Each region was divided into five districts of 10 to 15 stores each. A district director was responsible for supervision and coordination of activities for the 10 to 15 district stores.

Each district was divided into four lines of authority based on functional specialty. Three of these lines reached into the stores. The produce department manager within each store reported directly to the produce specialist for the division, and the same was true for the meat depart- ment manager, who reported directly to the district meat specialist. The meat and produce managers were respon- sible for all activities associated with the acquisition and sale of perishable products. The store manager’s responsi- bility included the grocery line, front-end departments, and store operations. The store manager was responsible for appearance of personnel, cleanliness, adequate checkout service, and price accuracy. A grocery manager reported to the store manager, maintained inventories, and restocked

shelves for grocery items. The district merchandising office was responsible for promotional campaigns, advertising circulars, district advertising, and attracting customers into the stores. The grocery merchandisers were expected to co- ordinate their activities with each store in the district.

Business for the C & C chain has dropped off in all regions in recent years—partly because of a declining economy, but mostly because of increased competition from large discount retailers such as Walmart, Target, and Costco. When these large discounters entered the grocery business, they brought a level of competition unlike any C & C had seen before. C & C had managed to hold its own against larger supermarket chains, but now even the big chains were threatened by Walmart, which became number 1 in grocery sales in 2001. C & C managers knew they couldn’t compete on price, but they were considering ways they could use advanced information technology to improve service and customer satisfaction and distinguish the store from the large discounters.

However, the most pressing problem was how to im- prove business with the resources and stores they now had. A consulting team from a major university was hired to investigate store structure and operations. The consultants visited several stores in each region, talking to about 50 managers and employees. The consultants wrote a report that pinpointed four problem areas to be addressed by store executives.

1. The chain was slow to adapt to change. Store layout and structure were the same as had been designed 15 years ago. Each store did things the same way, even though some stores were in low-income areas and other stores in suburban areas. A new computerized supply chain management system for ordering and stocking had been developed, but after two years it was only partially implemented in the stores. Other proposed in- formation technology (IT) initiatives were still “on the back burner,” not yet even in the development stage.

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Chapter 3: Fundamentals of Organization Structure 131

2. Roles of the district store supervisor and the store manager were causing dissatisfaction. Store managers wanted more decentralization and freedom to tailor store inventory, and to carry specialty products, to fit their specific market clientele as a way to boost sales. The store managers also wanted to learn general man- agement skills for potential promotion into district or regional management positions. However, their jobs re- stricted them to narrow operational activities with little authority and they learned little about merchandising, meat, and produce. Moreover, district store supervisors used store visits to inspect for cleanliness and adherence to operating standards rather than to train the store manager and help coordinate operations with perish- able departments. Close supervision on the operational

details had become the focus of operations management rather than development, training, and coordination.

3. Cooperation within stores was low and morale was poor. The informal, friendly atmosphere originally cre- ated by Doug Cummins was gone. One example of this problem occurred when the grocery merchandiser and store manager in a Louisiana store decided to pro- mote Coke and Diet Coke as a loss leader. Thousands of cartons of Coke were brought in for the sale, but the stockroom was not prepared and did not have room. The store manager wanted to use floor area in the meat and produce sections to display Coke cartons, but those managers refused. The produce department manager said that Diet Coke did not help his sales and it was okay with him if there was no promotion at all.

Exhibit 3.21 Organization Structure for C & C Grocery Stores, Inc.

(Same as Southeast)(Same as Southeast)

President Cummins

Vice President Purchasing

Vice President Human Resources

Vice President Merchandising

Vice President Distribution

Vice President Northeast

Vice President Southeast

District Director

Vice President South

Vice President Finance and IT

Grocery Merchandiser

Meat Merchandiser

Operations Manager

Produce Manager

District Produce Specialist

District Store Supervisor

Store Manager

District Meat Specialist

Store Meat Department

Manager

Grocery Department

Manager

Store Produce Department

Manager

District Grocery Specialist

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132 Part 2: Organization Purpose and Structural Design

4. Long-term growth and development of the store chain would probably require reevaluation of long-term strategy. The percent of market share going to tradi- tional grocery stores was declining nationwide due to competition from large superstores and discount retail- ers. In the near future, C & C might need to introduce nonfood items into the stores for one-stop shopping, add specialty or gourmet sections within stores, and investigate how new technology could help distinguish the company, such as through targeted marketing and promotion, providing superior service and conve- nience, and offering their customers the best product assortment and availability.

To solve the first three problems, the consultants recommended reorganizing the district and the store structure as illustrated in Exhibit 3.22. Under this reorganization, the meat, grocery, and produce department managers would all report to the store manager. The store

manager would have complete store control and would be responsible for coordination of all store activities. The district supervisor’s role would be changed from supervision to training and development. The district supervisor would head a team that included himself and several meat, produce, and merchandise specialists who would visit area stores as a team to provide advice and help for the store managers and other employees. The team would act in a liaison capacity between district specialists and the stores.

The consultants were enthusiastic about the proposed structure. With the removal of one level of district opera- tional supervision, store managers would have more free- dom and responsibility. The district liaison team would establish a cooperative team approach to management that could be adopted within stores. Focusing store responsi- bility on a single manager would encourage coordination within stores and adaptation to local conditions. It would also provide a focus of responsibility for storewide admin- istrative changes.

Exhibit 3.22 Proposed Reorganization of C & C Grocery Stores, Inc.

District Director

Operations Manager

Grocery Merchandiser

Grocery Specialist

Meat Specialist

Produce Specialist

District Coordinator

Meat Merchandiser

Produce Manager

Store Manager

Meat Department

Manager

Grocery Department

Manager

Produce Department

Manager

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Chapter 3: Fundamentals of Organization Structure 133

The consultants also believed that the proposed structure could be expanded to accommodate nongrocery lines and gourmet units if these were included in C & C’s future plans. Within each store, a new department manager could be

added for pharmacy, gourmet/specialty items, or other major departments. The district team could be expanded to include specialists in these lines, as well as an information technology coordinator to act as liaison for stores in the district.

CASE FOR ANALYSIS | Aquarius Advertising Agency100

The Aquarius Advertising Agency is a medium-sized firm that offered two basic services to its clients: customized plans for the content of an advertising campaign (e.g., slogans and layouts) and complete plans for media (e.g., radio, TV, newspapers, billboards, and Internet). Additional services included aid in marketing and distribution of products and marketing research to test advertising effectiveness.

Its activities were organized in a traditional manner. The organization chart is shown in Exhibit 3.23. Each department included similar functions.

Each client account was coordinated by an account executive who acted as a liaison between the client and the various specialists on the professional staff of the operations and marketing divisions. The number of direct communications and contacts between clients and Aquarius specialists, clients and account executives, and Aquarius specialists and account executives is indicated in Exhibit 3.24. These sociometric data were gathered by a consultant who conducted a study of the patterns of formal and informal communication. Each intersecting cell of Aquarius personnel and the clients contains an index of the direct contacts between them.

Although an account executive was designated to be the liaison between the client and specialists within the agency, communications frequently occurred directly between clients and specialists and bypassed the account executive. These direct contacts involved a wide range of interactions, such as meetings, telephone calls, and e-mail messages. A large number of direct communications occurred between agency specialists and their counterparts in the client organization. For example, an art specialist working as one member of a team on a particular client account would often be contacted directly by the client’s in-house art specialist, and agency research personnel had direct communication with research personnel of the client firm. Also, some of the unstructured contacts often led to more formal meetings with clients in which agency personnel made

presentations, interpreted and defended agency policy, and committed the agency to certain courses of action.

Both hierarchical and professional systems operated within the departments of the operations and marketing divisions. Each department was organized hierarchically with a director, an assistant director, and several levels of authority. Professional communications were widespread and mainly concerned with sharing knowledge and techniques, technical evaluation of work, and development of professional interests. Control in each department was exercised mainly through control of promotions and supervision of work done by subordinates. Many account executives, however, felt the need for more influence, and one commented:

Creativity and art. That’s all I hear around here. It is hard as hell to effectively manage six or seven hotshots who claim they have to do their own thing. Each of them tries to sell his or her idea to the client, and most of the time I don’t know what has happened until a week later. If I were a despot, I would make all of them check with me first to get approval. Things would sure change around here.

The need for reorganization was made more acute by changes in the environment. Within a short period of time, there was a rapid turnover in the major accounts handled by the agency. It was typical for advertising agencies to gain or lose clients quickly, often with no advance warning as consumer behavior and lifestyle changes emerged and product innovations occurred.

An agency reorganization was one solution proposed by top management to increase flexibility in this unpre- dictable environment. The reorganization would be aimed at reducing the agency’s response time to environmental changes and at increasing cooperation and communica- tion among specialists from different departments. The top managers are not sure what type of reorganization is appropriate. They would like your help analyzing their context and current structure and welcome your advice on proposing a new structure.

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134 Part 2: Organization Purpose and Structural Design

Exhibit 3.23 Aquarius Advertising Agency Organization Chart

Media Department

Merchandising Department

Research Department

Newspapers/ Magazine

Production Department

TV/Radio/Internet Production Department

Copy Department

Art Department

Board of Directors

President

Executive Vice President Policy CommitteeLegal Counsel

Financial Manager Human Resources

Manager

Accounts Vice President

Operations Vice President

Marketing Vice President

Account Executive

Accounts Manager

Account Executive

Account Executive

Account Executive

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Chapter 3: Fundamentals of Organization Structure 135

Exhibit 3.24 Sociometric Index of Aquarius Personnel and Clients F = Frequent—daily O = Occasional—once or twice per project N = None

Clients

Account Manager

Account Executives

TV/Radio Specialists

Newspaper/Magazine Specialists

Copy Specialists

Art Specialists

Merchandising Specialists

Media Specialists

Research Specialists

Cl ie

nt s

A cc

ou nt

M an

ag er

A cc

ou nt

E xe

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TV /R

ad io

S pe

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N ew

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ag az

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Sp ec

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ts

Co py

S pe

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A rt

S pe

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M er

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pe ci

al is

ts

M ed

ia S

pe ci

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ts

Re se

ar ch

S pe

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is ts

X F

X F

X

N

F

X

N

F

N

X

N

F

O

O

X

N

F

O

O

N

X

N

F

N

N

O

O

X

N

F

N

O

O

O

F

X

N

F

O

O

O

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F

F

X

F N N O O O O O

NOTES

1. Phred Dvorak and Yoshio Takahashi, “Nissan Pins Revival on Leadership Trio,” The Wall Street Journal Online, November 21, 2013, http://online.wsj.com/news/articles/SB100014240 52702304607104579211641207439728 (accessed February 24, 2014).

2. Annie Lowrey, “World Bank, Rooted in Bureaucracy, Proposes a Sweeping Reorganization,” The New York Times, October 7, 2013, B2.

3. Dan Carrison, “Borrowing Expertise from the FBI,” Industrial Management, May–June 2009, 23–26.

4. Reported in Brad Stone, The Everything Store: Jeff Bezos and the Age of Amazon (New York: Little, Brown, 2013), 168–169.

5. Pete Engardio with Michael Arndt and Dean Foust, “The Future of Outsourcing,” BusinessWeek, January 30, 2006, 50–58; “Working with Wyeth to Establish a High— Performance Drug Discovery Capability,” Accenture website,

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136 Part 2: Organization Purpose and Structural Design

http://www.accenture.com/SiteCollectionDocuments /PDF/wyeth (accessed July 18, 2011); and Ira Spector, “Industry Partnerships: Changing the Way R&D Is Conducted,” Applied Clinical Trials Online, March 1, 2006, http://appliedclinicaltrialsonline.findpharma.com /appliedclinicaltrials/article/articleDetail.jsp?id=310807 (accessed July 18, 2011).

6. Carol Hymowitz, “Have Advice, Will Travel; Lacking Permanent Offices, Accenture’s Executives Run ‘Virtual’ Company on the Fly,” The Wall Street Journal, June 5, 2006, B1.

7. John Child, Organization (New York: Harper & Row, 1984). 8. Stuart Ranson, Bob Hinings, and Royston Greenwood, “The

Structuring of Organizational Structures,” Administrative Science Quarterly 25 (1980), 1–17; and Hugh Willmott, “The Structuring of Organizational Structures: A Note,” Administrative Science Quarterly 26 (1981), 470–474.

9. This section is based on Frank Ostroff, The Horizontal Or- ganization: What the Organization of the Future Looks Like and How It Delivers Value to Customers (New York: Oxford University Press, 1999).

10. Stephen Salsbury, The State, the Investor, and the Railroad: The Boston & Albany, 1825–1867 (Cambridge: Harvard University Press, 1967), 186–187.

11. “The Cases of Daniel McCallum and Gustavus Swift,” Willamette University, http://www.willamette.edu/~fthompso /MgmtCon/McCallum.htm (accessed July 29, 2011); “The Rise of the Professional Manager in America,” ManagementGuru.com, http://www.mgmtguru.com/mgt301 /301_Lecture1Page7.htm (accessed July 29, 2011); and Alfred D. Chandler, Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Cambridge, MA: Massachusetts Institute of Technology Press, 1962).

12. David Nadler and Michael Tushman, Strategic Organization Design (Glenview, IL: Scott Foresman, 1988).

13. William C. Ouchi, “Power to the Principals: Decentralization in Three Large School Districts,” Organization Science 17, no. 2 (March–April 2006), 298–307.

14. Sarah Lyall, “Britain Plans to Decentralize Health Care,” The New York Times, July 24, 2010, www.nytimes .com/2010/07/25/world/europe/25britain. html?pagewanted=all (accessed August 14, 2012).

15. Hiroko Tabuchi and Bill Vlasic, “Battered by Expensive Crises, Toyota Declares a Rebirth,” The New York Times, January 3, 2013, B1.

16. Ibid. 17. Andrew Campbell, Sven Kunisch, and Günter Müller-Stewens,

“To Centralize or Not to Centralize?” McKinsey Quarterly, June 2011, www.mckinseyquarterly.com/To_centralize_or _not_to_centralize_2815 (accessed August 14, 2012).

18. Ibid.; and “Country Managers: From Baron to Hotelier,” The Economist, May 11, 2002, 55–56.

19. Based on Jay R. Galbraith, Designing Complex Organizations (Reading, MA: Addison-Wesley, 1973), and Organization Design (Reading, MA: Addison-Wesley, 1977), 81–127.

20. George Anders, “Overseeing More Employees—With Fewer Managers,” The Wall Street Journal, March 24, 2008, B6.

21. Thomas Kayser, “Six Ingredients for Collaborative Partner- ships,” Leader to Leader, Summer 2011, 48–54.

22. Siobhan Gorman and Julian E. Barnes, “Spy, Military Ties Aided bin Laden Raid,” The Wall Street Journal, May 23, 2011, http://online.wsj.com/article/SB1000142405274870408 3904576334160172068344.html (accessed May 23, 2011).

23. Lee Iacocca with William Novak, Iacocca: An Autobiography (New York: Phantom Books, 1984), 152–153.

24. Ronald J. Recardo and Kleigh Heather, “Ten Best Practices for Restructuring the Organization,” Global Business and Organizational Excellence, January–February 2013, 23–37; Kirsten Foss and Waymond Rodgers, “Enhancing Information Usefulness by Line Managers’ Involvement in Cross-Unit Activities,” Organization Studies 32, no. 5 (2011), 683–703; M. Casson, Information and Organization (Oxford: Oxford University Press, 1997); Justin J. P. Jansen, Michiel P. Tempelaar, Frans A. J. van den Bosch, and Henk W. Volberda, “Structural Differentiation and Ambidexterity: The Mediating Role of Integration Mechanisms,” Organization Science 20, no. 4 (July–August 2009), 797–811; and Galbraith, Designing Complex Organizations.

25. “Panel Says Toyota Failed to Listen to Outsiders,” USA Today, May 23, 2011, http://content.usatoday.com/communities /driveon/post/2011/05/toyota-panel-calls-for-single-us-chief -paying-heed-to-criticism/1#.VDU5Q7N0x1s (accessed October 7, 2014).

26. These are based in part on Galbraith, Designing Complex Organizations; and Recardo and Heather, “Ten Best Practices for Restructuring the Organization.”

27. David Stires, “How the VA Healed Itself,” Fortune, May 15, 2006, 130–136.

28. Jay Galbraith, Diane Downey, and Amy Kates, “How Net- works Undergird the Lateral Capability of an Organization— Where the Work Gets Done,” Journal of Organizational Excellence (Spring 2002), 67–78.

29. Walter Kiechel III, “The Art of the Corporate Task Force,” Fortune, January 28, 1991, 104–105; and William J. Altier, “Task Forces: An Effective Management Tool,” Management Review, February 1987, 52–57.

30. Margaret Frazier, “Flu Prep,” The Wall Street Journal, March 25–26, 2006, A8.

31. Paul R. Lawrence and Jay W. Lorsch, “New Managerial Job: The Integrator,” Harvard Business Review, November– December 1967, 142–151.

32. Dan Heath and Chip Heath, “Blowing the Baton Pass,” Fast Company, July–August 2010, 46–48.

33. Anthony M. Townsend, Samuel M. DeMarie, and Anthony R. Hendrickson, “Virtual Teams: Technology and the Workplace of the Future,” Academy of Management Executive 12, no. 3 (August 1998), 17–29.

34. Erin White, “How a Company Made Everyone a Team Player,” The Wall Street Journal, August 13, 2007, B1.

35. Pete Engardio, “A Guide for Multinationals: One of the Greatest Challenges for a Multinational Is Learning How to Build a Productive Global Team,” BusinessWeek, August 20, 2007, 48–51; and Lynda Gratton, “Working Together . . . When Apart,” The Wall Street Journal, June 18, 2007.

36. Jody Hoffer Gittell, The Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance (New York: McGraw-Hill, 2003).

37. This discussion is based on Jody Hoffer Gittell, “Coordinating Mechanisms in Care Provider Groups: Relational Coordination as a Mediator and Input Uncertainty as a Moderator of Performance Effects,” Management Science 48, no. 11 (November 2002), 1408– 1426; J. H. Gittell, “The Power of Relationships,” Sloan Management Review (Winter 2004), 16–17; and J. H. Gittell, The Southwest Airlines Way.

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Chapter 3: Fundamentals of Organization Structure 137

38. Based on the story in Jody Hoffer Gittell, “Paradox of Coor- dination and Control,” California Management Review 42, no. 3 (Spring 2000), 101–117.

39. “Transcript of Stripes Interview with Lt. Gen. David M. Rodriguez,” Stars and Stripes, December 31, 2009, http://www .stripes.com/news/transcript-of-stripes-interview-with-lt-gen -david-m-rodriguez-1.97669# (accessed July 21, 2011); and Robert D. Kaplan, “Man Versus Afghanistan,” The Atlantic, April 2010, 60–71. Note: Rodriguez was scheduled to leave Afghanistan in late July 2011.

40. Henry Mintzberg, The Structuring of Organizations (Englewood Cliffs, NJ: Prentice-Hall, 1979).

41. Frank Ostroff, “Stovepipe Stomper,” Government Executive, April 1999, 70.

42. Raymond E. Miles, Charles C. Snow, Øystein D. Fjeldstad, Grant Miles, and Christopher Lettl, “Designing Organizations to Meet 21st-Century Opportunities and Challenges,” Organizational Dynamics 39, no. 2 (2010), 93–103.

43. Based on Robert Duncan, “What Is the Right Organization Structure?” Organizational Dynamics, Winter 1979, 59–80; and W. Alan Randolph and Gregory G. Dess, “The Congruence Perspective of Organization Design: A Conceptual Model and Multivariate Research Approach,” Academy of Management Review 9 (1984), 114–127.

44. Geeta Anand, “The Henry Ford of Heart Surgery,” The Wall Street Journal, November 25, 2009, A16.

45. Survey reported in Timothy Galpin, Rod Hilpirt, and Bruce Evans, “The Connected Enterprise: Beyond Division of Labor,” Journal of Business Strategy 28, no. 2 (2007), 38–47.

46. Adam Bryant, “An Office? She’ll Pass on That,” (an interview with Meridee A. Moore, Corner Office column), The Wall Street Journal, March 7, 2010, BU2.

47. Rahul Jacob, “The Struggle to Create an Organization for the 21st Century,” Fortune, April 3, 1995, 90–99.

48. R. E. Miles et al., “Designing Organizations to Meet 21st- Century Opportunities and Challenges.”

49. David C. Robertson with Bill Breen, Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry (New York: Crown Business, 2013), 32.

50. N. Anand and Richard L. Daft, “What Is the Right Organization Design?” Organizational Dynamics 36, no. 4 (2007), 329–344.

51. Loretta Chao, “Alibaba Breaks Up E-Commerce Unit,” The Wall Street Journal, June 17, 2011, B2.

52. Yue Maggie Zhou, “Designing for Complexity: Using Divi- sions and Hierarchy to Manage Complex Tasks,” Organiza- tion Science 24, no. 2 (March–April 2013), 339–355.

53. Geoff Colvin and Jessica Shambora, “J&J: Secrets of Suc- cess,” Fortune, May 4, 2009, 117–121.

54. Eliza Newlin Carney, “Calm in the Storm,” Government Ex- ecutive, October 2003, 57–63; and Brian Friel, “Hierarchies and Networks,” Government Executive, April 2002, 31–39.

55. Based on Duncan, “What Is the Right Organization Structure?”

56. Joseph Weber, “A Big Company That Works,” BusinessWeek, May 4, 1992, 124.

57. Phred Dvorak and Merissa Marr, “Stung by iPod, Sony Addresses a Digital Lag,” The Wall Street Journal, December 30, 2004, B1.

58. Nick Wingfield, “Microsoft Overhauls, the Apple Way,” http://www.nytimes.com/2013/07/12/technology/microsoft -revamps-structure-and-management.html?pagewanted=all

(accessed October 7, 2014); Brian R. Fitzgerald, “Microsoft Memo: The Highlights,” The Wall Street Journal, July 13, 2013, http://blogs.wsj.com/digits/2013/07/11/microsoft -memo-the-highlights/ (accessed February 25, 2014); and quote from Kurt Eichenwald, “Microsoft’s Lost Decade,” Vanity Fair, August 2012, 108–135.

59. Susanna Kim, “Major Microsoft Investors Want Bill Gates Out as Chairman,” ABC News, October 2, 2013, http://abcnews .go.com/Business/microsoft-shareholders-call-bill-gates-step -chairman/story?id=20443636 (accessed October 2, 2013).

60. Maisie O’Flanagan and Lynn K. Taliento, “Nonprofits: Ensuring That Bigger Is Better,” McKinsey Quarterly, no. 2 (2004), 112ff.

61. Lowrey, “World Bank, Rooted in Bureaucracy, Proposes a Sweeping Reorganization.”

62. Mae Anderson, “Wal-Mart Reorganizes U.S. Operations to Help Spur Growth,” USA Today, January 28, 2010, http:// www.usatoday.com/money/industries/retail/2010-01-28- walmart-reorganization_N.htm (accessed July 21, 2011); and “Organizational Chart of Wal-Mart Stores,” The Official Board.com, http://www.theofficialboard.com/org-chart/wal -mart-stores (accessed July 21, 2011).

63. Jay R. Galbraith, “The Multi-Dimensional and Reconfigurable Organization,” Organizational Dynamics 39, no. 2 (2010), 115–125; Thomas Sy and Laura Sue D’Annunzio, “Challenges and Strategies of Matrix Organizations: Top-Level and Mid- Level Managers’ Perspectives,” Human Resource Planning 28, no. 1 (2005), 39–48; and Stanley M. Davis and Paul R. Lawrence, Matrix (Reading, MA: Addison-Wesley, 1977), 11–24. For a current perspective on matrix management, see Kevan Hall, Making the Matrix Work: How Matrix Managers Engage People and Cut Through Complexity (London: Nicholas Brealey Publishing, 2013).

64. Davis and Lawrence, Matrix. 65. Steven H. Appelbaum, David Nadeau, and Michael Cyr,

“Performance Evaluation in a Matrix Organization: A Case Study (Part One),” Industrial and Commercial Training 40, no. 5 (2008), 236–241; Erik W. Larson and David H. Gobeli, “Matrix Management: Contradictions and Insight,” California Management Review 29 (Summer 1987), 126–138; and Sy and D’Annunzio, “Challenges and Strategies of Matrix Organizations.”

66. Davis and Lawrence, Matrix, 155–180. 67. Robert C. Ford and W. Alan Randolph, “Cross-Functional

Structures: A Review and Integration of Matrix Organizations and Project Management,” Journal of Management 18 (June 1992), 267–294; and Duncan, “What Is the Right Organization Structure?”

68. Lawton R. Burns, “Matrix Management in Hospitals: Testing Theories of Matrix Structure and Development,” Administrative Science Quarterly 34 (1989), 349–368; and Sy and D’Annunzio, “Challenges and Strategies of Matrix Organizations.”

69. Carol Hymowitz, “Managers Suddenly Have to Answer to a Crowd of Bosses” (In the Lead column), The Wall Street Journal, August 12, 2003, B1; and Michael Goold and Andrew Campbell, “Making Matrix Structures Work: Creating Clarity on Unit Roles and Responsibilities,” European Management Journal 21, no. 3 (June 2003), 351–363.

70. Christopher A. Bartlett and Sumantra Ghoshal, “Matrix Management: Not a Structure, a Frame of Mind,” Harvard Business Review, July–August 1990, 138–145.

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138 Part 2: Organization Purpose and Structural Design

71. Kevan Hall, “Revisiting Matrix Management,” People & Strategy 36, no. 1 (2013), 4–5.

72. This case was inspired by John E. Fogerty, “Integrative Management at Standard Steel” (unpublished manuscript, Latrobe, Pennsylvania, 1980); Stanley Reed with Adam Aston, “Steel: The Mergers Aren’t Over Yet,” BusinessWeek, February 21, 2005, 6; Michael Arndt, “Melting Away Steel’s Costs,” BusinessWeek, November 8, 2004, 48; and “Steeling for a Fight,” The Economist, June 4, 1994, 63.

73. Michael Hammer, “Process Management and the Future of Six Sigma,” Sloan Management Review, Winter 2002, 26–32; and Michael Hammer and Steve Stanton, “How Process Enterprises Really Work,” Harvard Business Review 77 (November–December 1999), 108–118.

74. Hammer, “Process Management and the Future of Six Sigma.” 75. Based on Ostroff, The Horizontal Organization; and Anand

and Daft, “What Is the Right Organization Design?” 76. Julia Moskin, “Your Waiter Tonight . . . Will Be the Chef,”

The New York Times, March 12, 2008, F1. 77. Frank Ostroff, The Horizontal Organization, 102–114. 78. Jill Jusko, “Engaged Teams Keep Lockheed Martin Delivering

on Time, Every Time,” IndustryWeek, January 2013, 26. 79. See Anand and Daft, “What Is the Right Organization

Design?”; Pete Engardio, “The Future of Outsourcing,” BusinessWeek, January 30, 2006, 50–58; Jane C. Linder, “Transformational Outsourcing,” MIT Sloan Management Review, Winter 2004, 52–58; and Denis Chamberland, “Is It Core or Strategic? Outsourcing as a Strategic Management Tool,” Ivey Business Journal, July–August 2003, 1–5.

80. Bob Sechler, “Colleges Shedding Non-Core Operations,” The Wall Street Journal, April 2, 2012, A6; and David Streitfeld, “A City Outsources Everything. California’s Sky Doesn’t Fall,” The New York Times, July 20, 2010, A1.

81. Anand and Daft, “What Is the Right Organization Design?”; Yuzo Yamaguchi and Daisuke Wakabayashi, “Hitachi to Outsource TV Manufacture,” The Wall Street Journal Online, July 10, 2009, http://online.wsj.com/article /SB124714255400717925.html (accessed July 17, 2009); Engardio, “The Future of Outsourcing”; Chamberland, “Is It Core or Strategic?”; and Keith H. Hammonds, “Smart, Determined, Ambitious, Cheap: The New Face of Global Competition,” Fast Company, February 2003, 91–97.

82. Jena McGregor, “The Chore Goes Offshore,” BusinessWeek, March 23 & 30, 2009, 50–51.

83. David Nadler, quoted in “Partners in Wealth: The Ins and Outs of Collaboration,” The Economist, January 21–27, 2006, 16–17.

84. Ranjay Gulati, “Silo Busting: How to Execute on the Promise of Customer Focus,” Harvard Business Review, May 2007, 98–108.

85. The discussion of virtual networks is based on Anand and Daft, “What Is the Right Organization Design?”; Melissa A. Schilling and H. Kevin Steensma, “The Use of Modular Organizational Forms: An Industry-Level Analysis,” Academy of Management Journal 44, no. 6 (2001), 1149–1168; Raymond E. Miles and Charles C. Snow, “The New Network Firm: A Spherical Structure Built on a Human Investment Philosophy,” Organizational Dynamics, Spring 1995, 5–18; and R. E. Miles, C. C. Snow, J. A. Matthews, G. Miles,

and H. J. Coleman Jr., “Organizing in the Knowledge Age: Anticipating the Cellular Form,” Academy of Management Executive 11, no. 4 (1997), 7–24.

86. Darren Dahl, “Want a Job? Let the Bidding Begin; a Radical Take on the Virtual Company,” Inc., March 2011, 93–96.

87. David Segal, “A Georgia Town Takes the People’s Business Private,” The New York Times, June 24, 2012, BU1.

88. Paul Engle, “You Can Outsource Strategic Processes,” Industrial Management, January–February 2002, 13–18.

89. Don Tapscott, “Rethinking Strategy in a Networked World,” Strategy + Business 24 (Third Quarter, 2001), 34–41.

90. Joann S. Lublin, “Smart Balance Keeps Tight Focus on Creativity” (Theory & Practice column), The Wall Street Journal, June 8, 2009; and Rebecca Reisner, “A Smart Balance of Staff and Contractors,” BusinessWeek Online, June 16, 2009, http://www.businessweek.com/managing/content /jun2009/ca20090616_217232.htm (accessed April 30, 2010).

91. Gregory G. Dess, Abdul M. A. Rasheed, Kevin J. McLaughlin, and Richard L. Priem, “The New Corporate Architecture,” Academy of Management Executive 9, no. 3 (1995), 7–20.

92. This discussion of strengths and weaknesses is based on Miles and Snow, “The New Network Firm”; Dess et al., “The New Corporate Architecture”; Anand and Daft, “What Is the Right Organization Design?”; Henry W. Chesbrough and David J. Teece, “Organizing for Innovation: When Is Virtual Virtuous?” Harvard Business Review, August 2002, 127–134; Cecily A. Raiborn, Janet B. Butler, and Marc F. Massoud, “Outsourcing Support Functions: Identifying and Managing the Good, the Bad, and the Ugly,” Business Horizons 52 (2009), 347–356; and M. Lynne Markus, Brook Manville, and Carole E. Agres, “What Makes a Virtual Organization Work?” Sloan Management Review, Fall 2000, 13–26.

93. James R. Hagerty, “A Toy Maker Comes Home to the U.S.A.,” The Wall Street Journal, March 11, 2013, B1.

94. “Organization Chart for Starbucks,” The Official Board. com, http://www.theofficialboard.com/org-chart/starbucks (accessed July 21, 2011).

95. Linda S. Ackerman, “Transition Management: An In-depth Look at Managing Complex Change,” Organizational Dynamics, Summer 1982, 46–66.

96. Based on Ostroff, The Horizontal Organization, 29–44. 97. Based on Child, Organization, Ch. 1; and Jonathan D. Day,

Emily Lawson, and Keith Leslie, “When Reorganization Works,” The McKinsey Quarterly, 2003 Special Edition: The Value in Organization, 21–29.

98. Adapted by Dorothy Marcic from “Organizing,” in Donald D. White and H. William Vroman, Action in Organizations, 2nd ed. (Boston: Allyn & Bacon, 1982), 154; and Cheryl Harvey and Kim Morouney, “Organization Structure and Design: The Club Ed Exercise,” Journal of Management Education (June 1985), 425–429.

99. Prepared by Richard L. Daft, from Richard L. Daft and Richard Steers, Organizations: A Micro/Macro Approach (Glenview, IL: Scott Foresman, 1986). Reprinted with permission.

100. Adapted from John F. Veiga and John N. Yanouzas, “Aquarius Advertising Agency,” The Dynamics of Organization Theory (St. Paul, MN: West, 1984), 212–217, with permission.

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t 3Open System Design Elements Chapter 4 The External Environment Chapter 5 Interorganizational Relationships Chapter 6 Designing Organizations for the International Environment

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140

the Organization’s Environment Task Environment • General Environment • International Environment

the Changing Environment Complexity • Dynamism • Framework

adapting to Complexity and Dynamism Adding Positions and Departments • Building Relationships • Differentiation and Integration • Organic Versus Mechanistic Management Processes • Planning, Forecasting, and Responsiveness

Framework for adapting to Complexity and Dynamism

Dependence on Financial resources

Influencing Financial resources Establishing Formal Relationships • Influencing Key Sectors

Organization–Environment Integrative Framework

Design Essentials

Learning Objectives after reading this chapter you should be able to: 1. Define the task environment and its key

sectors. 2. Define the general environment and its key

sectors. 3. Explain environmental complexity and

environmental dynamism. 4. Describe the environmental uncertainty model. 5. Explain how organizations adapt to complexity

and dynamism in a changing environment. 6. Understand how the environment affects

organizational differentiation and integration. 7. Describe how the environment affects organic

versus mechanistic management processes. 8. Specify how organizations depend on financial

resources. 9. Recognize how organizations influence key

environment sectors.

The External Environment4ChapTER

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Chapter 4: the External Environment 141

Gregg Steinhafel, who joined Target as a buyer in 1979 and took over as the CEO in 2008, earned a reputation for stocking the stores with trendy merchandise at low prices. Target’s bulls-eye logo became one of the best-known trademarks in retail. It seemed that Target could do no wrong, but in the past few years, things have been rough for Steinhafel and Target. The biggest problem was a disastrous security failure during the 2013 holiday shopping season, when malicious software quietly gathered account information from 40 million credit and debit cards as the data moved unencrypted through Target’s cash register systems. News of the data breach seriously hurt Target, reducing traffic at stores and making it more difficult for executives to deal with other issues. Executives were already struggling with a costlier-than-expected expansion into Canada and taking over online operations from Amazon, which ran Target’s back-end operations until 2011. When Target first took over the website, it was unreliable, crashing at times when demand was high for hot-selling products. All of these issues led to the layoff of 475 people and the elimination of 700 open positions at headquarters, the largest round of corporate layoffs since 2009. Morale is in the pits. “Target’s staff needs to be utterly focused on reinvigorating the business and the data breach diverted their attention at a critical time,” said Amy Koo, an analyst with consultancy Kantar Retail.1

Changes in the environment can create both threats and opportunities for organizations. The data breach was a serious external threat to Target, and managers will likely be dealing with the fallout for years. All organizations face tremendous uncertainty in dealing with events in the external environment and often have to adapt quickly to new competition, economic turmoil, changes in consumer interests, or innovative technologies. Cybercrime, such as the data breach at Target, is a growing threat from the environment to every organization.

Purpose of this Chapter

The purpose of this chapter is to develop a framework for assessing environments and how organizations can respond to them. First we identify the organizational domain and the sectors that influence the organization. Then we explore two major environmental forces on the organization—the need for information and the need

Before reading this chapter, please check whether you agree or disagree with each of the following statements:

1 the best way for an organization to cope with a complex environment is to develop a complex structure (rather than keep it simple and uncomplicated). I aGrEE I DISaGrEE

2 In a volatile, fast-changing environment, serious planning activities are a waste of time and resources. I aGrEE I DISaGrEE

3 Managers of business organizations should not get involved in political activities.I aGrEE I DISaGrEE

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142 Part 3: Open System Design Elements

for financial resources. Organizations respond to these forces through structural design; planning systems; and attempts to adapt to and influence various people, events, and organizations in the external environment.

the Organization’s Environment In a broad sense the environment is infinite and includes everything outside the organization. However, the analysis presented here considers only those aspects of the environment to which the organization is sensitive and must respond to survive. Thus, organizational environment is defined as everything that exists outside the boundary of the organization and has the potential to affect all or part of the organization.

The environment of an organization can be understood by analyzing its domain within external sectors. An organization’s domain is the chosen environmental field of action. It is the territory an organization stakes out for itself with respect to products, services, and markets served. Domain defines the organization’s niche and defines those external sectors with which the organization will interact to accomplish its goals.

The environment comprises several sectors or subdivisions that contain similar elements. Eleven sectors can be analyzed for each organization: industry, raw materials, human resources, financial resources, market, technology, economic conditions, government, natural, sociocultural, and international. The sectors and a hypothetical organizational domain are illustrated in Exhibit 4.1. For most companies, the sectors in Exhibit 4.1 can be further categorized as either the task environment or the general environment.

task Environment

The task environment includes sectors with which the organization interacts directly and that have a direct impact on the organization’s ability to achieve its goals. The task environment typically includes the industry, raw materials, and market sectors, and perhaps the human resources and international sectors.

The following examples illustrate how each of these sectors can affect organizations:

• In the industry sector, the retail industry in South Korea has always been dominated by big department stores, but as smartphone use has surged in the country over the past few years, companies saw new ways to reach consumers. South Korea has a low number of women in the workforce, so there is a ready audience of affluent television and Internet shoppers. Online and home shopping competitors are growing in popularity, and posters on subway station walls allow people to make purchases simply by snapping a picture of a barcode.2

• In the raw materials sector, Tyson Foods is spending hundreds of millions of dollars to build 90 chicken farms in China to guarantee a supply of high- quality birds, which the company then processes and sells to fast food companies, wholesalers, and other meatpackers that use the meat in sausage and other prod- ucts. In the United States, Tyson pays independent farmers to raise chickens, but it has little control over product quality and safety in China so it decided to run its own farms, hoping safe products will build its brand in a country where the company is not well known.3

Briefcase as an organization manager, keep these guidelines in mind: Organize elements in the external environ- ment into 11 sectors for analysis: industry, raw materials, human resources, financial resources, market, technology, economic conditions, government, natural, sociocultural, and international. Focus on sectors that may experience significant change at any time.

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Chapter 4: the External Environment 143

• In the market sector, smart companies are keeping tabs on social media (tweets, Facebook) to see what customers and potential customers care about, gain rapid insight into trends, and learn what words to use in marketing. For example, companies such as Mars, the maker of M&Ms, and Kraft, which makes different varieties of macaroni and cheese, are tweaking their products, particularly the use of certain food dyes, to address customer concerns.4

Exhibit 4.1 An Organization’s Environment

(a) Industry Sector

(b) Raw

Materials Sector

(c) Human

Resources Sector

(d) Financial

Resources Sector

(e) Market Sector

(f) Technology

Sector

(g) Economic Conditions

Sector

(h) Government

Sector

(i) Natural Sector

(j) Sociocultural

Sector

(k) International

Sector

Interna tional Context

DOMAIN

ORGANIZATION

(a) Competitors, industry size and competitiveness, related industries

(b) Suppliers, manufacturers, real estate, services

(c) Labor market, employment agencies, universities, training schools, employees in other companies, unionization

(d) Stock markets, banks, savings and loans, private investors

(e) Customers, clients, potential users of products and services

(f) Techniques of production, science, computers, information technology, e-commerce

(g) Recession, unemployment rate, ination rate, rate of investment, economics, growth

(h) City, state, federal laws and regulations, taxes, services, court system, political processes

(i) Green movement, sustainability, natural resource management (i) Age, values, beliefs, education, religion, work ethic, consumer movements

(j) Competition from and acquisition by foreign €rms, entry into overseas markets, foreign customs, regulations, exchange rate

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144 Part 3: Open System Design Elements

• The human resources sector is of significant concern to every business. In China, a new labor movement is challenging business leaders with emerging labor activist groups as well as legal aid and support networks at universities promoting workers rights. Young migrant workers are using the Internet and mobile phones to organize and spread information about poor working conditions. “Every worker is a labor lawyer by himself. They know their rights better than my HR officer,” said the German owner of a factory that produces cable connectors in China.5

• For most companies today, the international sector is also a part of the task environment because of globalization and intense competition. In August 2013, the U.S. Department of Agriculture (USDA) gave approval for four Chinese poultry processors to begin shipping cooked poultry products to the United States, which increased competition for U.S. processing plants. Not long after that decision, China’s Shuanghui International Holding Ltd. began a $4.7 billion takeover of the U.S.-based pork processor Smithfield Foods Inc. to acquire new technology and improve safety practices.6

General Environment

The general environment includes those sectors that might not have a direct impact on the daily operations of a firm but will indirectly influence it. The general environ- ment often includes the government, natural, sociocultural, economic conditions, technology, and financial resources sectors. These sectors affect all organizations eventually. Consider the following examples:

• In the government sector, regulations influence every phase of organizational life. Two of the most prominent and far-reaching changes in the United States in recent years were the Patient Protection and Affordable Care Act (ObamaCare) and the Dodd–Frank Act (financial regulatory reform).7 Small companies in par- ticular are struggling with the time and expense required to meet provisions of new healthcare and financial reform laws.

• The natural sector of the external environment, including all elements that oc- cur naturally on earth, is of growing importance as consumers, organizations, and managers become increasingly sensitive to diminishing natural resources and the environmental impact of a company’s products and business practices. Many companies have adopted a philosophy of sustainability, which refers to economic development that meets the needs of the current generation while pre- serving the environment for the needs of future generations as well. Caesars Entertainment, one of the world’s largest gaming companies, created a scorecard to keep track of how well the company was doing at reducing energy consump- tion, recycling waste, reducing water consumption, and meeting other “green” goals. Managers found that the more information guests had about Caesars’ sustainability practices, the better they felt about the company and the more likely they were to enjoy their stay at the casino and to book future visits.8

• One significant element in the sociocultural sector is pressure from advocacy groups to improve working conditions for employees hired by contractors for large companies such as Walmart, Apple, and Amazon. Walmart recently sus- pended one of its seafood suppliers in the South after immigrant workers said they had been forced to work more than 80 hours a week, threatened with beat- ings, and told their families in Mexico would be hurt if they complained to

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Chapter 4: the External Environment 145

government agencies. The National Guestworker Alliance released a list of 644 federal citations at 12 Walmart food suppliers. “We work with more than 60,000 suppliers in the United States and we have rigorous standards in place that our suppliers are required to follow,” said Lorenzo Lopez, a Walmart spokesman, adding that Walmart is conducting its own investigation and will terminate its relationship with any suppliers that violate its ethical standards.9

• General economic conditions often affect the way a company must do business. The global recession that began in 2008 affected companies in all industries. Briggs Inc., a small New York City company that plans customized events for corporations wanting to woo top clients or reward staff or client loyalty, had to make some changes when it began losing customers. Even huge, elite corpora- tions were hesitant to spend extravagantly in the weakening economy, so Briggs began looking for ways to save clients’ money, such as moving events to smaller venues, scaling down décor, and adding extras that didn’t add to the cost. Com- panies can hold stylish and unique events in boutique hotels instead of Fifth Avenue locations, for instance. The strategy was a financial burden for Briggs, but it helped the company hold onto clients for the long term.10

• The technology sector is an area in which massive changes have occurred in re- cent years. Technology for mobile Internet is a rapidly growing area. Although technology has created some jobs, analysts say it is eliminating many more than it is creating. In countries from the United States to Canada to Japan, studies have found substantial drops in white-collar jobs linked to adoption of new technology. Today, software is picking out worrisome spots on medical scans, spotting profits in stock trades in milliseconds, sifting through documents for evidence in court cases, and recording power usage beamed from digital utility meters at millions of homes. A consultant estimates that 2 million jobs in human resources, finance, information technology, and procurement have disappeared in the United States and Europe since 2008 and been replaced by technology. When business conditions improve, many managers realize they don’t have to rehire.11

• All businesses have to be concerned with financial resources, and this sector is often the first and foremost in the minds of entrepreneurs. Many small-business owners turned to online person-to-person (P-to-P) lending networks for small loans as banks tightened their lending standards. Jeff Walsh, for example, bor- rowed around $22,000 through Prosper.com for his coin laundry business. Alex Kalempa needed $15,000 to expand his business of developing racing shift sys- tems for motorcycles, but banks offered him credit lines of only $500 to $1,000. Kalempa went to LendingClub.com, where he got the $15,000 loan at an inter- est rate several points lower than the banks were offering.12

International Environment

The international sector can directly affect many organizations, and it has become extremely important in the last few years. The auto industry, for example, has experienced profound shifts as China recently emerged as the world’s largest auto market. In response, car makers are moving international headquarters into China and designing features that appeal to the Chinese market, including bigger, limousine-like back seats, advanced entertainment systems, and light-colored interiors. These trends, inspired by the Chinese market, are reflected in models sold around the world.13

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146 Part 3: Open System Design Elements

In addition, international events can influence all the domestic sectors of the environment. For example, adverse weather and a workers’ strike in Western Africa, which supplies about two-thirds of the world’s cocoa beans, sharply increased raw material costs for Choco-Logo, a small maker of gourmet chocolates in Buffalo, New York.14 Farmers, fertilizer companies, food manufacturers, and grocers in the United States faced new competitive issues because of an unexpected grain shortage and rising costs related to international changes. Strong economic growth in developing countries enabled millions of people to afford richer diets, including grain-fed meat, which directly contributed to the grain shortage in the United States.15 Countries and organizations around the world are connected as never before, and economic, political, and sociocultural changes in one part of the world eventually affect other areas.

Every organization faces uncertainty domestically as well as globally. Consider the fate of the Richard Ginori porcelain tableware factory in Italy.

In PractIce Richard

Ginori

Founded in 1735, the Richard Ginori factory has produced singular, handcrafted, elegantly decorated porcelain tableware that graced the tables of Italy’s wealthy, was customized for luxury liners and lavish hotels, and has been used at the Vatican. But after years of struggling, the factory declared bankruptcy in January 2013.

Changes and uncertainty in the environment have been too much for Ginori to handle. Formal dining has been gradually dying out, and along with it the market for handmade porcelain, which is slow and expensive to produce. To try to compete, Ginori began producing more everyday products, including tableware as a promotional giveaway for a supermarket. That only weakened the brand, some say, and put it in direct competition with cheaper ceramics. Italians now buy about 60 percent of their tableware from China. The lobbying association that represents 273 Italian ceramics manufacturers has accused the Chinese of dumping products in the Italian market below the cost of manufacturing.

Court-appointed liquidators have been searching for a buyer for what’s left of Ginori. The city of Sesto Fiorentino and the 300 employees of the factory who fret by the front gates can do little to determine what happens with all the uncertainty in the environment. “Foreign capital is welcome,” said Mayor Gianni Gianassi, “but the heads and the hands of the factory must remain Tuscan.”16

All organizations have to adapt to both subtle and massive shifts in the envi- ronment. In the following sections, we discuss in greater detail how companies can cope with and respond to environmental complexity and dynamism.

the Changing Environment How does the environment influence an organization? The patterns and events occurring in the environment can be described along three primary dimensions: dynamism (whether events in the environment are stable or unstable), complexity (whether the environment is simple or complex), and abundance (amount of financial resources available to support the organization’s growth).17 These dimensions are illustrated in Exhibit 4.2. As the environment becomes more complex, events become less stable, and financial resources become less available, the level of uncertainty increases. These dimensions boil down to two essential ways the environment influences organizations: (1) the need for information about

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Chapter 4: the External Environment 147

changes in the environment and (2) the need for resources from the environment. The environmental conditions of complexity and dynamism create a greater need to gather information and to respond to changes based on that information. The organization also is concerned with scarce financial resources and with the need to ensure availability of resources, which will be discussed later in this chapter.

Environmental uncertainty pertains primarily to those sectors illustrated in Exhibit 4.1 that an organization deals with on a regular, day-to-day basis. Although sectors of the general environment—such as economic conditions, social trends, or technological changes—can create uncertainty for organizations, determining an organization’s environmental uncertainty generally means focusing on sectors of the task environment, such as how many elements (e.g., people, other organizations, events) the organization deals with regularly and how rapidly these various elements change. To assess uncertainty, each sector of the organization’s task environment can be analyzed along dimensions such as stability or instability and degree of complexity.18 The total amount of uncertainty felt by an organization is the uncertainty accumulated across relevant task environment sectors.

Organizations must cope with and manage uncertainty to be effective. Uncer- tainty means that decision makers do not have sufficient information about en- vironmental factors, and they have a difficult time predicting external changes. Uncertainty increases the risk of failure for organizational decisions and makes it difficult to compute costs and probabilities associated with decision alternatives.19 The remainder of this section will focus on the information perspective, which is concerned with uncertainty created by the extent to which the environment is com- plex and the extent to which events are dynamic. Later in the chapter, we discuss how organizations influence the environment to acquire needed financial resources.

Complexity

Environmental complexity refers to heterogeneity, or the number and dissimilarity of external elements (e.g., competitors, suppliers, industry changes, government regulations) that affect an organization’s operations. The more external elements

Complexity (Simple to Complex)

Dynamism (Stable to Unstable)

Financial Resources (Abundance

to Scarcity)

Exhibit 4.2 Factors Causing Uncertainty for the Organization

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148 Part 3: Open System Design Elements

regularly influence the organization and the greater the number of other companies in an organization’s domain, the greater the complexity. A complex environment is one in which the organization interacts with and is influenced by numerous diverse external elements. In a simple environment, the organization interacts with and is influenced by only a few similar external elements.

For example, a family-owned hardware store in a suburban community is in a simple environment. The store does not have to deal with complex technologies or extensive government regulations, and cultural and social changes have little impact. Human resources are not a problem because the store is run by family members and part-time help. The only external elements of real importance are a few competitors, suppliers, and customers. On the other hand, pharmaceutical companies such as Abbott Laboratories, Merck, and Pfizer operate in a highly complex environment. They use multiple, complex technologies; cope with numerous ever-changing government regulations; are significantly affected by international events; compete for scarce financial resources and highly trained scientists; interact with numerous suppliers, customers, contractors, and partners; respond to changing social values; and deal with complex legal and financial systems in multiple countries. This large number of external elements in a drug company’s domain creates a complex environment. Abbott recently announced plans to split into two separate companies to better cope with the complexity of the environment. Other companies, such as Merck and Schering Plough, merged to better cope with uncertainty.20

Dynamism

Dynamism refers to whether the environment in which the organization operates is stable or unstable. An environmental domain is stable if it remains essentially the same over a period of months or years. Under unstable conditions, environmental elements shift rapidly. Consider what is happening in the environment for digital camera makers.

In PractIce Fujifilm holding

Corporation

Uh-oh! Managers at Fuji got high marks for seeing the trend toward digital cameras and responding faster than Kodak, but even they failed to prepare for the dynamism in the environment for compact digital cameras.

Adding Wi-Fi technology for Internet connectivity is common in many consumer electronics, but for the most part digital cameras remain stand-alone devices. It’s an oversight that is hurting not only Fuji but also Panasonic, Olympus, Canon, and other camera makers. The number of photos being taken is soaring, but most people are using their smartphones so they can easily share the photos on Facebook, Instagram, and other social media. Shipments of compact digital cameras plummeted 42 percent in the first five months of 2013. “It’s the classic case of an industry that is unable to adapt,” said Christopher Chute, a digital imaging analyst at research firm IDC.

Fujifilm said it planned to cut production of point-and-shoot models by 50 percent, but even that might not be enough. “Everyone in this industry recognizes the market is changing,” said Hiroshi Tanaka, corporate vice president at Fujifilm. “The question is what we can do about it.”

Shigenobu Nagamori, CEO of Nidec Corporation, a supplier of components used in a variety of consumer electronic products, offers a warning to manufacturers hoping for the compact digital camera’s rebound: “I told them to assume that the inexpensive cameras are dead, just like the PCs,” he said.21

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Chapter 4: the External Environment 149

As this example shows, instability often occurs when consumer interests shift, new technologies are introduced, or competitors react with aggressive moves and countermoves regarding advertising and new products or services. Sometimes specific, unpredictable events—such as the data breach at Target described in the chapter opening example, reports of lead-tainted paint in Mattel toys made in China, the Pakistani government’s attempt to block access to certain videos on YouTube, or the discovery of heart problems related to pain drugs such as Vioxx and Celebrex— create unstable conditions for organizations. Today, freewheeling bloggers, Twitterers, and YouTubers are a tremendous source of instability for scores of companies. For example, when United Airlines refused to compensate a musician for breaking his $3,500 guitar, he wrote a song and posted a derogatory music video about his lengthy negotiations with the company on YouTube. Word spread quickly across the Internet, and United just as quickly responded with a settlement offer.22 Similarly, Domino’s Pizza managers had to act quickly after two pranksters posted a video showing employees fouling a pizza on the way to delivery. Domino’s responded with a video of its own. The company president apologized and thanked the online community for bringing the issue to his attention. He promised that the wrongdoers would be prosecuted and outlined steps Domino’s was taking to ensure the episode would never happen again. By engaging in an online conversation about the crisis, Domino’s demonstrated concern for its customers and squelched further rumors and fears.23

Environmental domains are increasingly unstable for most organizations.24 This chapter’s BookMark on page 150 examines the volatile nature of today’s business world and gives some tips for managing in a fast-shifting environment. Although environments are more unstable for most organizations today, an example of a traditionally stable environment is a public utility.25 In the rural Midwest, demand and supply factors for a public utility are stable. A gradual increase in demand may occur, which is easily predicted over time. Toy companies, by contrast, have an unstable environment. Hot new toys are difficult to predict, a problem compounded by the fact that children are losing interest in toys at a younger age, their interest captured by video and computer games, electronics, and the Internet. Adding to the instability for toymakers is the shrinking retail market, with big toy retailers going out of business trying to compete with discounters such as Walmart. Toymakers are trying to attract more customers in developing markets such as China, Poland, Brazil, and India to make up for the declining U.S. market, but hitting the target in those countries has proven to be a challenge. Companies such as Fisher-Price, owned by Mattel, can find their biggest products languishing on shelves as shoppers turn to less expensive locally made toys in countries where brand consciousness doesn’t come into play. As one toy analyst said, “Chinese kids have been growing for 5,000 years without the benefits of Fisher-Price.”26

Framework

The simple–complex and stable–unstable dimensions are combined into a framework for assessing environmental uncertainty in Exhibit 4.3. In the simple, stable environment, uncertainty is low. There are only a few external elements in a limited number of environmental sectors (e.g., suppliers, customers) to contend with, and they tend to remain stable. The complex, stable environment represents somewhat greater uncertainty. A large number of elements (e.g., suppliers, customers, government regulations, industry changes, unions, economic conditions) have to be scanned, analyzed, and acted upon for the organization to perform well. External elements do not change rapidly or unexpectedly in this environment.

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150 Part 3: Open System Design Elements

Confronting Reality: Doing What Matters to Get Things Right By Lawrence A. Bossidy and Ram Charan

The business world is changing at an increasingly rapid pace. That is the reality that spurred Larry Bossidy, retired chairman and CEO of Honeywell International, and Ram Charan, a noted author, speaker, and business consultant, to write Confronting Reality: Doing What Matters to Get Things Right. Too many managers, they believe, are tempted to hide their heads in the sand of financial issues rather than face the confusion and complexity of the organization’s environment.

LESSONS FOr FaCING rEaLItY For many companies, today’s environment is characterized by global hypercompetition, declining prices, and the grow- ing power of consumers. Bossidy and Charan offer some lessons to leaders for navigating in a fast-changing world.

• Understand the environment as it is now and is likely to be in the future, rather than as it was in the past. Relying on the past and conventional wisdom can lead to disaster. Kmart, for example, stuck to its old formula as Walmart gobbled its customers and carved out a new business model. Few could have predicted in 1990, for example, that Walmart would now be America’s biggest seller of groceries.

• Seek out and welcome diverse and unorthodox ideas. Managers need to be proactive and open-minded toward conversing with employees, suppliers, cus- tomers, colleagues, and anyone else they come in contact with. What are people thinking about? What changes and opportunities do they see? What worries them about the future?

• Avoid the common causes of manager failure to con- front reality: filtered information, selective hearing,

wishful thinking, fear, emotional overinvestment in a failing course of action, and unrealistic expectations. For example, when sales and profits fell off a cliff at data-storage giant EMC, managers displayed a bias toward hearing good news and believed the company was only experiencing a blip in the growth curve. When Joe Tucci was named CEO, however, he was determined to find out if the slump was temporary. By talking directly with top leaders at his customers’ organizations, Tucci was able to face the reality that EMC’s existing business model based on high-cost technology was dead. Tucci implemented a new busi- ness model to fit that reality.

• Ruthlessly assess your organization. Understanding the internal environment is just as important. Manag- ers need to evaluate whether their company has the talent, commitment, and attitude needed to drive the important changes. At EMC, Tucci realized his sales force needed an attitude shift to sell software, ser- vices, and business solutions rather than just expen- sive hardware. The arrogant, hard-driving sales tactics of the past had to be replaced with a softer, more customer-oriented approach.

StaYING aLIVE Staying alive in today’s business environment requires that managers stay alert. Managers should always be looking at their competitors, broad industry trends, technological changes, shifting government policies, changing market forces, and economic developments. At the same time, they work hard to stay in touch with what their customers really think and really want. By doing so, leaders can confront real- ity and be poised for change.

Confronting Reality: Doing What Matters to Get Things Right, by Lawrence A. Bossidy and Ram Charan, is published by Crown Busi- ness Publishing.

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Even greater uncertainty is felt in the simple, unstable environment.27 Rapid change creates uncertainty for managers. Even though the organization has few external elements, those elements are hard to predict (such as shifting social trends or changing customer interests), and they react unexpectedly to organizational initiatives. The greatest uncertainty for an organization occurs in the complex, unstable environment. A large number of elements in numerous environmental sectors impinge upon the organization, and they shift frequently or react strongly to organizational initiatives. When several sectors change simultaneously, the environment becomes turbulent.28

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Chapter 4: the External Environment 151

A soft drink distributor functions in a simple, stable environment. Demand changes only gradually. The distributor has an established delivery route, and sup- plies of soft drinks arrive on schedule. State universities, appliance manufacturers, and insurance companies are in somewhat stable, complex environments. A large number of external elements are present, but although they change, changes are gradual and predictable.

Toy manufacturers are in simple, unstable environments. Organizations that design, make, and sell toys, as well as those that make electronic games or are involved in the clothing or music industry, face shifting supply and demand. Fashion apparel company Zara launches around 11,000 new products annually to try to meet changing customer tastes, for example.29 Although there may be few elements to contend with—e.g., suppliers, customers, competitors—they are difficult to predict and change abruptly and unexpectedly.

Exhibit 4.3 Framework for Assessing Environmental Uncertainty

Sources: Based on Robert Duncan, “Characteristics of Organizational Environments and Perceived Environments Uncertainty,” Administrative Science Quarterly 17 (September 1972), 313–327; Robert B. Duncan, “Multiple Decision-Making Structures in Adapting to Environmental Uncertainty: The Impact on Organizational Effectiveness,” Human Relations 26, no. 3 (1973), 273–291; and Robert B. Duncan, “Modifications in Decision Structure in Adapting to the Environment: Some Implications for Organizational Learning,” Decision Sciences 5, no. 4 (October 1974), 705–725.

Unstable

ENVIRONMENTAL DYNAMISM

Stable

ENVIRONMENTAL COMPLEXITY

Simple Complex

Simple + Stable = Low Uncertainty

Complex + Stable = Low–Moderate Uncertainty

Simple + Unstable = High–Moderate Uncertainty

Complex + Unstable = High Uncertainty

Un cer

tai nty

Examples: Electronic games, fashion clothing, music industry, social media, toy manufacturers

Few external elements that change rapidly

Examples: Soft drink bottlers, self-storage leasing, container manufacturers, food processors

Few external elements that change slowly

Examples: Universities, appliance manufacturers, chemical companies, insurance companies

Many external elements that change slowly

Examples: Oil companies, aerospace rms, telecommunications rms, large healthcare systems

Many external elements that change rapidly

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152 Part 3: Open System Design Elements

The telecommunications industry, the oil industry, and airlines face complex, unstable environments. Many external sectors are changing simultaneously. In the case of airlines, in just a few years the major carriers were confronted with an air- traffic controller shortage, aging fleets of planes, labor unrest, soaring fuel prices, the entry of new low-cost competitors, a series of major air-traffic disasters, and a drastic decline in customer demand. Within just a few years, four large airlines and many smaller ones went through bankruptcy, and the airlines collectively laid off 170,000 employees. In late 2013, American Airlines emerged from bankruptcy and merged with US Airways.30

adapting to Complexity and Dynamism Once you see how environments differ with respect to dynamism and complexity, the next question is, “How do organizations adapt to each level of environmental uncertainty?” Environmental uncertainty represents an important contingency for organization structure and internal behaviors. Recall from Chapter 3 that organizations facing uncertainty often use structural mechanisms that encourage horizontal communication and collaboration to help the company adapt to changes in the environment. In this section we discuss in more detail how the environment affects organizations. An organization in a certain environment will be managed and controlled differently from an organization in an uncertain environment with respect to positions and departments, organizational differentiation and integration, control processes, and future planning and forecasting. Organizations need to have the right fit between internal structure and the external environment.

adding Positions and Departments

As complexity and uncertainty in the external environment increase, so does the number of positions and departments within the organization, leading to increased internal complexity. This relationship is part of being an open system. Each sector in the external environment requires an employee or department to deal with it. The human resource department deals with unemployed people who want to work for the company. The marketing department finds customers. Procurement employees obtain raw materials from hundreds of suppliers. The finance group deals with bankers. The legal department works with the courts and government agencies. E-business departments handle electronic commerce, and information technology departments deal with the increasing complexity of computerized information and knowledge management systems. For example, President Barack Obama added a chief technology officer position and a chief information officer position to the U.S. government. Many organizations added chief compliance officer or chief governance officer positions to deal with the complexities associated with the 2002 Sarbanes–Oxley Act, often referred to as SOX. SOX required several types of corporate governance reforms, including better internal monitoring to reduce the risk of fraud, certification of financial results by top executives, improved measures for internal auditing, and enhancing public financial disclosure. Adding new positions and departments is a common way for organizations to adapt to

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Chapter 4: the External Environment 153

growing environmental uncertainty. After the disastrous explosion and oil spill in the Gulf of Mexico, BP embarked on a major restructuring of its exploration, development, and production operations (referred to as upstream) to try to make sure a similar event never happens again. To improve risk management, CEO Robert W. Dudley appointed a dedicated chief executive for the entire upstream operations worldwide.31

Building relationships

The traditional approach to coping with environmental uncertainty was to establish buffer departments. The purpose of buffering roles is to absorb uncertainty from the environment.32 The technical core performs the primary production activity of an organization. Buffer departments surround the technical core and exchange materi- als, resources, and money between the environment and the organization. They help the technical core function efficiently. The purchasing department buffers the tech- nical core by stockpiling supplies and raw materials. The human resource depart- ment buffers the technical core by handling the uncertainty associated with finding, hiring, and training production employees.

A more recent approach many organizations use is to drop the buffers and ex- pose the technical core to the uncertain environment. These organizations no longer create buffers because they believe being well connected to customers and suppliers is more important than internal efficiency. Highly uncertain environments require rapid transfer of information and knowledge so the organization can adapt quickly. Teams, as described in Chapter 3, often work directly with customers and other parties outside the organization.33 At Total Attorneys, a Chicago-based company that provides software and services to small law firms, cross-functional teams work with customers who test and provide feedback on products as they are developed.34 Opening up the organization to the environment by building closer relationships with external parties makes it more fluid and adaptable.

Boundary-spanning roles link and coordinate an organization with key elements in the external environment. Boundary spanning is primarily concerned with the ex- change of information to detect and bring into the organization information about changes in the environment and to send information into the environment that pres- ents the organization in a favorable light.35

Organizations have to keep in touch with what is going on in the environ- ment so that managers can respond to market changes and other developments. A study of high-tech firms found that 97 percent of competitive failures resulted from lack of attention to market changes or the failure to act on vital informa- tion.36 To detect and bring important information into the organization, bound- ary personnel scan the environment. For example, a market research department scans and monitors trends in consumer tastes. Boundary spanners in engineering and research and development departments scan new technological developments, innovations, and raw materials. Boundary spanners prevent the organization from stagnating by keeping top managers informed about environmental changes. The greater the uncertainty in the environment, the greater the importance of boundary spanners.37

One approach to boundary spanning is business intelligence, which refers to the high-tech analysis of large amounts of internal and external data to spot patterns and relationships that might be significant. For example, Verizon uses business intelligence

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154 Part 3: Open System Design Elements

to actively monitor customer interactions so that it can catch problems and fix them almost immediately.38 Tools to automate the process are a hot area of software, with companies spending billions on business intelligence software in recent years.39

Business intelligence is related to another important area of boundary spanning, known as competitive intelligence (CI). CI gives top executives a systematic way to collect and analyze public information about rivals and use it to make better decisions.40 Using techniques that range from Internet surfing to digging through trash cans, intelligence professionals dig up information on competitors’ new products, manufacturing costs, or training methods and share it with top leaders. Intelligence teams are the newest wave of CI activities. An intelligence team is a cross-functional group of managers and employees, usually led by a CI professional, who work together to gain a deep understanding of a specific business issue, with the aim of presenting insights, possibilities, and recommendations to top leaders.41 Intelligence teams can provide insights that enable managers to make more informed decisions about goals, as well as devise contingency plans and scenarios related to major competitive issues.

The boundary task of sending information into the environment to represent the organization is used to influence other people’s perception of the organization. In the marketing department, advertising and sales people represent the organization to customers. Purchasers may call on suppliers and describe purchasing needs. The legal department informs lobbyists and elected officials about the organization’s needs or views on political matters. Many companies set up special web pages and blogs to present the organization in a favorable light.

Briefcase as an organization manager, keep these guidelines in mind: Scan the external en- vironment for threats, changes, and opportu- nities. Use boundary- spanning roles, such as market research and intelligence teams, to bring into the orga- nization information about changes in the environment. Enhance boundary-spanning ca- pabilities when the envi- ronment is uncertain.

1the best way for an organization to cope with a complex environment is to de-velop a complex structure (rather than keep it simple and uncomplicated). aNSWEr: Agree. As an organization’s environment becomes more complex, the organization has to add jobs, departments, and boundary-spanning roles to cope with all the elements in the environment. When environmental sec- tors are complex, there is no way for an organization to stay simple and un- complicated and continue to be effective.

assEss YouR answER

Differentiation and Integration

Another response to environmental uncertainty is the amount of differentiation and integration among departments. Organizational differentiation refers to “the differences in cognitive and emotional orientations among managers in different functional departments, and the difference in formal structure among these departments.”42 When the external environment is complex and rapidly changing, organizational departments become highly specialized to handle the uncertainty in that part of the external environment each department works with. Success in each environmental sector (human resources, technology, government, and so forth) requires special expertise and behavior. Employees in an R&D department thus have unique attitudes, values, goals, and education that distinguish them from employees in manufacturing or sales departments.

A study by Paul Lawrence and Jay Lorsch examined three organizational departments—manufacturing, research, and sales—in 10 corporations.43 This study

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Chapter 4: the External Environment 155

found that each department evolved toward a different orientation and structure to deal with specialized parts of the external environment. Exhibit 4.4 illustrates the market, scientific, and manufacturing subenvironments identified by Lawrence and Lorsch. As shown in the exhibit, each department interacted with different external groups. The differences that evolved among departments within the organizations are shown in Exhibit 4.5. To work effectively with the scientific subenvironment, R&D had a goal of quality work, a long time horizon (up to five years), an informal structure, and task-oriented employees. Sales was at the opposite extreme. It had a goal of customer satisfaction, was oriented toward the short term (two weeks or so), had a very formal structure, and was socially oriented.

One outcome of high differentiation is that coordination and collaboration among departments become difficult. More time and resources must be devoted to achieving coordination when attitudes, goals, and work orientation differ so widely. Integration is the quality of collaboration among departments.44 Formal integrators are often required to coordinate departments. When the environment

Exhibit 4.4 Organizational Departments Differentiate to Meet Needs of Subenvironments

President

R & D Department

Sales Department

Manufacturing Department

Scienti�c Subenvironment

Manufacturing Subenvironment

Market Subenvironment

Scienti�c journals

Research centers

Raw materials

Customers

Distribution system

Advertising agencies

Competitors

Labor Suppliers

Professional associations

Production equipment

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Exhibit 4.5 Differences in Goals and Orientations Among Organizational Departments

Characteristic r&D Department Manufacturing Department Sales Department

Goals Time horizon Interpersonal orientation Formality of structure

New developments, quality Long Mostly task Low

Efficient production Short Task High

Customer satisfaction Short Social High

Source: Based on Paul R. Lawrence and Jay W. Lorsch, Organization and Environment (Homewood, IL: Irwin, 1969), 23–29.

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156 Part 3: Open System Design Elements

is highly uncertain, frequent changes require more information processing to achieve horizontal coordination, so integrators become a necessary addition to the organization structure. Sometimes integrators are called liaison personnel, project managers, brand managers, or coordinators. As illustrated in Exhibit 4.6, organizations with highly uncertain environments and a highly differentiated structure assign about 22 percent of management personnel to integration activities, such as serving on committees, on task forces, or in liaison roles.45 In organizations characterized by very simple, stable environments, almost no managers are assigned to integration roles. Exhibit 4.6 shows that as environmental uncertainty increases, so does differentiation among departments; hence, the organization must assign a larger percentage of managers to coordinating roles.

Lawrence and Lorsch’s research concluded that organizations perform better when the levels of differentiation and integration match the level of uncertainty and complexity in the environment. Organizations that performed well in uncertain en- vironments had high levels of both differentiation and integration, while those per- forming well in less uncertain environments had lower levels of differentiation and integration. A recent study of 266 modern manufacturing firms in nine countries confirmed that high levels of integration are associated with better performance in complex environments.46

Organic Versus Mechanistic Management Processes

Recall our discussion of organic and mechanistic designs from Chapter 1. The degree of uncertainty in the external environment is one primary contingency that shapes whether an organization will function best with an organic or a mechanistic design. Tom Burns and G. M. Stalker observed 20 industrial firms in England and discovered that internal management processes were related to the external environment.47 When the external environment was stable, the internal organization was characterized by standard rules, procedures, a clear hierarchy of authority, formalization, and centralization. Burns and Stalker called this a mechanistic organization system, as described in Chapter 1 and illustrated in Exhibit 1.7.

In rapidly changing environments, the internal organization was much looser, free-flowing, and adaptive, with a loose hierarchy and decentralized decision making. Burns and Stalker used the term organic to characterize this type of organization. Complete the questionnaire in the “How Do You Fit the Design?” box for some insight into whether you are more suited to working in an organic organization or a mechanistic one.

As environmental uncertainty increases, organizations tend to become more organic, which means decentralizing authority and responsibility to lower levels, encouraging employees to take care of problems by working directly with one

Industry Plastics Foods Container

Environmental uncertainty Departmental differentiation Percent management in integrating roles

High High 22

Moderate Moderate 17

Low Low 0

Source: Based on Jay W. Lorsch and Paul R. Lawrence, “Environmental Factors and Organizational Integration,” Organizational Planning: Cases and Concepts (Homewood, IL: Irwin and Dorsey, 1972), 45.

Exhibit 4.6 Environmental Uncertainty and Organizational Integrators

Briefcase as an organization manager, keep these guidelines in mind: Match internal organi- zation structure to the external environment. If the external environ- ment is complex, make the organization struc- ture complex. associate a stable environment with a mechanistic structure and an un- stable environment with an organic structure. If the external environ- ment is both complex and changing rapidly, make the organization highly differentiated and organic, and use mechanisms to achieve coordination across departments.

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Chapter 4: the External Environment 157

another, encouraging teamwork, and taking an informal approach to assigning tasks and responsibility. Thus, the organization is more fluid and is able to adapt continually to changes in the external environment.48 Guiltless Gourmet, which sells low-fat tortilla chips and other high-quality snack foods, provides an example. When large companies like Frito Lay entered the low-fat snack-food market, Guiltless Gourmet shifted to a flexible network structure to remain competitive. The company redesigned itself to become basically a full-time marketing organization, while production and other activities were outsourced. An 18,000-square-foot plant in Austin was closed, and the workforce was cut from 125 to about 10 core people who handle marketing and sales promotions. The flexible structure allowed Guiltless Gourmet to adapt quickly to changing market conditions.49

HOW DO YOU FIt tHE DESIGN?

MIND aND ENVIrONMENt Does your mind best fit an organization in a certain or an uncertain environment? Think back to how you thought or behaved as a student, as an employee, or in a formal or informal leader position. Please answer whether each of the following items was Mostly True or Mostly False for you.

Mostly true

Mostly False

1. I always offered comments on my interpretation of data or issues.

2. I welcomed unusual viewpoints of others even if we were work- ing under pressure.

3. I made it a point to attend indus- try trade shows and company (school) events.

4. I explicitly encouraged others to express opposing ideas and arguments.

5. I asked “dumb” questions.

6. I enjoyed hearing about new ideas even when working toward a deadline.

7. I expressed a controversial opin- ion to bosses and peers.

8. I suggested ways of improving my and others’ ways of doing things.

Scoring: Give yourself one point for each item you marked as Mostly True. If you scored less than 5, your mindfulness level may be suited to an organization in a stable rather than unstable environment. A score of 5 or above suggests a higher level of mindfulness and a better fit for an organization in an uncertain environment.

Interpretation: In an organization in a highly uncertain environment everything seems to be changing. In that case, an important quality for a professional employee or manager is “mindfulness,” which includes the qualities of being open-minded and an independent thinker. In a stable environment, an organization will be more “mechanistic,” and a manager without mindfulness may perform okay because much work can be done in the traditional way. In an uncertain environment, everyone needs to facilitate new thinking, new ideas, and new ways of working. A high score on this exercise suggests higher mindfulness and a better fit with an “organic” organization in an uncertain environment.

Sources: These questions are based on ideas from R. L. Daft and R. M. Lengel, Fusion Leadership, Chapter 4 (San Francisco, CA: Berrett Koehler, 2000); B. Bass and B. Avolio, Multifactor Leadership Questionnaire, 2nd ed. (Menlo Park, CA: Mind Garden, Inc); and Karl E. Weick and Kathleen M. Sutcliffe, Managing the Unexpected: Assuring High Performance in an Age of Complexity (San Francisco, CA: Jossey-Bass, 2001).

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158 Part 3: Open System Design Elements

Planning, Forecasting, and responsiveness

The whole point of increasing internal integration and shifting to a more organic design is to enhance the organization’s ability to quickly respond to sudden changes in an uncertain environment. It might seem that in an environment where everything is changing all the time, planning is useless. However, in uncertain environments, planning and environmental forecasting actually become more important as a way to keep the organization geared for a coordinated, speedy response. When the environment is stable, the organization can concentrate on current operational problems and day-to-day efficiency. Long-range planning and forecasting are not needed because environmental demands in the future will be much the same as they are today.

With increasing environmental uncertainty, planning and forecasting become necessary.50 Indeed, surveys of multinational corporations have found that as environments become more turbulent, managers increase their planning activities, particularly in terms of planning exercises that encourage learning, continual adaptation, and innovation.51 For example, following the September 11, 2001, terrorist attacks in the United States, there was a surge in the use of scenario and contingency planning as a way to manage uncertainty. Although their popularity waned for several years, these approaches made a comeback due to increasing environmental turbulence and the recent global financial crisis. Japanese consumer electronics makers such as Sony, Panasonic, and Sharp, for example, have been struggling with falling sales in almost every product category and have had to plan for a different future. Sony’s plan was to make a push into the medical field with an investment into the endoscope maker Olympus.52

With scenario planning, managers mentally rehearse different scenarios based on anticipating various changes that could affect the organization. Scenarios are like stories that offer alternative, vivid pictures of what the future will look like and how managers will respond. Royal Dutch/Shell Oil has long used scenario building and has been a leader in speedy response to massive changes that other organizations failed to perceive until it was too late.53 Planning can soften the adverse impact of exter- nal shifts. Organizations that have unstable environments often establish a separate planning department. In an unpredictable environment, planners scan environmental elements and analyze potential moves and countermoves by other organizations.

2In a volatile, fast-changing environment, serious planning activities are a waste of time and resources. aNSWEr: Disagree. General Colin Powell once said, “No battle plan survives contact with the enemy.”54 Yet no wise general would go into battle without one. Serious planning becomes more important in a turbulent environment, even though a plan will not last long. Planning and environmental forecasting help managers anticipate and be prepared to respond to changes. Lack of planning makes more sense in a stable, easily predictable environment.

assEss YouR answER

Planning, however, cannot substitute for other actions, such as effective bound- ary spanning and adequate internal integration and coordination. The organizations that are most successful in uncertain environments are those that keep everyone in close touch with the environment so they can spot threats and opportunities, en- abling the organization to respond immediately.

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Chapter 4: the External Environment 159

Framework for adapting to Complexity and Dynamism Exhibit 4.7 summarizes the ways in which environmental uncertainty influences or- ganizational characteristics. The complexity and dynamism dimensions are combined and illustrate four levels of uncertainty. The low uncertainty environment is simple and stable. Organizations in this environment can have few departments and a mech- anistic design. In a low–moderate uncertainty environment, more departments are needed, along with more integrating roles to coordinate the departments. Some plan- ning may occur. Environments that are high–moderate uncertainty are simple but unstable. Organization design is organic and decentralized. Planning is emphasized,

Exhibit 4.7 Contingency Framework for Environmental Uncertainty and Organizational Responses

Stable

ENVIRONMENTAL DYNAMISM

Unstable

ENVIRONMENTAL COMPLEXITY

Simple Complex

Low Uncertainty

1. Mechanistic design: formal, centralized

2. Few departments

3. No integrating roles

4. Current operations orientation; low-speed response

1. Organic design, teamwork: participative, decentralized

2. Few departments, much boundary spanning

3. Few integrating roles

4. Planning orientation; fast response

1. Organic design, teamwork: participative, decentralized

2. Many departments differentiated, extensive boundary spanning

3. Many integrating roles

4. Extensive planning, forecasting; high-speed response

1. Mechanistic design: formal, centralized

2. Many departments, some boundary spanning

3. Few integrating roles

4. Some planning; moderate-speed response

Low–Moderate Uncertainty

High–Moderate Uncertainty High Uncertainty

Uncertainty

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160 Part 3: Open System Design Elements

and managers are quick to make internal changes as needed. The high uncertainty environment is both complex and unstable and is the most difficult environment from a management perspective. Organizations are large and have many departments, but they are also organic. A large number of management personnel are assigned to co- ordination and integration, and the organization uses boundary spanning, planning, and forecasting to enable a high-speed response to environmental changes.

Dependence on Financial resources Thus far, this chapter has described several ways in which organizations adapt to the lack of information and to the uncertainty caused by environmental dynamism and complexity. We turn now to the third characteristic of the organization–envi- ronment relationship that affects organizations, which is the abundance or scarcity of needed financial resources. A first response for many organizations faced with declining financial resources is to lay off employees and cut investments. As the U.S. government wrestled with budget negotiations in late 2012 to avoid $600 billion in cuts to government spending, for example, organizations from defense contractor Lockheed Martin to health insurer Aetna were already cutting jobs in anticipation of reduced financial resources.55 Downsizing, or reducing the size of a company’s workforce, will be discussed in more detail in Chapter 9.

Companies also strive to acquire control over financial resources to minimize their dependence on other organizations.56 The environment is the source of scarce financial resources essential to organizational survival. Research in this area is called the resource-dependence perspective. resource dependence means that organizations depend on the environment but strive to acquire control over resources to minimize their dependence. Organizations are vulnerable if vital financial resources are con- trolled by other organizations, so they try to be as independent as possible. Orga- nizations do not want to become too vulnerable to other organizations because of negative effects on performance.

Although companies like to minimize their dependence, when costs and risks are high they also team up to share scarce resources and be more competitive on a global basis. Formal relationships with other organizations present a dilemma to managers. Organizations seek to reduce vulnerability with respect to resources by developing links with other organizations, but they also like to maximize their own autonomy and independence. Organizational linkages require coordination,57 and they reduce the freedom of each organization to make decisions without concern for the needs and goals of other organizations. Interorganizational relationships thus represent a trade-off between resources and autonomy. To maintain autonomy, organizations that already have abundant financial resources will tend not to estab- lish new linkages. Organizations that need resources will give up independence to acquire those resources. For example, DHL, the express delivery unit of Germany’s Deutsche Post AG, lost billions of dollars trying to take over the U.S. package de- livery market and eventually entered into a partnership with UPS to have that com- pany handle DHL parcels in the United States. The two organizations continue to compete in overseas markets. In the face of $3 billion in losses, difficulty building a local management team in the United States, and maintenance problems at U.S. package handling facilities, Deutsche Post’s CEO Frank Appel called the partnership with UPS “a pragmatic and realistic strategy” for his company’s U.S. operations.58 Resource dependence will be discussed in more detail in Chapter 5.

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Chapter 4: the External Environment 161

Influencing Financial resources In response to the need for resources, organizations try to maintain a balance between depending on other organizations and preserving their own independence. Organizations maintain this balance through attempts to modify, manipulate, or control elements of the external environment (such as other organizations, government regulators) to meet their needs.59 To survive, the focal organization often tries to reach out and change or control its environment. Two strategies can be adopted to influence resources in the external environment: establish favorable relationships with other organizations and shape the organization’s environment.60 Techniques to accomplish each of these strategies are summarized in Exhibit 4.8. As a general rule, when organizations sense that valued resources are scarce, they will use the strategies in Exhibit 4.8 rather than go it alone. Notice how dissimilar these strategies are from the responses to environmental dynamism and complexity described in Exhibit 4.7. The dissimilarity reflects the difference between responding to the need for resources and responding to the need for information.

Establishing Formal relationships

Building formal relationships includes techniques such as acquiring ownership, establishing joint ventures and partnerships, developing connections with important people in the environment, recruiting key people, and using advertising and public relations.

acquire an Ownership Stake. Companies use various forms of ownership to reduce uncertainty in an area important to the acquiring company. For example, a firm might buy a part of or a controlling interest in another company, giving it access to technology, products, or other resources it doesn’t currently have.

A greater degree of ownership and control is obtained through acquisition or merger. An acquisition involves the purchase of one organization by another so that the buyer assumes control, such as when Google bought YouTube, eBay bought PayPal, and Walmart purchased Britain’s ASDA Group. A merger is the unification of two or more organizations into a single unit.61 Sirius Satellite Radio and XM Satellite Radio Holdings merged to become Sirius XM Radio. The merger enabled the companies to combine resources and share risks to be more competitive against digital music providers and other emerging types of music distribution. In the past few years, there has been a huge wave of acquisition and merger activity in the tele- communications and advertising industries, reflecting how these companies cope with the tremendous uncertainty they face. For example, Omnicom and Publicis opted to try to merge to create the largest advertising company in the world in order to compete in a new environment of fewer resources.

Establishing Formal relationships Influencing Key Sectors

1. Acquire an ownership stake 2. Form joint ventures and partnerships 3. Lock in key players 4. Recruit executives 5. Use advertising and public relations

1. Change where you do business (your domain)

2. Use political activity, regulation 3. Join in trade associations 4. Avoid illegitimate activities

Exhibit 4.8 Organizing Strategies for Controlling the External Environment

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162 Part 3: Open System Design Elements

Form Joint Ventures and Partnerships. When there is a high level of comple- mentarity between the business lines, geographical positions, or skills of two com- panies, the firms often go the route of a strategic alliance rather than ownership through merger or acquisition.63 Such alliances are formed through contracts and joint ventures.

Contracts and joint ventures reduce uncertainty through a legal and binding relationship with another firm. Contracts come in the form of license agreements that involve the purchase of the right to use an asset (such as a new technology) for a specific time and supplier arrangements that contract for the sale of one firm’s output to another. Contracts can provide long-term security by tying customers and suppliers to specific amounts and prices. For example, the Italian fashion house Versace forged a deal to license its primary asset—its name—for a line of designer eyeglasses.64

Joint ventures result in the creation of a new organization that is formally independent of the parents, although the parents will have some control.65 Madrid- based tech start-up FON formed a joint venture with British phone carrier BT to install FON wi-fi technology in the modems of nearly 2 million BT customers. Office Depot and Reliance Retail Limited, a division of India’s largest private-sector employer, entered into a joint venture to provide office products and services to business customers in India. Food and agricultural corporation Cargill Inc. has numerous joint ventures around the world, such as the one with Spanish cooperative Hojiblanca to source, trade, and supply customers worldwide with private label and bulk olive oils. As evidenced by these short examples, many joint ventures are undertaken to share risks when companies are doing business in other countries or on a global scale.

Lock in Key Players. Cooptation occurs when leaders from important sectors in the environment are made part of an organization. It takes place, for example, when influential customers or suppliers are appointed to the board of directors, such as

In PractIce Omnicom

and publicis

Once upon a time, advertising was controlled by small, independent shops led by creative people. They grew, then merged, then grew some more. Today, advertising and marketing is big business. Well, make that “Big Data” business. The attempted merger of Omnicom and Publicis is not so much a response to competition from other advertising agencies, but to bolster against the likes of IBM, Google, Salesforce, and Oracle. “Fighting that fight is a potentially losing battle,” said Darren Herman, chief digital media officer at the Media Kitchen, an agency owned by MDC Partners.

When the merger of Omnicom and Publicis was announced in Paris, Maurice Lévy, CEO of Publicis, said the “billions of people” online are providing data that offer the opportunity to use advertising technologies to crunch data and target specific messages to very narrow audiences. Ad agencies have long worked hand-in-hand with Google, Facebook, and Twitter, but now those companies and others, including IBM, Oracle, Microsoft, and numerous data analytics start-ups, also work directly with companies to develop targeted ad campaigns, cutting out the advertising agency. Some companies, including Nike, Progressive, and Procter & Gamble, use fast-paced, algorithmic bidding systems to target individual consumers. Advertising agencies are under pressure like never before. The attempted merger is a sign that the marketing business is becoming more personalized and more competitive. “All of a sudden the new set of companies playing in this space is not only large and profitable, but they are competing with companies that are very large and profitable,” said an analyst of the mergers in advertising.62

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Chapter 4: the External Environment 163

when the senior executive of a bank sits on the board of a manufacturing company. As a board member, the banker may become psychologically coopted into the inter- ests of the manufacturing firm.

An interlocking directorate is a formal linkage that occurs when a member of the board of directors of one company sits on the board of directors of another company. The individual is a communications link between companies and can influence policies and decisions. When one individual is the link between two com- panies, this is typically referred to as a direct interlock. An indirect interlock occurs when a director of company A and a director of company B are both directors of company C. They have access to one another but do not have direct influence over their respective companies.66 Research shows that, as a firm’s financial for- tunes decline, direct interlocks with financial institutions increase. Financial uncer- tainty facing an industry also has been associated with greater indirect interlocks between competing companies.67 However, during the economic turmoil of recent years, some companies, including Apple and Google, have run up against a long- standing U.S. federal law that bars direct interlocks between competing companies. Arthur Levinson, chairman of Roche Holding AG’s Genentech, for example, re- signed from the Google board after the Federal Trade Commission began inves- tigating his participation on both the Google and Apple boards. Similarly, Eric Schmidt, executive chairman and former CEO of Google, resigned from the Apple board for the same reason, as the two companies compete in a growing number of businesses.68

Important business or community leaders also can be appointed to other orga- nizational committees or task forces. By serving on committees or advisory panels, these influential people learn about the needs of the company and are more likely to consider the company’s interests in their decision making. Today, many companies face uncertainty from environmental pressure groups, so organizations are trying to bring in leaders from this sector, such as when DuPont appointed environmentalists to its biotechnology advisory panel.69

recruit Executives. Transferring or exchanging executives also offers a method of establishing favorable linkages with external organizations. For example, the high- frequency trading firm Getco LLC hired a former associate director in the Securities and Exchange Commission’s Division of Trading and Markets to be part of its regulatory and compliance team.70 The aerospace industry often hires retired generals and executives from the Department of Defense. These generals have personal friends in the department, so the aerospace companies obtain better information about technical specifications, prices, and dates for new weapons systems. They can learn the needs of the defense department and are able to present their case for defense contracts in a more effective way. Companies without personal contacts find it nearly impossible to get a defense contract. Having channels of influence and communication between organizations reduces financial uncertainty and dependence for an organization.

Get Your Side of the Story Out. A traditional way of establishing favorable relationships is through advertising. Organizations spend large amounts of money to influence the tastes and opinions of consumers. Advertising is especially important in highly competitive industries and in industries that experience variable demand. For example, since the U.S. Food and Drug Administration loosened regulations to permit advertising of prescription drugs in the United States, the major pharmaceutical companies have spent nearly $5 billion

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164 Part 3: Open System Design Elements

annually on advertisements such as a cute cartoon bee pushing Nasonex spray for allergies or heart attack survivors promoting the benefits of cholesterol- fighting Crestor.71

Public relations is similar to advertising, except that stories often are free and aimed at public opinion. Public relations people cast an organization in a favorable light in speeches, on websites, in press reports, and on television. Public relations attempts to shape the company’s image in the minds of customers, suppliers, government officials, and the broader public. Google is a master at shaping its image through donations, fellowship programs, and at conferences that establish a network of ties to advocacy organizations, public intellectuals, and academic institutions that often take Google’s side in public debates and national policy issues. By encouraging and sometimes supporting groups that hold viewpoints similar to its own, Google has an ongoing widespread PR campaign that one reporter referred to as “subtle acts of persuasion.”72 Blogging, tweeting, and social networking have become important components of public relations activities for many companies today.73

Influencing Key Sectors

In addition to establishing favorable linkages, organizations often try to change the environment. There are four techniques for influencing or changing a firm’s environment.

Change Where You Do Business. Early in this chapter, we talked about the orga- nization’s domain and the 10 sectors of the environment. An organization’s domain is not fixed. Managers make decisions about which business to be in; the markets to enter; and the suppliers, banks, employees, and location to use; and this domain can be changed if necessary to keep the organization competitive.74 An organization can seek new environmental relationships and drop old ones. Walmart, which has long focused on its big box retail stores, is finally trying to get into e-commerce “for real,” while Amazon is trying to build a physical presence across the nation.

Briefcase as an organization manager, keep these guidelines in mind: Reach out and con- trol external sectors that threaten needed resources. Influence the domain by engag- ing in political activity, joining trade associa- tions, and establishing favorable relationships. Establish relationships through ownership, joint ventures and strategic partnerships, coopta- tion, interlocking direc- torates, and executive recruitment. Reduce the amount of change or threat from the external environment so the or- ganization will not have to change internally.

In PractIce amazon

and Walmart

Who would have thought Walmart would one day be playing catch-up to Amazon? That seems to be happening, as the country’s largest brick-and-mortar retailer struggles to build an online presence to compete with the conqueror of the online shopping world, Amazon, which is beginning to build warehouses and pickup locations across the country that will invade Walmart’s turf.

Amazon has decided it wants to control all shopping, not just online shopping. Thus, to remain competitive, Walmart is trying to learn the rules of the technology business from the ground up at its dot-com division, Walmart Global E-Commerce, where it has started @WalmartLabs. Managers at the two giants are now shifting their domains so that Walmart is becoming more technology oriented and Amazon is competing more in physical space. Both companies believe the future is a combination of stores and online.

Walmart Global E-Commerce, which is located in Silicon Valley, has acquired a number of start-ups that build tools to crunch data, create mobile apps, or speed up websites, and the purchases included the founders and engineers. The company offers “hack days,” when engineers can work on anything they want. It has also hired 150 people from companies such as Yahoo and eBay. Walmart is hoping to turn its 4,100 stores in the United States and many of its 6,200 overseas stores into e-commerce assets. Many items ordered online can be shipped from stores. It is also allowing customers to pick up online orders from stores and is trying same-day delivery in test markets.75

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Chapter 4: the External Environment 165

Walmart managers know they need to alter the domain to be more competitive against Amazon as shopping habits continue to shift more toward online. Managers have many reasons for altering an organization’s domain. They may try to find a domain where there is little competition, no government regulation, abundant suppliers, affluent customers, and barriers to keep competitors out. Acquisition and divestment are two techniques for altering the domain. For example, Google acquired YouTube to expand its domain beyond search, and Facebook recently paid $16 billion for WhatsApp, a text-messaging application with 450 million users. An example of divestment was when Google sold the Motorola Mobility smartphone unit to Lenovo for $2.9 billion in February 2014 to get out of the business of manufacturing phones.76

Get Political. Political activity includes techniques to influence government legisla- tion and regulation. Political strategy can be used to erect regulatory barriers against new competitors or to squash unfavorable legislation. Corporations also try to influ- ence the appointment to agencies of people who are sympathetic to their needs.

Health insurance companies heavily lobbied federal and state officials to try to ward off strict regulation of insurance premiums and company profits under ObamaCare. Large retailers such as Walmart and Target are lobbying to change laws so that Amazon.com will be required to collect sales taxes. And Facebook has a Washington office with a staff of eight people lobbying legislators primarily regarding tighter privacy restrictions on online companies.77

Many CEOs believe they should participate directly in lobbying. CEOs have easier access than lobbyists and can be especially effective when they do the politicking. Political activity is so important that “informal lobbyist” is an unwritten part of almost any CEO’s job description.78 Top executives at Amerilink Telecom Corporation did some serious politicking as they tried to open the U.S. market to telecommunications equipment manufactured by China’s Huawei Technologies Company.

In PractIce huawei Technologies

Huawei Technologies tried for years to break into the U.S. market, but security concerns have thwarted its ambitions. Alleged ties to the Chinese government and military have had U.S. officials worried that allowing equipment from the company could disrupt or intercept critical U.S. communications.

Huawei is the world’s largest telecommunications company and a leader in the “plumbing” of mobile phone networks. Sales in 2012 were more than $35.4 billion. The company says more than a third of the world’s population is hooked up to networks that use Huawei gear— and that’s what has U.S. officials worried. For one of its recent efforts in the United States, a bid for a multibillion-dollar network upgrade at Sprint Nextel, Huawei partnered with the U.S. consulting firm Amerilink, a company founded by William Owens, former vice chairman of the Joint Chiefs of Staff under President Bill Clinton. Owens and other top executives immediately launched an extensive lobbying campaign, meeting with numerous officials from Congress and the Obama administration. In addition, the company recruited several former government officials to aid in lobbying, including former Congressional leader Richard Gebhardt, Gordon England, who served as deputy secretary of defense and homeland security under President George W. Bush, and former World Bank president James Wolfensohn.

Despite the heavy lobbying efforts, Huawei’s joint bid with Amerilink was rejected by Sprint after government officials allegedly expressed serious concerns to Sprint managers about security risks. In addition, the United States has launched a quiet lobbying effort of its own to persuade other countries to reject Huawei’s equipment. South Korea recently agreed that Huawei equipment will not be used or connected to U.S. military bases in that country and that sensitive U.S.–South Korea communications will be routed over separate networks.79

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166 Part 3: Open System Design Elements

Despite the failure of the lobbying efforts so far, this example shows how com- panies use political activity to try to influence government opinion and legislation that affects the organization’s success.

3Managers of business organizations should not get involved in political activities. aNSWEr: Disagree. Smart business managers get involved in lobbying and other political activities to try to make sure the consequences of new laws and regulations are mostly positive for their own firms. Companies pay huge fees to associations and lobbyists to make sure government actions work out in their favor.

assEss YouR answER

Unite with Others. Much of the work to influence the external environment is accomplished jointly with other organizations that have similar interests. For ex- ample, most large pharmaceutical companies belong to Pharmaceutical Research and Manufacturers of America. Manufacturing companies are part of the National Association of Manufacturers, and retailers join the Retail Industry Leaders Asso- ciation. The American Petroleum Institute is the leading trade group for oil and gas companies. By pooling resources, these organizations can pay people to carry out activities such as lobbying legislators, influencing new regulations, developing public relations campaigns, and making campaign contributions. Primerica is using the resources and influence of the American Council of Life Insurers to push for changes in state licensing exams, which the company believes put minorities at a disadvantage. Primerica, unlike most large insurance companies, focuses on selling basic term life insurance and depends almost exclusively on middle-income consum- ers rather than selling pricier policies. Company managers say the way the test ques- tions are phrased limits their ability to expand their corps of minority agents that could better serve minority communities.80

Don’t Fall into Illegitimate activities. Illegitimate activities represent the final technique companies sometimes use to control their environmental domain, but this technique typically backfires. Conditions such as low profits, pressure from senior managers, or scarce environmental resources may lead managers to adopt behaviors not considered legitimate.81 One study found that companies in industries with low demand, shortages, and strikes were more likely to be convicted for illegal activities, suggesting that illegal acts are an attempt to cope with resource scarcity. Some non- profit organizations have been found to use illegitimate or illegal actions to bolster their visibility and reputation as they compete with other organizations for scarce grants and donations, for example.82

Bribery is one of the most frequent types of illegitimate activity, particularly in companies operating globally. Energy companies face tremendous uncertainty, for example, and need foreign governments to approve giant investments and authorize risky projects. Under pressure to win contracts in Nigeria, Albert “Jack” Stanley, a former executive at KBR (then a division of Halliburton Company), admits he orchestrated a total of about $182 million in bribes to get Nigerian officials to approve the construction of a liquefied natural gas plant in that country. Stanley faces up to seven years in prison and a hefty fine after pleading guilty.83 Other types of illegitimate activities include payoffs to foreign governments, illegal political contributions, promotional gifts, and price-fixing. For nearly a decade, executives from Procter & Gamble (P&G), Colgate-Palmolive, Unilever, and Henkel AG secretly

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Chapter 4: the External Environment 167

met in restaurants around Paris to allegedly fix the price of laundry detergent in France. The managers used fake names and discussed elaborate and complex pricing mechanisms in meetings that sometimes lasted as long as four hours. The scheme went on for years until members had a disagreement over price increases and promotions and one member handed over a 282-page report to French antitrust authorities. The companies involved were eventually fined a total of €361 ($484 million).84

Organization–Environment Integrative Framework The relationships illustrated in Exhibit 4.9 summarize the two major themes about organization–environment relationships discussed in this chapter. One theme is that the amount of complexity and dynamism in an organization’s domain influences

Exhibit 4.9 Relationship Between Environmental Characteristics and Organizational Actions

OrganizationEnvironment

Many departments and boundary roles

Greater differentiation and more integrators for internal coordination

Organic structure and systems with low formalization, decentralization, and low standardization to enable a high-speed response

Establishment of favorable relationships: ownership, joint ventures, strategic partnerships, interlocking directorates, executive recruitment, advertising, and public relations

Control of the environmental domain: change of domain, political activity, trade associations, and illegitimate activities

Environmental domain (11 sectors)

High complexity

High rate of change

Scarcity of valued resources

Resource dependence

High uncertainty

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168 Part 3: Open System Design Elements

the need for information and hence the uncertainty felt within an organization. Greater information uncertainty is resolved through greater structural flexibility (an organic design) and the assignment of additional departments and boundary roles. When uncertainty is low, management structures can be more mechanistic, and the number of departments and boundary roles can be fewer. The second theme pertains to the scarcity of financial resources. The more dependent an organization is on other organizations for those resources, the more important it is to either establish favorable linkages with those organizations or control entry into the domain. If dependence on external resources is low, the organization can maintain autonomy and does not need to establish linkages or control the external domain.

Design Essentials

■ Dynamism and complexity in the external environment have major implications for organization design and management action. Organizations are open social systems. Most are involved with hundreds of elements in the external environ- ment, such as customers, suppliers, competitors, government regulators, and special interest groups. Important environmental sectors with which organiza- tions deal are the industry, raw materials, human resources, financial resources, market, technology, economic conditions, government, natural, sociocultural, and international.

■ Organizational environments differ in terms of uncertainty and resource depen- dence. Organizational uncertainty is the result of the stable–unstable and sim- ple–complex dimensions of the environment. Resource dependence is the result of scarcity of financial resources needed by the organization.

■ Organization design takes on a logical perspective when the environment is con- sidered. Organizations try to survive and achieve efficiencies in a world character- ized by uncertainty and scarcity. Specific departments and functions are created to deal with uncertainties. The organization can be conceptualized as a technical core and departments that buffer environmental uncertainty. Boundary-spanning roles bring information about the environment into the organization and send information about the organization to the external environment.

■ The concepts in this chapter provide specific frameworks for understanding how the environment influences the structure and functioning of an organization. Environmental complexity and dynamism, for example, have specific impact on internal complexity and adaptability. Under great uncertainty, more resources are allocated to departments that will plan, deal with specific environmental elements, and integrate diverse internal activities. Moreover, organizations in rapidly changing environments typically reflect a loose, organic structure and management processes.

■ When risk is great or resources are scarce, the organization can establish linkages through acquisitions, strategic alliances, interlocking directorates, executive recruitment, or advertising and public relations that will minimize risk and maintain a supply of scarce resources. Other techniques for influencing the environment include a change of the domain in which the organization operates, political activity, participation in trade associations, and perhaps illegitimate activities.

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Chapter 4: the External Environment 169

■ Two important themes in this chapter are that organizations can learn and adapt to the environment and that organizations can change and control the environment. These strategies are especially true for large organizations that command many resources. Such organizations can adapt when necessary but can also neutralize or change problematic areas in the environment.

KEY CONCEPtS

boundary-spanning roles buffering roles business intelligence complexity cooptation differentiation direct interlock

domain dynamism general environment indirect interlock integration intelligence team interlocking directorate

mechanistic organic organizational environment resource dependence sectors task environment uncertainty

DISCUSSION QUEStIONS

1. Define organizational environment. Would the task environment of a new Internet-based company be the same as that of a large government agency? Discuss.

2. What are some forces that influence environmental uncertainty? Which typically has the greatest impact on uncertainty—environmental complexity or environmental dynamism? Why?

3. Name some factors causing environmental complexity for an organization of your choice. How might this environmental complexity lead to organizational complexity? Explain.

4. Discuss the importance of the international sector for today’s organizations, compared to domestic sectors. What are some ways in which the interna- tional sector affects organizations in your city or community?

5. Describe differentiation and integration. In what type of environmental uncertainty will differentiation and integration be greatest? Least?

6. How do you think planning in today’s organizations compares to planning 25 years ago? Do you think planning becomes more important or less important in a world where everything is changing fast and crises are a regular part of organizational life? Why?

7. What is an organic organization? A mechanistic organization? How does the environment influence organic and mechanistic designs?

8. Why do organizations become involved in interorgani- zational relationships? Do these relationships affect an organization’s dependency? Performance?

9. Assume you have been asked to calculate the ratio of staff employees to production employees in two organizations—one in a simple, stable environment and one in a complex, shifting environment. How would you expect these ratios to differ? Why?

10. Is changing the organization’s domain a feasible strategy for coping with a threatening environment? Explain. Can you think of an organization in the recent news that has changed its domain?

CHaPtEr 4 WOrKSHOP Organizations You Rely On85

Below, list four organizations you somehow rely on in your daily life for some resource. Examples might be a restau- rant, a clothing store, a university, your family, the post office, your wireless provider, an airline, a pizzeria that delivers, and your place of work. In the first column, list those four organizations. Then, in column 2, choose another

organization you could use in case the one in column 1 was not available. In column 3, evaluate your level of dependence on the organizations listed in column 1 as Strong, Medium, or Weak. Finally, in column 4, rate the certainty of that organization being able to meet your needs as High (certainty), Medium, or Low.

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170 Part 3: Open System Design Elements

Organization Backup Organization Level of Dependence Level of Certainty

1.

2.

3.

4.

Questions 1. Do you have adequate backup organizations for those

of high resource dependence? How might you create even more backups?

2. What would you do if an organization you rated high for dependence and high for certainty suddenly became

high dependence and low certainty? How would your behavior relate to the concept of resource dependence?

3. Have you ever used any behaviors similar to those in Exhibit 4.8 to manage your relationships with the organizations listed in column 1?

CaSE FOr aNaLYSIS | CPI Corporation: What Happened?86

They are the most treasured possessions; they line mantels and living room walls; they are the first items frantically sought by family members following fires or natural disas- ters. They are family photographs.

Considering the popularity and demand for beloved photographs, it seems logical that the market leader in the portrait studio industry, with a 60-year history of success and the convenience of store locations within retail giants Walmart, Sears, and BabiesRUs, would have the confidence of a secure and bright future. That was the apparent situa- tion for CPI Corporation, the store-within-a-store portrait studios. With over 1,500 locations, the studios offered consumers the convenience of inexpensive family portrait packages, combined with one-stop shopping for family and household needs.

Then abruptly, in April 2013, CPI announced closure of all of the company’s U.S. locations. That announcement and immediate slamming of the doors caught everyone, in- cluding employees and customers, by surprise. As families scrambled to locate and retrieve their photographs, em- ployees absorbed the blow of a sudden loss of salary and benefits, including health insurance.

But in recent years, there had been voices of concern and questions about direction at CPI. At a board meeting in St. Louis in 2006, then-CEO Paul Rasmussen expressed concerns with the need for improvement of the customer in-store experience and his own awareness of the lengthy wait times for photo sessions, followed by additional lengthy wait times (up to six weeks) for delivery of the photos from a central printing location.

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Chapter 4: the External Environment 171

The abruptness of the closures may have been the only real surprise to many competitors who continue to thrive and who expressed amazement that the industry leader failed to blaze the way with cutting-edge technology.

“There’s no reason why CPI didn’t invent Instagram (photo sharing),” said Mitch Goldstone, CEO of ScanMy- Photos.com. “CPI had the greatest opportunity. They had a huge customer base nation-wide that they let disappear overnight.”

Aware of its corporate strengths, CPI increasingly failed to read and respond to the changing environment in which it conducted business. A glance through its recent history reveals potential problem areas for the company. Rasmussen’s 2006 urging to board members to shorten in-store wait times and to modernize backdrops and tra- ditional posing styles was ignored in favor of finding ways to attract additional customers. Consumer expectations were changing toward the immediate gratification enabled by the iPhone age with digital photography and instant ac- cess/sharing capabilities for their photographs. CPI, how- ever, remained committed to centralization of printing and avoided the cost of updating stores with digital technology.

Meanwhile, competitors discovered innovative ways to build technology into their services and products. Compa- nies such as Picture Perfect offered one-hour digital print- ing. ScanMyPhotos.com provided the convenience of online photo services. And Lifetouch, whose store-within-a-store photo studios are located in JCPenney and Target stores, expanded their market into providing school pictures.

As technological trends and consumer behaviors and attitudes changed, CPI continued holding on to its own success model. In April 2013, with loan obligations of $98.5 million, CPI closed all U.S. locations. By June, competitor Lifetouch Portrait Studios, Inc. had entered a “stalking horse” agreement to purchase all CPI assets and awaited competing offers.

Photography and digital technology continue to evolve at an unimaginable pace, and consumers feel empowered in their abilities to now go beyond taking, sharing, and printing photographs to explore the design and manipula- tion and animation of photographs. As business competi- tors within the industry weigh their future, how will they pay attention and adjust their business strategies in order to remain viable and avoid the CPI fate?

CaSE FOr aNaLYSIS | the Paradoxical twins: acme and Omega Electronics87

Part I In 1986, Technological Products of Erie, Pennsylvania, was bought out by a Cleveland manufacturer. The Cleveland firm had no interest in the electronics division of Technological Products and subsequently sold to different investors two plants that manufactured computer chips and printed circuit boards. Integrated circuits, or chips, were the first step into microminiaturization in the electronics industry, and both plants had developed some expertise in the technology, along with their superior capabilities in manufacturing printed circuit boards. One of the plants, located in nearby Waterford, was renamed Acme Electronics; the other plant, within the city limits of Erie, was renamed Omega Electronics, Inc.

Acme retained its original management and upgraded its general manager to president. Omega hired a new president who had been a director of a large electronic research laboratory and upgraded several of the existing personnel within the plant. Acme and Omega often competed for the same contracts. As subcontractors, both firms benefited from the electronics boom and both looked forward to future growth and expansion. The world was going digital, and both companies began producing digital microprocessors along with the production of circuit boards. Acme had annual sales of $100 million and employed

550 people. Omega had annual sales of $80 million and employed 480 people. Acme regularly achieved greater net profits, much to the chagrin of Omega’s management.

Inside acme The president of Acme, John Tyler, was confident that, had the demand not been so great, Acme’s competitor would not have survived. “In fact,” he said, “we have been able to beat Omega regularly for the most profitable contracts, thereby increasing our profit.” Tyler credited his firm’s greater effectiveness to his managers’ abilities to run a “tight ship.” He explained that he had retained the basic structure developed by Technological Products because it was most efficient for high-volume manufacturing. Acme had detailed organization charts and job descriptions. Tyler believed everyone should have clear responsibilities and narrowly defined jobs, which would lead to efficient performance and high company profits. People were generally satisfied with their work at Acme; however, some of the managers voiced the desire to have a little more latitude in their jobs.

Inside Omega Omega’s president, Jim Rawls, did not believe in organization charts. He felt his organization had departments similar to Acme’s, but he thought Omega’s

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172 Part 3: Open System Design Elements

plant was small enough that things such as organization charts just put artificial barriers between specialists who should be working together. Written memos were not allowed since, as Rawls expressed it, “the plant is small enough that if people want to communicate, they can just drop by and talk things over.”

The head of the mechanical engineering department said, “Jim spends too much of his time and mine making sure everyone understands what we’re doing and listen- ing to suggestions.” Rawls was concerned with employee satisfaction and wanted everyone to feel part of the or- ganization. The top management team reflected Rawls’s attitudes. They also believed that employees should be fa- miliar with activities throughout the organization so that cooperation between departments would be increased. A newer member of the industrial engineering department said, “When I first got here, I wasn’t sure what I was sup- posed to do. One day I worked with some mechanical en- gineers and the next day I helped the shipping department design some packing cartons. The first months on the job were hectic, but at least I got a real feel for what makes Omega tick.”

Part II In the 1990s, mixed analog and digital devices began threatening the demand for the complex circuit boards manufactured by Acme and Omega. This system-on- a-chip technology combined analog functions, such as sound, graphics, and power management, together with digital circuitry, such as logic and memory, making it highly useful for new products such as cellular phones and wireless computers. Both Acme and Omega realized the threat to their futures and began aggressively to seek new customers.

In July 1992, a major photocopier manufacturer was looking for a subcontractor to assemble the digital mem- ory units of its new experimental copier. The projected contract for the job was estimated to be $7 million to $9 million in annual sales.

Both Acme and Omega were geographically close to this manufacturer, and both submitted highly competitive bids for the production of 100 prototypes. Acme’s bid was slightly lower than Omega’s; however, both firms were asked to produce 100 units. The photocopier manufacturer told both firms that speed was critical because its president had boasted to other manufacturers that the firm would have a finished copier available by Christmas. This boast, much to the designer’s dismay, required pressure on all subcontractors to begin prototype production before the final design of the copier was complete. This meant Acme and Omega would have at most two weeks to produce the prototypes or would delay the final copier production.

Part III Inside acme As soon as John Tyler was given the blueprints (Monday, July 13, 1992), he sent a memo to the purchasing depart- ment asking to move forward on the purchase of all neces- sary materials. At the same time, he sent the blueprints to the drafting department and asked that it prepare manu- facturing prints. The industrial engineering department was told to begin methods design work for use by the produc- tion department supervisors. Tyler also sent a memo to all department heads and executives indicating the critical time constraints of this job and how he expected that all employ- ees would perform as efficiently as they had in the past.

The departments had little contact with one another for several days, and each seemed to work at its own speed. Each department also encountered problems. Purchasing could not acquire all the parts on time. Industrial engineering had difficulty arranging an efficient assembly sequence. Mechanical engineering did not take the deadline seriously and parceled its work to vendors so the engineers could work on other jobs scheduled previously. Tyler made it a point to stay in touch with the photocopier manufacturer to let it know things were progressing and to learn of any new developments. He traditionally worked to keep important clients happy. Tyler telephoned someone at the photocopier company at least twice a week and got to know the head designer quite well.

On July 17, Tyler learned that mechanical engineering was far behind in its development work, and he “hit the roof.” To make matters worse, purchasing had not obtained all the parts, so the industrial engineers decided to assemble the product without one part, which would be inserted at the last minute. On Thursday, July 23, the final units were being assembled, although the process was delayed several times. On Friday, July 24, the last units were finished while Tyler paced around the plant. Late that afternoon, Tyler received a phone call from the head designer of the photocopier manufacturer, who told Tyler that he had received a call on Wednesday from Jim Rawls of Omega. He explained that Rawls’s workers had found an error in the design of the connector cable and taken corrective action on their prototypes. He told Tyler that he had checked out the design error and that Omega was right. Tyler, a bit overwhelmed by this information, told the designer that he had all the memory units ready for shipment and that, as soon as they received the missing component on Monday or Tuesday, they would be able to deliver the final units. The designer explained that the design error would be rectified in a new blueprint he was sending over by messenger and that he would hold Acme to the Tuesday delivery date.

When the blueprint arrived, Tyler called in the production supervisor to assess the damage. The

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Chapter 4: the External Environment 173

alterations in the design would call for total disassembly and the unsoldering of several connections. Tyler told the supervisor to put extra people on the alterations first thing Monday morning and to try to finish the job by Tuesday. Late Tuesday afternoon, the alterations were finished and the missing components were delivered. Wednesday morning, the production supervisor discovered that the units would have to be torn apart again to install the missing component. When John Tyler was told this, he again “hit the roof.” He called industrial engineering and asked if it could help out. The production supervisor and the methods engineer couldn’t agree on how to install the component. John Tyler settled the argument by ordering that all units be taken apart again and the missing component installed. He told shipping to prepare cartons for delivery on Friday afternoon.

On Friday, July 31, 50 prototypes were shipped from Acme without final inspection. John Tyler was concerned about his firm’s reputation, so he waived the final inspection after he personally tested one unit and found it operational. On Tuesday, August 4, Acme shipped the last 50 units.

Inside Omega On Friday, July 10, Jim Rawls called a meeting that included department heads to tell them about the potential contract they were to receive. He told them that as soon as he received the blueprints, work could begin. On Monday, July 13, the prints arrived and again the department heads met to discuss the project. At the end of the meeting, drafting had agreed to prepare manufacturing prints, while industrial engineering and production would begin methods design.

Two problems arose within Omega that were similar to those at Acme. Certain ordered parts could not be delivered on time, and the assembly sequence was difficult to engineer. The departments proposed ideas to help one another, however, and department heads and key employees had daily meetings to discuss progress. The head

of electrical engineering knew of a Japanese source for the components that could not be purchased from normal suppliers. Most problems were solved by Saturday, July 18.

On Monday, July 20, a methods engineer and the production supervisor formulated the assembly plans, and production was set to begin on Tuesday morning. On Monday afternoon, people from mechanical engineering, electrical engineering, production, and industrial engineering got together to produce a prototype just to ensure that there would be no snags in production. While they were building the unit, they discovered an error in the connector cable design. All the engineers agreed, after checking and rechecking the blueprints, that the cable was erroneously designed. People from mechanical engineering and electrical engineering spent Monday night redesigning the cable, and on Tuesday morning, the drafting department finalized the changes in the manufacturing prints. On Tuesday morning, Rawls was a bit apprehensive about the design changes and decided to get formal approval. Rawls received word on Wednesday from the head designer at the photocopier firm that they could proceed with the design changes as discussed on the phone. On Friday, July 24, the final units were inspected by quality control and were then shipped.

Part IV Ten of Acme’s final memory units were defective, whereas all of Omega’s units passed the photocopier firm’s tests. The photocopier firm was disappointed with Acme’s delivery delay and incurred further delays in repairing the defective Acme units. However, rather than give the entire contract to one firm, the final contract was split between Acme and Omega with two directives added: maintain zero defects and reduce final cost. In 1993, through extensive cost-cutting efforts, Acme reduced its unit cost by 20 percent and was ultimately awarded the total contract.

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174 Part 3: Open System Design Elements

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Chapter 4: the External Environment 175

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176 Part 3: Open System Design Elements

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84. Max Colchester and Christina Passariello, “Dirty Secrets in Soap Prices,” The Wall Street Journal, December 9, 2011, http://online.wsj.com/news/articles/SB100014240529702034 13304577086251676539124 (accessed December 19, 2011).

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Chapter 4: the External Environment 177

85. Adapted by Dorothy Marcic from “Organizational Dependencies,” in Ricky W. Griffin and Thomas C. Head, Practicing Management, 2nd ed. (Dallas: Houghton Mifflin), 2–3.

86. Based on Tom Gara and Karen Talley, “Portrait of a Studio Missing the Boat,” The Wall Street Journal Online, April 9, 2013, http://online.wsj.com/news/articles/SB10001424 127887323820304578411103993150918 (accessed April 15, 2014); Kavita Kumar, “The Fall of CPI,” St. Louis Post- Dispatch, April 14, 2013, http://www.stltoday.com/business

/local/the-fall-of-cpi/article_28fa0d94-0575-5e06-8ad0 -4de245e07eeb.html (accessed April 15, 2014); and Jim Suhr, “CPI Corp., Sears’ and Walmart Portrait Photographer, Abruptly Shuts Down,” The Huffington Post, http://www .huffingtonpost.com/2013/04/07/cpi-corp-shut-down_n _3033911.html (accessed April 15, 2014).

87. Adapted from John F. Veiga, “The Paradoxical Twins: Acme and Omega Electronics,” in John F. Veiga and John N. Yanouzas, The Dynamics of Organizational Theory (St. Paul, MN: West, 1984), 132–138.

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178

Organizational Ecosystems Is Competition Dead? • The Changing Role of Management • Interorganizational Framework

Resource Dependence Types of Resource-Dependence Relationships • Power Implications

Collaborative Networks Why Collaboration? • From Adversaries to Partners

Population Ecology What Hinders Adaptation? • Organizational Form and Niche • Process of Ecological Change • Strategies for Survival

Institutionalism The Institutional View and Organization Design • Institutional Similarity

Design Essentials

Learning Objectives After reading this chapter you should be able to: 1. Define an organizational ecosystem and the

changing role of competition. 2. Explain the changing role of management in

interorganizational relationships. 3. Discuss types of resource-dependence

relationships and the power implications. 4. Describe the role of collaborative networks. 5. Explain the interorganizational shift from

adversaries to partners. 6. Understand the population-ecology perspective

and its key concepts. 7. Specify the key aspects of institutionalism.

Interorganizational Relationships5Chapter

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Chapter 5: Interorganizational Relationships 179

Several garment factory fires in Bangladesh in 2012 and the collapse of another apparel plant in 2013 that killed more than 1,100 workers put the spotlight on poor working conditions in that country. The incidents set off public outrage, requiring the retailers such as Walmart, Target, and H&M that use Bangladesh contractors to respond. It’s a serious problem, and even though Walmart publicly blacklisted about 250 Bangladesh suppliers found to have safety problems and other retailers took similar steps, it wasn’t enough to salve the public’s anger. Now, major U.S. retailers including Gap, Walmart, Target, Macy’s, Costco, and VF Corporation have banded together in a group called the Alliance for Bangladesh Worker Safety. The group’s primary goals are to improve working conditions and prevent such disasters. It has come up with common fire and building safety standards and formed a board that includes four company representatives, former U.S. ambassador to Bangladesh Jim Moriarty, and fire safety consultant Randy Tucker. The group will provide $100 million in low-cost loans. The alliance falls short of the commitment made by an alliance of mostly European companies, including H&M, that has agreed to directly pay for the costs of repair and renovation of some 5,000 Bangladesh garment factories. Yet it is definitely a step in the right direction. Former U.S. Representative Ellen O’Kane Tauscher, who will serve as chairman of the board, says her job is to ensure accountability. “We expect scrutiny, but it is also important to give us time to put the plans into action.”1

When dealing with a massive, complex problem, like the organizational catastrophes in Bangladesh, even the most sophisticated and capable organization will soon reach the limit of its effectiveness. Today’s organizations face numerous complex problems because of the complexity and uncertainty of the environment, as discussed in the previous chapter. Thus, a widespread organizational trend is to reduce boundaries and increase collaboration between companies, sometimes even between competitors. For example, Poste Italiane S.p.A., which serves as Italy’s postal service as well as a bank, credit card firm, and mobile phone company, created one of

Before reading this chapter, please check whether you agree or disagree with each of the following statements:

1 Organizations should strive to be as independent and self-sufficient as possible so that their managers aren’t put in the position of “dancing to someone else’s tune.” I AGREE I DISAGREE

2 The success or failure of a start-up is largely determined by the smarts and management ability of the entrepreneur. I AGREE I DISAGREE

3 Managers should quickly copy or borrow techniques being used by other successful companies to make their own organization more effective and to keep pace with changing times.

I AGREE I DISAGREE

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180 Part 3: Open System Design Elements

the most sophisticated cyber security operations in the world. CEO Massimo Sarmi realized that to achieve true security for customers against cybercrime, he needed to collaborate with other organizations. He began reaching out around the globe. Poste Italiane has signed a memorandum of understanding with the U.S. Secret Service, for example, and joined the electronic crime task force in New York City. The company has partnered with companies such as software firm Microsoft, energy company Enel, and Visa/MasterCard, and academic organizations such as George Mason University and the University of London, to open a global Cyber Security Program of Excellence. The center is promoting international cooperation regarding cyber security and studying ways to make the Internet more dynamically secure through active defense. “[T]he problem is global,” Sarmi says. “It’s not national or local.”2

In many industries, the business environment is so complicated that no single company can develop all the expertise and resources needed to stay competitive. Why? Globalization and rapid advances in technology, communications, and transportation have created amazing new opportunities, but they have also raised the cost of doing business and made it increasingly difficult for any company to take advantage of those opportunities on its own. In this new economy, webs of organizations are emerging. Collaboration and partnership is the new way of doing business. Organizations think of themselves as teams that create value jointly rather than as autonomous companies that are in competition with all others.

Purpose of This Chapter

This chapter explores the most recent trend in organizing, which is the increasingly dense web of relationships among organizations. Companies have always been dependent on other organizations for supplies, materials, and information. The question involves the way these relationships are managed. At one time it was a matter of a large, powerful company tightening the screws on small suppliers. Today a company can choose to develop positive, trusting relationships. The notion of horizontal relationships described in Chapter 3 and the understanding of environmental uncertainty in Chapter 4 are leading to the next stage of organizational evolution, which is a web of horizontal relationships across organizations. Organizations can choose to build relationships in many ways, such as appointing preferred suppliers, establishing agreements, business partnering, joint ventures, or even mergers and acquisitions.

Interorganizational research has yielded perspectives such as resource depen- dence, collaborative networks, population ecology, and institutionalism. The sum total of these ideas can be daunting because it means managers no longer can rest in the safety of managing a single organization. They have to figure out how to manage a whole set of interorganizational relationships, which is a great deal more challenging and complex.

Organizational Ecosystems Interorganizational relationships are the relatively enduring resource transactions, flows, and linkages that occur among two or more organizations.3 Traditionally, these transactions and relationships have been seen as a necessary evil to obtain

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Chapter 5: Interorganizational Relationships 181

what an organization needs. The presumption has been that the world is composed of distinct businesses that thrive on autonomy and compete for supremacy. A com- pany may be forced into interorganizational relationships depending on its needs and the instability and complexity of the environment.

A new view described by James Moore argues that organizations are now evolving into business ecosystems. An organizational ecosystem is a system formed by the interaction of a community of organizations and their environment. An ecosystem cuts across traditional industry lines.4 A similar concept is the megacommunity approach, in which businesses, governments, and nonprofit organizations join together across sectors and industries to tackle huge, compelling problems of mutual interest, such as energy development, world hunger, or cybercrime.5

Is Competition Dead?

No company can go it alone under a constant onslaught of international competitors, changing technology, and new regulations. Organizations around the world are embedded in complex networks of confusing relationships— collaborating in some markets, competing fiercely in others. The number of corporate alliances has been increasing at a rate of 25 percent annually, and many of those have been between competitors.6 Hyundai, Chrysler, and Mitsubishi jointly run the Global Engine Manufacturing Alliance to build four-cylinder engines. Volvo is now owned by Zhejiang Geely Holding Group of China, but it maintains an alliance with previous owner Ford Motor Company to supply engines and certain other components.7

Traditional competition, which assumes a distinct company competing for survival and supremacy with other standalone businesses, no longer exists because each organization both supports and depends on the others for success, and perhaps for survival. However, most managers recognize that the competitive stakes are higher than ever in a world where market share can crumble overnight, and no industry is immune from almost instant obsolescence.8 In today’s world, a new form of competition is in fact intensifying.9

For one thing, companies now need to co-evolve with others in the ecosystem so that everyone gets stronger. Consider the wolf and the caribou. Wolves cull weaker caribou, which strengthens the herd. A strong herd means that wolves must become stronger themselves. With co-evolution, the whole system becomes stronger. In the same way, companies co-evolve through discussion with each other, shared visions, alliances, and managing complex relationships.

Exhibit 5.1 illustrates the complexity of an ecosystem by showing the myriad overlapping relationships among high-tech companies. Since the time this chart was created, many of these companies have merged, been acquired, or gone out of business. Ecosystems constantly change and evolve, with some relationships growing stronger while others weaken or are terminated. The changing pattern of relationships and interactions in an ecosystem contributes to the health and vitality of the system as an integrated whole.10

In an organizational ecosystem, conflict and cooperation exist at the same time. For example, consider what is happening with Apple and Samsung.

Briefcase As an organization manager, keep these guidelines in mind: Look for and develop relationships with other organizations. Don’t limit your thinking to a single industry or busi- ness type. Build an eco- system of which your organization is a part.

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182 Part 3: Open System Design Elements E

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Chapter 5: Interorganizational Relationships 183

Some companies believe cooperation is essential to success. Google, for example, has a whole team dedicated to giving away technology to the competition. Microsoft also tends to support and cooperate with a wide range of companies that help sell software and services. It has invested $2 billion to a leveraged buy-out of Dell Computer. Microsoft, executives say, “is committed to the long-term success of the entire PC ecosystem.”12

Other companies, such as Apple, are less willing to cooperate, although they do so when it clearly benefits them. “Open systems don’t always win,” warned the recently deceased Steve Jobs, Apple’s co-founder and former CEO, who always kept tight control and close watch over his company’s products.13 In general, cooperation has become the rule in many industries and especially in high-tech firms. The business press is full of articles that talk about frenemies, reflecting the trend toward companies being both friends and enemies, collaborators and competitors. Many companies that long prided themselves on independence have shifted to an ecosystem approach. Mutual dependencies and partnerships have become a fact of life. Is competition dead? Companies today may use their strength to achieve victory over competitors, but ultimately cooperation carries the day.

The Changing Role of Management

Within business ecosystems managers learn to move beyond traditional responsibilities of corporate strategy and designing hierarchical structures and control systems. Managers have to look beyond the boundaries of their own company and build relationships with a network of partners. If a top manager looks down to enforce order and uniformity, the company is missing opportunities for new and evolving external relationships.14 In this new world, managers think about horizontal processes rather than vertical structures. Important initiatives are not just

In PractIce apple and Samsung

Samsung is Apple’s most ferocious rival in the smartphone wars. The company is also Apple’s biggest supplier of the sophisticated processors and memory chips used for many of Apple’s iPhones, iPods, and iPads, and it also produces screens for some products.

A decade ago, when Apple first began collaborating with Samsung, the two companies didn’t really compete, but that changed when Samsung got into producing smartphones that today eclipse the iPhone in terms of units shipped. Apple managers have tried to find alternate suppliers for some of the parts it uses from Samsung, but it isn’t easy. The two firms have worked together for more than half a decade to build custom chips. Apple executives realized Samsung had ambitions to compete with their company, but they needed the technology that only Samsung could deliver in large quantities. Samsung, meanwhile, needed the business. Apple remains Samsung’s biggest customer. An attempt by Apple to begin using Sharp for screens on the third-generation iPad faltered when Sharp missed the launch deadline. Soon after, Samsung bought a 3 percent stake in Sharp and agreed to buy more LCD screens from them. The move made Samsung Sharp’s key client, potentially preventing Apple from gaining more bargaining power.

For now, Apple and Samsung need each other. If Apple pulled all of its business, Samsung would lose a huge portion of its sales and earnings. Apple will likely continue searching for a way to “divorce” Samsung, but for now the two companies are locked in a relationship that is usually, although perhaps not always, mutually beneficial. Even as they collaborate, the two companies have spent the better part of two years suing and countersuing over the look, feel, and features of their phones.11

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184 Part 3: Open System Design Elements

top down; they cut across the boundaries separating organizational units. Moreover, horizontal relationships now include linkages with suppliers and customers, who become part of the team. Business leaders can learn to lead economic co-evolution. Managers learn to see and appreciate the rich environment of opportunities that grow from cooperative relationships with other contributors to the ecosystem. Rather than trying to force suppliers into low prices or customers into high prices, managers strive to strengthen the larger system evolving around them, finding ways to understand this big picture and how to contribute. For example, managers at luxury retailer Neiman Marcus are cooperating with managers at cheap-chic retailer Target and with fashion designers in an experiment that pushes the boundaries of retail and potentially expands the customer base for all. For the holiday shopping season, a limited edition collection of 50 designer items from fashion houses including Diane Von Furstenberg, Tory Burch, Derek Lam, Rodarte, and 20 other designers will be offered at an average price of $60 at both retail chains. Neiman had contacts with the designers, while Target had an extensive supply chain to produce items in bulk. Executives from the two retailers met in person to brainstorm how the experiment might work, then began negotiating with designers.15

This is a broader leadership role than ever before. Managers in charge of coordinating with other companies must learn new executive skills. For example, Federal investigations have found that the inability of managers to collaborate and communicate effectively across organizational boundaries played a significant role in the BP-Transocean Deepwater Horizon oil spill, as we described in Chapter 1. One question raised by investigators concerned an argument between a BP manager and a Transocean manager that occurred on the rig the day of the explosion. BP and Federal agency managers also had trouble collaborating effectively in clean-up efforts.16

A study of executive roles by the Hay Group distinguished between operations roles and collaborative roles. Most traditional managers are skilled in handling op- erations roles, which have traditional vertical authority and are accountable for business results primarily through direct control over people and resources. Col- laborative roles, on the other hand, don’t have direct authority over horizontal col- leagues or partners, but are nonetheless accountable for specific business results. Managers in collaborative roles have to be highly flexible and proactive. They achieve results through personal communication and assertively seeking out needed information and resources.17

The old way of managing relied almost exclusively on operations roles, defend- ing the organization’s boundaries and maintaining direct control over resources. To- day, though, collaborative roles are becoming more important for success. When partnerships fail, it is usually because of an inability of the partners to develop trusting, collaborative relationships rather than due to the lack of a solid business plan or strategy. In successful alliances, people work together almost as if they were members of the same organization.18 Consider the U.S. war against terrorism. As we discussed in the opening section of this chapter, interorganizational collaboration is essential for tackling large, complex problems. To fight terrorism, the U.S. govern- ment not only collaborates with governments of other countries but also with nu- merous private security companies. At the Pentagon’s National Military Command Center, employees of private contracting firms work side-by-side with military per- sonnel monitoring potential crises worldwide and providing information to top leaders. “We could not perform our mission without them,” said Ronald Sanders, former chief of human capital at the Office of the Director of National Intelligence. “They serve as our reserves, providing flexibility and expertise we can’t acquire. Once they are on board, we treat them as if they’re part of the total force.”19

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Chapter 5: Interorganizational Relationships 185

Interorganizational Framework

Appreciating the larger organizational ecosystem is one of the most exciting areas of organization theory. The models and perspectives for understanding interorganizational relationships ultimately help managers change their role from top-down manage ment to horizontal coordination across organizations. Exhibit 5.2 shows a framework for analyzing the different views of interorganizational relationships. Relationships among organizations can be characterized by whether the organizations are dissimilar or similar and whether relationships are competitive or cooperative. By understanding these perspectives, managers can assess their environment and adopt strategies to suit their needs. The first perspective is called resource-dependence theory, which was described briefly in Chapter 4. It describes rational ways organizations deal with each other to reduce their dependence on the environment. The second perspective is about collaborative networks, wherein organizations allow themselves to become dependent on other organizations to increase value and productivity for all. The third perspective is population ecology, which examines how new organizations fill niches left open by established organizations and how a rich variety of new organizational forms benefits society. The final approach is called institutionalism, which explains why and how organizations legitimate themselves in the larger environment and design structures by borrowing ideas from each other. These four approaches to the study of interorganizational relationships are described in the remainder of this chapter.

Resource Dependence Resource dependence represents the traditional view of relationships among orga- nizations. As described in Chapter 4, resource-dependence theory argues that orga- nizations try to minimize their dependence on other organizations for the supply of important resources and try to influence the environment to make resources

Exhibit 5.2 A Framework of Interorganizational Relationships*

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Population Ecology

Institutionalism

*Thanks to Anand Narasimhan for suggesting this framework.

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186 Part 3: Open System Design Elements

available.20 Organizations succeed by striving for independence and autonomy. When threatened by greater dependence, organizations will assert control over ex- ternal resources to minimize that dependence.

When organizations feel resource or supply constraints, the resource-dependence perspective says they maneuver to maintain their autonomy through a variety of strategies, several of which were described in Chapter 4. One strategy is to adapt to or alter the interdependent relationships. This could mean purchasing ownership in suppliers, developing long-term contracts or joint ventures to lock in necessary resources, or building relationships in other ways.

Types of Resource-Dependence Relationships

Organizations operating under the resource-dependence philosophy will do what- ever is needed to avoid excessive dependence on other organizations and maintain control of resources and outcomes, thereby reducing their uncertainty. Exhibit 5.3 shows a hierarchy of resource-dependence relationships. The strategies at the top of the hierarchy offer managers more direct control over joint outcomes so that the or- ganization can maintain its autonomy, whereas those at the bottom offer less direct control.

Acquisition/Merger. This type of relationship offers the greatest amount of control over joint outcomes because the acquiring firm absorbs all of the resources, assets, and liabilities of the target organization. For example, Mattel recently acquired Canada’s Mega Brands Inc. to expand its line of toys and compete with LEGO in the market for plastic construction blocks. Mattel will own the company and control what happens with it.21

Joint Venture. A joint venture offers less control than full ownership. As Peter Drucker once said, “Businesses once grew by one of two ways: grass roots up, or by acquisition. . . . Today they grow through alliances—all kinds of dangerous alliances. Joint ventures and partnering which, by the way, very few people understand.”22 A joint venture is a new and distinct organizational entity set up by two or more organizations to jointly develop an innovative product or shared technology. The successful video streaming site HULU, for example, is a joint venture that was set up by News Corporation (which owns Fox), Disney (which owns ABC), and Comcast

Exhibit 5.3 Types of Resource- Dependence Relationships

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Ownership Acquisition/Merger Joint Venture Formal Agreement Strategic Alliance Supply Sourcing Trade Association Informal Agreement Board Interlock

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Chapter 5: Interorganizational Relationships 187

(which owns NBC). Although the three compete with one another on the television airwaves, they knew they could be more competitive together than separately with video streaming.23 Whirlpool has a joint venture with Hisense-Kelon Holdings Co. to make refrigerators and washers in China.24

Strategic Alliance. A strategic alliance is less formal and binding than a joint venture. It is a collaborative agreement between two or more organizations that contribute resources to a common endeavor while maintaining their individuality. One example is a strategic partnership between NBCUniversal News Group and NowThis News, a start-up that creates short news segments tailored for social media sites such as Instagram and Snapchat and stored on mobile apps for viewers to watch throughout the day. NowThis News creates 10-, 15-, and 30-second news segments focusing on the top serious stories of the day. The partnership with NBC is expected to facilitate the evolution to linking to longer videos for those who want more information.25

Supply Sourcing. Many organizations establish contracts with key suppliers to acquire resources to supplement in-house resources and capabilities. Rather than going it alone, companies such as Apple, Walmart, Dell, and Tesco develop deep, mutually beneficial relationships to make sure they have the supplies and resources they need. As one example, SCA (Svenska Cellulosa Aktiebolaget) uses fiber from recycled paper to make napkins, toilet paper, and paper towels for restaurants, offices, schools, and other institutions. When the supply of recycled paper went down in recent years due to reduced paper waste along with competition for the fiber from Chinese paper companies, SCA developed partnerships with numerous recycling centers, providing them with financial backing to upgrade equipment in exchange for the centers selling recovered fiber exclusively to SCA.26 At the same time, companies don’t want to become too dependent on one supplier. Apple, which for years has used a single company, Foxconn, to assemble iPhones and iPads, recently began using a second company, Pegatron Corp., as the primary assembler for the iPad Mini tablets and a low-cost iPhone. The goal is to reduce risk and overdependence on one company in the supply chain.27

Trade Association. A trade association is a federation that allows organizations, often in the same industry, to meet, share information, and monitor one another’s activities. A trade association can also use collective resources to lobby for government policies to protect the industry. Membership in the Smoke Free Alternatives Trade Association (SFATA) is growing as opposition to the electronic cigarette industry grows and “vaping” increases in popularity.28 SFATA has lobbied to keep the federal government from regulating electronic cigarettes the same way tobacco is regulated, believing that “self-regulation is pivotal to the success of the industry.”29

Board Interlock. A board interlock occurs when a director serves on the boards of multiple companies, creating connections among the companies. The candy company Hershey, for example, has for decades had a board with at least a dozen interlocks with other companies at any one time.30 This practice also occurs frequently in Silicon Valley, where venture capitalist Marc Andreessen is a director of several firms, including eBay, Hewlett-Packard, and Facebook.31

Briefcase As an organization manager, keep these guidelines in mind: reach out and influ- ence external people and organizations that threaten needed resources. adopt strategies to control resources, especially when your organiza- tion is dependent and has little power. assert your company’s influ- ence when you have power and control over resources.

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188 Part 3: Open System Design Elements

Power Implications

In resource-dependence relationships, large independent companies have power over smaller suppliers or partners. When a large company such as Amazon has power over small publishing companies, for instance, it can ask the companies for shipping deals or lower prices and the publishing companies have no choice but to go along. One former Amazon executive in charge of vendor relations in Europe admits that after Amazon grew large and powerful he took “an almost sadistic delight” in pressuring book publishers to give the online company better financial terms.32 As Facebook has grown more powerful, it is using its muscle to put restrictions and limits on independent developers that create applications for the social networking site.

In PractIce Facebook

Antoine Morcos instantly lost nearly half a million registered users for his photo-sharing application Vintage Camera when Facebook unexpectedly cut ties with the third-party app and blocked access to it from Facebook. “I was really shocked,” Morcos said. He received an e-mail from Facebook saying they had received too many complaints about Vintage Camera. Morcos believes the real issue is that the app competes with Facebook-owned Instagram.

Vintage Camera isn’t alone. Facebook has recently blocked a growing number of third- party apps, including messaging app Voxer, Yandex NV’s Wonder social discovery app, and Twitter’s Vine video app. Developers say Facebook is using its power to block applications that compete with Facebook-owned services. Message Me, a messaging service, found itself restricted from accessing users’ friends lists after the founders snubbed Facebook’s takeover advances. As Facebook continues to grow, it is struggling to balance developers, advertisers, and its own new products. Independent developers feel that they are getting squeezed out unless they are willing to play by Facebook’s ever-changing rules.33

Resource dependence can work in the opposite direction too. Auto companies such as Toyota and General Motors are working to develop a new type of electric motor that doesn’t require the use of neodymium, a rare earth mineral that is almost entirely mined and refined in China. Chinese suppliers have power over the auto com- panies as they strive to create more hybrid and electric vehicles, and the price of the mineral has soared.34 Power relationships in various industries are always shifting.

Collaborative Networks The collaborative-network perspective is an emerging alternative to resource-dependence theory. Companies join together to become more competitive and to share scarce resources. Large aerospace firms partner with one another and with smaller companies and suppliers to design next-generation jets. Large pharmaceutical companies join with small biotechnology firms to share resources and knowledge and spur innovation. Consulting firms, investment companies, and accounting firms may join in an alliance to meet customer demands for expanded services.35 Five leading medical groups spanning several states and millions of patients joined in a consortium to share electronic data, including patient health records. Geisinger Health System, Kaiser Permanente, Mayo Clinic, Intermountain Healthcare, and Group Health Cooperative believe using and sharing digitized patient records can help healthcare providers make smarter decisions and provide better care, such as referring a patient to a specialist in another system.36 Corporate alliances require managers who are good at building personal networks across boundaries. How effective are you at networking? Complete the questionnaire in the “How Do You Fit the Design?” box to find out.

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Chapter 5: Interorganizational Relationships 189

HOw DO YOu FIT THE DESIGN?

PERSONAl NETwORkING Are you a natural at reaching out to others for personal networking? Having multiple sources of information is a building block for partnering with people in other organiza- tions. To learn something about your networking, answer the following questions. Please answer whether each item is Mostly True or Mostly False for you in school or at work.

Mostly True

Mostly False

1. I learn early on about changes going on in the organization and how they might affect me or my job. ___ ___

2. I network as much to help other people solve problems as to help myself. ___ ___

3. I join professional groups and associations to expand my contacts and knowledge. ___ ___

4. I know and talk with peers in other organizations. ___ ___

5. I act as a bridge from my work group to other work groups. ___ ___

6. I frequently use lunches to meet and network with new people. ___ ___

7. I regularly participate in charita- ble causes. ___ ___

8. I maintain a list of friends and colleagues to whom I send holiday cards. ___ ___

9. I maintain contact with people from previous organizations and school groups. ___ ___

10. I actively give information to subordinates, peers, and my boss. ___ ___

Scoring: Give yourself one point for each item marked as Mostly True. A score of 7 or higher suggests very active networking. If you scored 3 or less, reaching out to others may not be natural for you and will require extra effort.

Interpretation: In a world of adversarial relationships between organizations, networking across organizational boundaries was not important. In a world of interorganiza- tional partnerships, however, many good things flow from active networking, which will build a web of organizational relationships to get things done. If you are going to man- age relationships with other organizations, networking is an essential part of your job. Networking builds social, work, and career relationships that facilitate mutual ben- efit. People with large, active networks tend to enjoy and contribute to partnerships and have broader impact on interorganizational relationships.

why Collaboration?

Why all this interest in interorganizational collaboration? Some companies have moved away from the idea of remaining independent to allow themselves to develop mutually dependent relationships with other organizations and accomplish things none of the organizations could do alone. There has been a tremendous surge in the formation of strategic alliances, for example, over the past three decades, with both large established firms and small entrepreneurial firms taking advantage of the benefits of collaboration.37 Some key reasons for collaboration include sharing risks when entering new markets, mounting expensive new programs and reducing costs, and enhancing the organization’s profile in selected industries or technologies. Cooperation and collaboration is a prerequisite for greater innovation, adaptation, problem solving, and performance.38 Partnerships are also a major avenue for entering global markets, with both large and small firms developing partnerships overseas and in North America. Joint ventures with organizations in other countries, for example, make up a substantial portion of U.S. firms’ foreign investment and entry strategies.39

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190 Part 3: Open System Design Elements

North American companies traditionally have worked alone, competing with each other and believing in the tradition of individualism and self-reliance, but they have learned from their international experience just how effective interorganizational relationships can be. Both Japan and Korea have long traditions of corporate clans or industrial groups that collaborate and assist each other. North Americans typically have considered interdependence a bad thing, believing it would reduce competition. However, the experience of collaboration in other countries has shown that competition among companies can be fierce in some areas even as they collaborate in others. It is as if the brothers and sisters of a single family went into separate businesses and want to outdo one another, but they will help each other out when push comes to shove.

1Organizations should strive to be as independent and self-sufficient as possible so that their managers aren’t put in the position of “dancing to someone else’s tune.”

ANSwER: Disagree. Trying to be separate and independent is the old way of thinking. This view says organizations should minimize their depen- dence on other firms so that they don’t become vulnerable. Today, though, successful companies see collaboration as a better approach to maintaining a balance of power and getting things done.

AssEss Your AnswEr

Interorganizational linkages provide a kind of safety net that encourages long-term investment, information sharing, and risk taking. Organizations can achieve higher levels of innovation and performance as they learn to shift from an adversarial to a partnership mindset.40 Consider the following examples:

• General Motors and Ford Motor Company compete fiercely to sell cars and trucks, but they have joined together to develop new transmissions with 9 speeds for front-wheel-drive vehicles and 10 speeds for rear-drive cars and trucks. The new transmissions are part of the companies’ efforts to meet upcoming standards for fuel efficiency and carbon dioxide emissions in the United States and Europe. By cooperating on design, engineering, and testing, the companies will save hundreds of millions of dollars. The two automakers have already collaborated on a 6-speed automatic transmission. “We’ve already proven that Ford and GM transmission engineers work extremely well together,” said Ford’s vice president of powertrain engineering.41

• Microsoft and Oracle recently struck a deal to allow pieces of Oracle’s business software to work with Microsoft’s software and online services. The deal between the often feuding technology giants comes as both companies are fighting competition from web-based alternatives to some of their key products. Moreover, the companies have common customers that want help getting products to work together. Steven Ballmer, former CEO of Microsoft, said the two firms have long had a “behind the scenes collaboration,” but that was no longer enough during a time when customers want all their cloud services to work together easily. Oracle CEO Larry Ellison hinted that his company will be partnering with other firms as well.42

• Roche Holding AG and AstraZeneca PLC developed a partnership to share data on early-stage drug design to increase the odds of developing safe and effective drugs. The data will also be shared with a third company, MedChemica Ltd.,

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Chapter 5: Interorganizational Relationships 191

which specializes in scrutinizing chemical compounds to pinpoint chemical structures that might create safety problems. The companies say they hope other pharmaceutical companies will join the data-sharing partnership, leading to the creation of safer, more effective drugs.43 Pharmaceutical companies have until recently been protective of their research data, but there is a noted trend toward collaboration, such as the recently formed Accelerating Medicines Partnership.

In PractIce accelerating Medicines partnership

Companies have spent billions of dollars racing to beat one another to find breakthrough drugs for diseases like Alzheimer’s. Now, 10 big pharmaceutical companies have formed a five-year collaborative agreement with the National Institutes of Health (NIH) to share scien- tists, tissue and blood samples, and research data. By collaborating, the scientists hope to interpret Alzheimer’s, Type 2 diabetes, lupus, and rheumatoid arthritis in a way none of the companies have been able to do on their own and identify targets for new drugs.

Called the Accelerating Medicines Partnership, the group includes companies that com- pete vigorously, such as Bristol-Myers Squibb, Johnson & Johnson, GlaxoSmithKline, Eli Lilly, Sanofi, and Merck. The pact prevents any company from using a discovery until the project makes data on the discovery public. “The moment the project results are out,” said David Wholley of the NIH, “all-out competition resumes to develop the winning drug.”

Getting the pact pulled together wasn’t easy. At times, some of the participants “weren’t even talking with one another.” Jan Lundbert, who leads Eli Lilly & Company’s research labo- ratories, said figuring out how to collaborate despite being rivals had a “bonding role: Do we respect each other as scientists and as human beings?”44

From Adversaries to Partners

Fresh flowers are blooming on the battle-scarred landscape where once-bitter ri- valries once took place. In North America, collaboration among organizations ini- tially occurred in nonprofit social service and mental health organizations, where public interest was involved. Community organizations collaborated to achieve greater effectiveness and better use of scarce resources.45 With the push from in- ternational competitors and international examples, hard-nosed American business managers soon began shifting to a new partnership paradigm on which to base their relationships.

Exhibit 5.4 provides a summary of this change in mindset. Rather than organizations maintaining independence, the new model is based on interdependence and trust. Performance measures for the partnership are loosely defined, and problems are resolved through discussion and dialogue. Managing strategic relationships with other firms has become a critical management skill, as discussed in this chapter’s BookMark. In the new orientation, people try to add value to both sides and believe in high commitment rather than suspicion and competition. Companies work toward equitable profits for both sides rather than just for their own benefit. The new model is characterized by lots of shared information, including electronic linkages and face-to-face discussions to provide feedback and solve problems. Sometimes people from other companies are on site to enable very close coordination. Partners develop equitable solutions to conflicts rather than relying on legal contracts and lawsuits. Contracts may be loosely specified, and it is not unusual for business partners to help each other outside whatever is specified in the contract.46

Briefcase As an organization manager, keep these guidelines in mind: Seek collaborative part- nerships that enable mutual dependence and enhance value and gain for both sides. Get deeply involved in your partner’s business, and vice versa, to benefit both.

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192 Part 3: Open System Design Elements

Exhibit 5.4 Changing Characteristics of Interorganizational Relationships

Traditional Orientation: Adversarial New Orientation: Partnership

low dependence High dependence

Suspicion, competition, arm’s length Trust, addition of value to both sides, high commitment

Detailed performance measures, closely monitored Loose performance measures; problems discussed

Price, efficacy, own profits Equity, fair dealing, both profit

Limited information and feedback Electronic linkages to share key information, problem feedback, and discussion

Legal resolution of conflict Mechanisms for close coordination; people on site

Minimal involvement and up-front investment, separate resources

Involvement in partner’s product design and production, shared resources

Short-term contracts Long-term contracts

Contract limiting the relationship Business assistance beyond the contract

Sources: Based on Mick Marchington and Steven Vincent, “Analysing the Influence of Institutional, Organizational, and Interpersonal Forces in Shaping Inter-Organizational Relations,” Journal of Management Studies 41, no. 6 (September 2004), 1029–1056; Jeffrey H. Dyer, “How Chrysler Created an American Keiretsu,” Harvard Business Review, July–August 1996, 42–56; Myron Magnet, “The New Golden Rule of Business,” Fortune, February 21, 1994, 60–64; and Peter Grittner, “Four Elements of Successful Sourcing Strategies,” Management Review, October 1995, 41–45.

Managing Strategic Relationships: The Key to Business Success By Leonard Greenhalgh

What determines organizational success in the twenty- first century? According to Leonard Greenhalgh, author of Managing Strategic Relationships: The Key to Business Success, it’s how successfully managers support, foster, and protect collaborative relationships both inside and outside the firm. In separate chapters, the book offers strategies for managing relationships between people and groups within the company and with other organi- zations. Effectively managing relationships generates a sense of commonwealth and consensus, which ultimately results in competitive advantage.

MANAGING RElATIONSHIPS IN A NEw ERA Greenhalgh says managers need a new way of thinking to fit the realities of the new era. He offers the following guidelines:

• Recognize that detailed legal contracts can undermine trust and goodwill. Greenhalgh stresses the need to build relationships that are based on honesty, trust, understanding, and common goals instead of on narrowly defined legal contracts that concentrate on what one business can give to the other.

• Treat partners like members of your own organization. Members of partner organizations need to be active

participants in the learning experience by becom- ing involved in training, team meetings, and other activities. Giving a partner organization’s employees a chance to make genuine contributions promotes deeper bonds and a sense of unity.

• Top managers must be champions for the alliance. Managers from both organizations have to act in ways that signal to everyone inside and outside the organization a new emphasis on partnership and col- laboration. Using ceremony and symbols can help instill a commitment to partnership in the company culture.

A PARTNERSHIP PARADIGM To succeed in today’s environment, old-paradigm manage- ment practices based on power, hierarchy, and adversarial relationships must be traded for new-era commonwealth practices that emphasize collaboration and communal forms of organization. The companies that will thrive, Greenhalgh believes, “are those that really have their act together—those that can successfully integrate strategy, processes, business arrangements, resources, systems, and empowered workforces.” That can be accomplished, he argues, only by effectively creating, shaping, and sustaining strategic collaborative relationships.

Managing Strategic Relationships: The Key to Business Success, by Leonard Greenhalgh, is published by The Free Press.

BookMark 5.0 hAvE You rEAd this book?

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Chapter 5: Interorganizational Relationships 193

In this new view of partnerships, dependence on another company is seen to reduce rather than increase risks. Greater value can be achieved by both parties. By being entwined in a system of interorganizational relationships, everyone does better because they help one another. This is a far cry from the belief that organiza- tions do best by being autonomous. The partnership mindset can be seen in a num- ber of industries. For example, aircraft manufacturers EADS, Embraer, and Boeing have teamed up to develop aviation biofuel.47 Top medical centers, such as the Mayo Clinic, the MD Anderson Cancer Center, and Community Health Systems, have formed partnerships with networks of clinics or smaller nonprofit hospitals to expand their services and leverage their brands.48 Auto companies have formed numerous partnerships to share development costs for new electric and hybrid ve- hicles. Canada’s Bombardier and its suppliers were linked together almost like one organization to build the Continental business jet.49

By breaking down boundaries and becoming involved in partnerships with an attitude of fair dealing and adding value to both sides, today’s companies are chang- ing the concept of what makes an organization.

Population Ecology This section introduces a different perspective on relationships among organiza- tions. The population-ecology perspective differs from the other perspectives because it focuses on organizational diversity and adaptation within a population of orga- nizations.50 A population is a set of organizations engaged in similar activities with similar patterns of resource utilization and outcomes. Organizations within a popu- lation compete for similar resources or similar customers, such as financial institu- tions in the Seattle area or car dealerships in Houston, Texas.

Within a population, the question asked by ecology researchers is about the large number and variation of organizations in society. Why are new organizational forms that create such diversity constantly appearing? The answer is that individual orga- nizational adaptation is severely limited compared to the changes demanded by the environment. Innovation and change in a population of organizations take place through the birth of new types of organizations more so than by the reform and change of existing organizations. Indeed, organizational forms are considered rela- tively stable, and the good of a whole society is served by the development of new forms of organization through entrepreneurial initiatives. New organizations meet the new needs of society more than established organizations that are slow to change.51

What does this theory mean in practical terms? It means that large, established organizations often become dinosaurs. Consider that among the companies that ap- peared on the first Fortune 500 list in 1955, only 71 stayed on the list for 50 years. Some were bought out or merged with other companies. Others simply declined and disappeared. Large, established firms often have tremendous difficulty adapting to a rapidly changing environment. Hence, new organizational forms that fit the current environment emerge, fill a new niche, and over time take away business from estab- lished companies.52 According to the population-ecology view, when looking at an organizational population as a whole, the changing environment determines which organizations survive or fail. The assumption is that individual organizations suffer from structural inertia and find it difficult to adapt to environmental changes. Thus, when rapid change occurs, old organizations are likely to decline or fail, and new organizations emerge that are better suited to the needs of the environment.

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194 Part 3: Open System Design Elements

what Hinders Adaptation?

Why do established organizations have such a hard time adapting? Michael Hannan and John Freeman, originators of the population-ecology model of organization, argue that there are many limitations on the ability of organizations to change. The limitations come from heavy investment in plants, equipment, and specialized personnel; limited information; the established viewpoints of decision makers; the organization’s own successful history that justifies current procedures; and the difficulty of changing corporate culture. True transformation is a rare and unlikely event in the face of all these barriers.53 Consider the story of Barnes & Noble.

In PractIce Barnes &

Noble Versus

amazon

When Jeff Bezos gave a talk to a class at the Harvard Business School in 1997, one student bluntly told him, “You seem like a really nice guy . . . but you really need to sell to Barnes & Noble and get out now.” Bezos told the class the student might be right but said “I think you might be underestimating the degree to which established brick-and-mortar business, or any company that might be used to doing things a certain way, will find it hard to be nimble or focus attention on a new channel. I guess we’ll see.”54

Bezos had a natural understanding of how hard it is for established organizations to adapt. He knew Barnes & Noble’s managers would have trouble seriously competing online because they wouldn’t want to risk losing money on an unproven new venture. They would be reluctant to pull talented and resourceful employees away from the bookstore business and put them to work on an effort that would, at least for a time, take money away from the profitable stores. Barnes & Noble also wasn’t equipped to package and ship one or two books to individual customers; it was geared to shipping boxes and boxes of books to a set number of locations. Making the switch would be difficult and full of errors. For Amazon, on the other hand, shipping one book at a time was just everyday business.55

Back in 1997, few people thought Amazon was a threat to Barnes & Noble. The story of how this new company defeated a giant illustrates that it is extremely difficult for large established companies to shift to a new way of doing things. Another example comes from Kodak, which actually invented some of the earliest digital photographic technology but couldn’t accept that customers would give up on the company’s traditional film. Kodak had been successful for so long and was so large and entrenched in its way of doing business that it couldn’t change substantively even when managers wanted to.56

The population-ecology model is developed from theories of natural selection in biology, and the terms evolution and selection are used to refer to the underlying behavioral processes. Theories of biological evolution try to explain why certain life forms appear and survive whereas others perish. Some theories suggest the forms that survive are typically best fitted to the immediate environment. The environment of the 1940s and 1950s was suitable to Woolworth, but new organizational forms like Walmart and other superstores became dominant in the 1980s. Now, the environment is shifting again, indicating that the “big box” era is coming to a close. With more people shopping online, smaller stores once again have an advantage in bricks-and-mortar retail. Walmart is planning to open dozens of small- scale Walmart Express stores in urban areas. Best Buy is also opting for smaller storefronts called Best Buy Mobile and searching for ways to fill unused floor space in its large outlets.57 No company is immune to the processes of social change. In recent years, technology has brought tremendous environmental change, leading to the decline of many outdated organizations and a proliferation of new companies such as Pinterest, Facebook, and Twitter.

Briefcase As an organization manager, keep these guidelines in mind: adapt your organization to new variations being selected and retained in the external environ- ment. If you are starting a new organization, find a niche that contains a strong environmental need for your product or service, and be pre- pared for a competitive struggle over scarce resources.

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Chapter 5: Interorganizational Relationships 195

Organizational Form and Niche

The population-ecology model is concerned with organizational forms. Organiza- tional form is an organization’s specific technology, structure, products, goals, and personnel, which can be selected or rejected by the environment. Each new orga- nization tries to find a niche (i.e., a domain of unique environmental resources and needs) sufficient to support it. The niche is usually small in the early stages of an organization but may increase in size over time if the organization is successful. If the organization doesn’t find an appropriate niche, it will decline and may perish.

From the viewpoint of a single firm, luck, chance, and randomness play impor- tant parts in survival. New products and ideas are continually being proposed by both entrepreneurs and large organizations. Whether these ideas and organizational forms survive or fail is often a matter of chance—whether external circumstances happen to support them. A woman starting a small electrical contracting business in a rapidly growing area such as Austin, Texas, or Raleigh, North Carolina (the two fastest growing cities in 2014), would have an excellent chance of success. If the same woman were to start the same business in a declining community elsewhere in the United States, her chance of success would be far less. Success or failure of a single firm thus is predicted by the characteristics of the environment as much as by the skills or strategies used by the organization’s managers.

2The success or failure of a start-up is largely determined by the smarts and management ability of the entrepreneur. ANSwER: Disagree. Luck is often as important as smarts because larger forces in the environment, typically unseen by managers, allow some firms to succeed and others to fail. If a start-up happens to be in the right place at the right time, chances for success are much higher, regardless of management ability.

AssEss Your AnswEr

Process of Ecological Change

The population-ecology model assumes that new organizations are always appear- ing in the population. Thus, organizational populations are continually undergoing change. The process of change in the population occurs in three stages: variation, selection, and retention, as summarized in Exhibit 5.5.

• Variation. Variation means the appearance of new, diverse forms in a population of organizations. These new organizational forms are initiated by entrepreneurs, established with venture capital by large corporations, or set up by governments seeking to provide new services. Some forms may be conceived to cope with a perceived need in the external environment. In recent years, a large number of new firms have been initiated to develop applications for smartphones and social networking sites, to develop computer software, to provide consulting and other services to large corporations, and to develop products and technologies for Internet commerce. Other new organizations produce a traditional product or service, but do it using new technology, new business models, or new management techniques that make the new companies far more able to survive. Organizational variations are analogous to mutations in biology, and they add to the scope and complexity of organizational forms in the environment.

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196 Part 3: Open System Design Elements

• Selection. Selection refers to whether a new organizational form is suited to the environment and can survive. Only a few variations are “selected in” by the environment and survive over the long term. Some variations will suit the external environment better than others. Some prove beneficial and thus are able to find a niche and acquire the resources from the environment necessary to survive. Other variations fail to meet the needs of the environment and perish. When there is insufficient demand for a firm’s product or service and when insufficient resources are available to the organization, that organization will be “selected out.”

• Retention. Retention is the preservation and institutionalization of selected orga- nizational forms. Certain technologies, products, and services are highly valued by the environment. The retained organizational form may become a dominant part of the environment. Many forms of organization have been institutional- ized, such as government, schools, churches, and automobile manufacturers. McDonald’s, which owns 43 percent of the fast-food market and provides the first job for many teenagers, has become institutionalized in American life.

Institutionalized organizations like McDonald’s seem to be relatively permanent features in the population of organizations, but they are not permanent in the long run. The environment is always shifting, and if the dominant organizational forms don’t adapt to external change, they will gradually diminish and be replaced by other organizations.

From the population-ecology perspective, the environment is the important de- terminant of organizational success or failure. The organization must meet an envi- ronmental need or else it will be selected out. The principles of variation, selection, and retention lead to the establishment of new organizational forms in a population of organizations.

Strategies for Survival

Another principle that underlies the population-ecology model is the struggle for existence, or competition. Organizations and populations of organizations are engaged in a competitive struggle over resources, and each organizational form is fighting to survive. The struggle is most intense among new organizations, and both the birth and survival frequencies of new organizations are related to factors in the larger environment. Historically, for example, factors such as size of urban

Exhibit 5.5 Elements in the Population Ecology Model of Organizations

Variation Selection Retention

• Some organizations �nd a successful niche and survive

• A few organizations grow large and become institutionalized in the environment

• Large number of variations appear in the population of organizations

© C

en ga

ge L

ea rn

in g®

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Chapter 5: Interorganizational Relationships 197

area, percentage of immigrants, political turbulence, industry growth rate, and en- vironmental variability have influenced the launching and survival of newspapers, telecommunication firms, railroads, government agencies, labor unions, and even voluntary organizations.58

In the population-ecology perspective, generalist and specialist strategies distin- guish organizational forms in the struggle for survival. Organizations with a wide niche or domain—that is, those that offer a broad range of products or services or that serve a broad market—are generalists. Organizations that provide a narrower range of goods or services or that serve a narrower market are specialists.

In the natural environment, a specialist form of flora and fauna would evolve in protective isolation in a place like Hawaii, where the nearest body of land is 2,000 miles away. The flora and fauna are heavily protected. In contrast, a place like Costa Rica, which experienced wave after wave of external influences, devel- oped a generalist set of flora and fauna that has better resilience and flexibility for adapting to a broad range of environments. In the business world, Amazon.com started with a specialist strategy, selling books over the Internet, but evolved to a generalist strategy with the addition of music, DVDs, electronics, and a wide range of other goods; creation of the Kindle digital reader; and more recently the addition of a streaming video service offering thousands of movies and TV shows. A com- pany such as Olmec Corporation, which sells African-American and Hispanic dolls, would be considered a specialist, whereas Mattel is a generalist, marketing a broad range of toys for boys and girls of all ages.59 Apple uses a specialist strategy with its iPhone, offering only one smartphone model, whereas Samsung uses a generalist strategy creating multiple versions of myriad phone products.60

Specialists are generally more competitive than generalists in the narrow area in which their domains overlap. However, the breadth of the generalist’s domain serves to protect it somewhat from environmental changes. Though demand may decrease for some of the generalist’s products or services, it usually increases for others at the same time. In addition, because of the diversity of products, services, and customers, generalists are able to reallocate resources internally to adapt to a changing envi- ronment, whereas specialists are not. However, because specialists are often smaller companies, they can sometimes move faster and be more flexible in adapting to changes.61 Managerial impact on company success often comes from selecting a strategy that steers a company into an open niche.

Institutionalism The institutional perspective provides yet another view of interorganizational re- lationships.62 The institutional perspective describes how organizations survive and succeed through congruence between an organization and the expectations from its environment. The institutional environment is composed of norms and values from stakeholders (e.g., customers, investors, associations, boards, other organizations, government, and the community). Thus, the institutional view believes that organi- zations adopt structures and processes to please outsiders, and these activities come to take on rule-like status in organizations. The institutional environment reflects what the greater society views as correct ways of organizing and behaving.63

legitimacy is defined as the general perception that an organization’s actions are desirable, proper, and appropriate within the environment’s system of norms, values, and beliefs.64 Institutional theory thus is concerned with the set of intangible

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198 Part 3: Open System Design Elements

norms and values that shape behavior, as opposed to the tangible elements of tech- nology and structure. Organizations and industries must fit within the cognitive and emotional expectations of their audience. For example, people will not deposit money in a bank unless it sends signals of compliance with norms of wise financial management. Consider also your local government and whether it could raise prop- erty taxes for increased school funding if community residents did not approve of the school district’s policies and activities.

Most organizations are concerned with legitimacy, as reflected in the annual Fortune magazine survey that ranks corporations based on their reputations and the annual Global RepTrak 100 conducted by the Reputation Institute. Success and a good reputation go hand in hand. The fact that there is a payoff for having a good reputation is verified by a study of organizations in the airline industry. Having a good reputation was significantly related to higher levels of performance based on measures such as return on assets and net profit margin.65

Many corporations actively shape and manage their reputations to increase their competitive advantage. In the wake of the mortgage meltdown and the fail- ure of giants Bear Stearns and Lehman Brothers, for example, many companies in the finance industry began searching for new ways to bolster legitimacy. Citigroup, Merrill Lynch, and Wachovia all ousted their chief executives over mortgage-related issues, partly as a way to signal a commitment to better business practices. The board of oil giant BP asked Tony Hayward to resign as CEO due to his mishandling of the Deepwater Horizon oil spill crisis and brought in a new CEO they believed could take the steps needed to restore the company’s reputation.66

The notion of legitimacy answers an important question for institutional theo- rists: Why is there so much homogeneity in the forms and practices of established organizations? For example, visit banks, high schools, hospitals, government de- partments, or business firms in a similar industry, in any part of the country, and they will look strikingly similar. When an organizational field is just getting started, such as in Internet-related businesses, diversity is the norm. New organizations fill emerging niches. Once an industry becomes established, however, there is an invis- ible push toward similarity. Isomorphism is the term used to describe this move toward similarity.

The Institutional View and Organization Design

The institutional view also sees organizations as having two essential dimensions— technical and institutional. The technical dimension is the day-to-day work, technology, and operating requirements. The institutional structure is that part of the organization most visible to the outside public. Moreover, the technical dimension is governed by norms of rationality and efficiency, but the institutional dimension is governed by expectations from people and organizations in the external environment. As a result of pressure to conduct business in a proper and correct way, the formal structures of many organizations reflect the expectations and values of the environment rather than the demand of work activities. This means that an organization may incorporate positions or activities (e.g., e-commerce division, chief compliance officer, social media director) perceived as important by the larger society to increase its legitimacy and survival prospects, even though these elements may decrease efficiency. For example, many small companies set up websites, even

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Chapter 5: Interorganizational Relationships 199

though the benefits gained from the site are sometimes outweighed by the costs of maintaining it. Having a website is perceived as essential by the larger society today. The formal structure and design of an organization may not be rational with respect to workflow and products or services, but it will ensure survival in the larger environment.

Organizations adapt to the environment by signaling their congruence with the demands and expectations stemming from cultural norms, standards set by professional bodies, funding agencies, and customers. Structure is something of a facade disconnected from technical work through which the organization obtains approval, legitimacy, and continuing support. The adoption of structures thus might not be linked to actual production needs and might occur regardless of whether specific internal problems are solved. Formal structure is separated from technical action in this view.67

Institutional Similarity

Many aspects of structure and behavior may be targeted toward environmental acceptance rather than toward internal technical efficiency. Interorganizational relationships thus are characterized by forces that cause organizations in a similar population to look like one another. Institutional similarity, called institutional isomorphism in the academic literature, is the emergence of a common structure and approach among organizations in the same field. Isomorphism is the process that causes one unit in a population to resemble other units that face the same set of environmental conditions.68

Exactly how does increasing similarity occur? How are these forces realized? Exhibit 5.6 provides a summary of three mechanisms for institutional adaptation. These three core mechanisms are mimetic forces, which result from responses to uncertainty; coercive forces, which stem from political influence; and normative forces, which result from common training and professionalism.69

Mimetic Forces. Most organizations, especially business organizations, face great uncertainty. It is not clear to senior executives exactly what products, services, technologies, or management practices will achieve desired goals, and sometimes the goals themselves are not clear. In the face of this uncertainty, mimetic forces, the pressures to copy or model other organizations, occur. Executives observe an innovation in a firm generally regarded as successful, so the practice is quickly

Briefcase As an organization manager, keep these guidelines in mind: pursue legitimacy with your organization’s major stakeholders in the external environ- ment. adopt strategies, structures, and manage- ment techniques that meet the expectations of significant parties, thereby ensuring their cooperation and access to resources.

Exhibit 5.6 Three Mechanisms for Institutional Adaptation

Mimetic Coercive Normative

Reason to become similar: Events:

Uncertainty Innovation visibility

Dependence Political law, rules, sanctions

Duty, obligation Professionalism—certification, accreditation

Social basis: Example:

Culturally supported Reengineering, benchmarking

Legal Pollution controls, school regulations

Moral Accounting standards, consultant training

Source: Adapted from W. Richard Scott, Institutions and Organizations (Thousand Oaks, CA: Sage, 1995).

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200 Part 3: Open System Design Elements

copied. McDonald’s revived stagnant sales by adding healthier menu items and new types of beverages, so other fast-food chains began doing the same. “You need to learn from your competition,” said David Novak, CEO of Yum Brands, the parent company of KFC, Taco Bell, and Pizza Hut. SanDisk, Microsoft, Samsung, and other companies came out with their own digital music players to try to capture some of the success Apple enjoyed with its iPod.70 Many large companies enter specific foreign markets when managers see their firm’s biggest rivals doing so, even if entering the market is highly risky. Managers don’t want to take a chance on losing out.71

Many times, this modeling of other organizations is done without any clear proof that performance will be improved. Mimetic processes explain why fads and fashions occur in the business world. Once a new idea starts, many organizations grab onto it, only to learn that the application is difficult and may cause more prob- lems than it solves. This was the case with the recent merger wave that swept many industries. The past few decades have seen the largest merger and acquisition wave in history, but evidence shows that many of these mergers did not produce the ex- pected financial gains and other benefits. The sheer momentum of the trend was so powerful that many companies chose to merge not because of potential increases in efficiency or profitability but simply because it seemed like the right thing to do.72

Techniques such as outsourcing, teams, Six Sigma quality programs, brainstorm- ing, and the balanced scorecard have all been adopted without clear evidence that they will improve efficiency or effectiveness. The one certain benefit is that man- agement’s feelings of uncertainty will be reduced, and the company’s image will be enhanced because the firm is seen as using the latest management techniques. A study of 100 organizations confirmed that those companies associated with using popular management techniques were more admired and rated higher in quality of management, even though these organizations often did not reflect higher economic performance.73 Perhaps the clearest example of official copying is the technique of benchmarking that occurs as part of the total quality movement. Benchmark- ing means identifying who is best at something in an industry and then duplicat- ing the technique for creating excellence, perhaps even improving it in the process. Many organizations, however, simply copy what a competitor is doing without un- derstanding why it is successful or how it might mesh—or clash—with their own organization’s way of doing business.74

The mimetic process occurs because managers face high uncertainty, they are aware of innovations occurring in the environment, and the innovations are cultur- ally supported, thereby giving legitimacy to adopters. This is a strong mechanism by which a group of banks, or high schools, or manufacturing firms begin to look and act like one another.

3 Managers should quickly copy or borrow techniques being used by other successful companies to make their own organization more effective and to keep pace with changing times.

ANSwER: Agree. Managers frequently copy techniques used by other, successful organizations as a way to appear legitimate and up to date. Copying other firms is one reason organizations may begin to look and act similar in their structures, processes, and management systems.

AssEss Your AnswEr

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Chapter 5: Interorganizational Relationships 201

Coercive Forces. All organizations are subject to pressure, both formal and informal, from government, regulatory agencies, and other important organizations in the environment, especially those on which a company is dependent. Coercive forces are the external pressures exerted on an organization to adopt structures, techniques, or behaviors similar to other organizations. For example, large corporations have recently been putting pressure on service providers, such as accounting or law firms, to step up their diversity efforts. Managers in these corporations have felt pressure to increase diversity within their own organizations and they want the firms with which they do business to reflect a commitment to hiring and promoting more women and minorities as well.75

Some pressures may have the force of law, such as government mandates to adopt new pollution control equipment or new safety standards. New regulations and government oversight boards have been set up for the mortgage and finance industries following the Wall Street meltdown. As one example, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act requires credit card companies to add specific warnings regarding late payments and the total amount of interest customers will pay if they make only the minimum payment.

Coercive pressures may also occur between organizations where there is a power difference, as described in the resource-dependence section earlier in this chapter. Large retailers and manufacturers often insist that certain policies, procedures, and techniques be used by their suppliers. As part of its new sustainability push, for instance, Walmart is requiring its 100,000 or so suppliers to calculate the “full environmental costs” of making their products (such as water use, carbon dioxide emissions, and waste) and provide this information for the company to distill into a rating system that shoppers will see alongside the price of the item.76

As with other changes, those brought about because of coercive forces may not make the organization more effective, but it will look more effective and will be accepted as legitimate in the environment. Organizational changes that result from coercive forces occur when an organization is dependent on another, when there are political factors such as rules, laws, and sanctions involved, or when some other contractual or legal basis defines the relationship. Organizations operating under those constraints will adopt changes and relate to one another in a way that increases homogeneity and limits diversity.

Normative Forces. The third reason organizations change according to the institu- tional view is normative forces. Normative forces are pressures to achieve standards of professionalism and to adopt techniques that are considered by the professional community to be up to date and effective. Changes may be in any area, such as information technology, accounting requirements, marketing techniques, or collab- orative relationships with other organizations.

Professionals share a body of formal education based on university degrees and professional networks through which ideas are exchanged by consultants and professional leaders. Universities, consulting firms, trade associations, and professional training institutions develop norms among professional managers. People are exposed to similar training and standards and adopt shared values, which are implemented in organizations with which they work. Business schools teach finance, marketing, and human resource majors that certain techniques are better than others, so using those techniques becomes a standard in the field. In one study, for example, a radio station changed from a functional to a multidivisional structure because a consultant recommended it as a “higher standard” of doing

Briefcase As an organization manager, keep this guideline in mind: enhance legitimacy by borrowing good ideas from other firms, complying with laws and regulations, and following procedures considered best for your company.

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202 Part 3: Open System Design Elements

business. There was no proof that this structure was better, but the radio station wanted legitimacy and to be perceived as fully professional and up to date in its management techniques.

Companies accept normative pressures to become like one another through a sense of obligation or duty to high standards of performance based on professional norms shared by managers and specialists in their respective organizations. These norms are conveyed through professional education and certification and have al- most a moral or ethical requirement based on the highest standards accepted by the profession at that time. In some cases, though, normative forces that maintain legiti- macy break down, as they did recently in the mortgage and finance industries, and coercive forces are needed to shift organizations back toward acceptable standards.

An organization may use any or all of the mechanisms of mimetic, coercive, or normative forces to change itself for greater legitimacy in the institutional environment. Firms tend to use these mechanisms when they are acting under conditions of dependence, uncertainty, ambiguous goals, and reliance on professional credentials. The outcome of these processes is that organizations become far more homogeneous than would be expected from the natural diversity among managers and environments.

Design Essentials

■ This chapter has been about the important evolution in interorganizational re- lationships. At one time organizations considered themselves autonomous and separate, trying to outdo other companies. Today more organizations see them- selves as part of an ecosystem. The organization may span several industries and will be anchored in a dense web of relationships with other companies. In this ecosystem, collaboration is as important as competition. Indeed, organizations may compete and collaborate at the same time, depending on the location and issue. In business ecosystems, the role of management is changing to include the development of horizontal relationships with other organizations.

■ Four perspectives have been developed to explain relationships among organiza- tions. The resource-dependence perspective is the most traditional, arguing that organizations try to avoid excessive dependence on other organizations. In this view, organizations devote considerable effort to controlling the environment to ensure ample resources while maintaining independence. Types of resource- dependence relationships include acquisitions or mergers, joint ventures, strategic alliances, supply sourcing, trade associations, and board interlocks.

■ The collaborative-network perspective is an emerging alternative to resource dependence. Organizations welcome collaboration and interdependence with other organizations to enhance value for both. Many executives are changing mindsets away from autonomy toward collaboration, often with former corpo- rate enemies. The new partnership mindset emphasizes trust, fair dealing, and achieving profits for all parties in a relationship.

■ The population-ecology perspective explains why organizational diversity con- tinuously increases with the appearance of new organizations filling niches left open by established companies. This perspective asserts that large companies usually cannot adapt to meet a changing environment; hence, new companies

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Chapter 5: Interorganizational Relationships 203

emerge with the appropriate form and skills to serve new needs. Through the process of variation, selection, and retention, some organizations will survive and grow while others perish. Companies may adopt a generalist or specialist strategy to survive in the population of organizations.

■ The institutional perspective argues that interorganizational relationships are shaped as much by a company’s need for legitimacy as by the need to provide products and services. The need for legitimacy means that the organization will adopt structures and activities that are perceived as valid, proper, and up to date by external stakeholders. In this way, established organizations copy techniques from one another and begin to look very similar. The emergence of common structures and approaches in the same field is called institutional similarity or institutional isomorphism. Three core mechanisms explain increasing organiza- tional homogeneity: mimetic forces, which result from responses to uncertainty; coercive forces, which stem from power differences and political influences; and normative forces, which result from common training and professionalism.

■ Each of the four perspectives is valid. They represent different lenses through which the world of interorganizational relationships can be viewed: organiza- tions experience a competitive struggle for autonomy; they can thrive through collaborative relationships with others; the slowness to adapt provides openings for new organizations to flourish; and organizations seek legitimacy as well as profits from the external environment. The important thing is for managers to be aware of interorganizational relationships and to consciously manage them.

kEY CONCEPTS

coercive forces collaborative-network perspective generalist institutional environment institutional perspective institutional similarity interorganizational relationships joint venture

legitimacy mimetic forces niche normative forces organizational ecosystem organizational form population population-ecology perspective

resource-dependence theory retention selection specialist strategic alliance struggle for existence trade association variation

DISCuSSION QuESTIONS

1. The concept of business ecosystems implies that orga- nizations are more interdependent than ever before. From personal experience, do you agree? Explain.

2. How do you feel about the prospect of becoming a manager and having to manage a set of relationships with other companies rather than just managing your own company? Discuss.

3. Assume you are the manager of a small firm that is de- pendent on a large manufacturing customer that uses the resource-dependence perspective. Put yourself in the position of the small firm, and describe what actions

you would take to survive and succeed. What actions would you take from the perspective of the large firm?

4. Many managers today were trained under assump- tions of adversarial relationships with other companies. Do you think operating as adversaries is easier or more difficult than operating as partners with other compa- nies? Discuss.

5. Discuss how the adversarial versus partnership orienta- tions work among students in class. Is there a sense of competition for grades? Is it possible to develop true partnerships in which your work depends on others?

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204 Part 3: Open System Design Elements

6. The population-ecology perspective argues that it is healthy for society to have new organizations emerg- ing and old organizations dying as the environment changes. Do you agree? Why would European coun- tries pass laws to sustain traditional organizations and inhibit the emergence of new ones?

7. Discuss how the process of variation, selection, and retention might explain innovations that take place within an organization.

8. Do you believe that legitimacy really motivates a large, powerful organization such as Walmart? Is acceptance by other people a motivation for individuals as well? Explain.

9. How does the desire for legitimacy result in organiza- tions becoming more similar over time?

10. How do mimetic forces differ from normative forces? Give an example of each.

CHAPTER 5 wORkSHOP The Shamatosi77

Instructions 1. Divide into groups of three. Half the groups, on one

side of the room, are “1s” and the other half are “2s.” 2. The 1s are Pharmacology; the 2s are Radiology. Read

only your own role, not the other one. 3. Any students not in a negotiating group can be as-

signed to observe a specific negotiation meeting. 4. Both groups want to purchase Shamatosi plants owned

by DBR. 5. Each group has 10 minutes to prepare a negotiation

strategy for meeting with the other side. 6. One Pharmacology group meets with one Radiology

group so that all groups meet with one counterpart. 7. You have 15 minutes to try and negotiate a possible

agreement to purchase Shamatosi plants from DBR. 8. You should decide whether you can form an agreement

to move ahead jointly or whether you will go into com- petition with each other. An agreement would consider the price offered for the plants, how the cost is shared, to where plants will be delivered (which company), and how plants are best utilized.

9. Groups report to the whole class on results of nego- tiation. Observers can comment on their observations, such as level of trust and/or disclosure and ease/diffi- culties of reaching an agreement between companies.

10. Instructor leads a discussion on interorganiza- tional agreements, decision-making, and joint ventures.

Role of Team from Pharmacology, Inc.: Dr. Bernice Hobbs, a biological researcher for Pharmacology, Inc., a major pharmaceutical company, has monitored with mounting concern the reports from Brazil’s Amazon rainforest. Everything from world weather patterns to providing an estimated one in four ingredients in medicine is tied to securing the world’s rainforests. But over the past decade, scientists and pharmaceutical companies, along with environmental groups and others, have observed

with alarm the destruction of the rainforests, and with it the destruction of entire species of plant, animal, and insect life.

As Hobbs monitors the situation, she is particularly concerned about conditions with regard to a particu- lar plant found in limited quantities near the Rio Negro. Rainforest trees have shallow roots because the major nu- trients for growth are located near the surface level. Biolo- gists discovered a rare tiny plant growth called Shamatosi embedded among the trees near the Rio Negro. For a num- ber of years, researchers have explored potential medical uses for these tiny plants.

Dr. Hobbs has been working with the leaves of the tiny Shamatosi plant and has discovered the plant’s potential as a cancer-suppressing drug after breast cancer surgery. For a number of years the leading drug in this category has been Tamoxifen, a synthetic drug described as “remarkable” and credited with saving more lives than any other oncological drug by the lead investigator for a major breast cancer research group. However, research has also shown that Tamoxifen raises the risk of cancer in the lining of the uterus and can lead to blood clots in the lungs. There is also a growing level of concern as Tamoxifen resistance has developed. The medicine developed by Hobbs may avoid these problems and bring a new treatment into the list of options for doctors and their patients. But more research is needed. Hobbs needs to have access to as many leaves as possible from the Shamatosi plant.

DBR, the Brazilian timber company, has possession of several thousand Shamatosi plants from this year’s season that have been replanted in portable crates. Your company, Pharmacology, Inc., has authorized $1.5 million for your team to bid to obtain the plants. You cannot go over this budget. Your team will meet with a team from Radiology, Inc., which also wants to purchase the Shamatosi plants from DBR, about a possible agreement for purchasing and using the plants for research.

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Chapter 5: Interorganizational Relationships 205

Role of Team from Radiology, Inc.: Dr. Alberto Dominguez, a biochemist for Radiology, Inc. who has expertise in treating radiation exposure, monitors with mounting concern the reports from Brazil’s Amazon rainforest. Everything from world weather patterns to providing an estimated one in four ingredients in medicine is tied to securing the world’s rainforests. But over the past decade, scientists and pharmaceutical companies, along with environmental groups and others, have observed with alarm the destruction of the rainforests, and with it the destruction of entire species of plant, animal, and insect life.

As Dominguez monitors the situation, he is particularly concerned about conditions concerning a particular plant found in limited quantities near the Rio Negro. Rainforest trees have shallow roots because the major nutrients for growth are located near the surface level. Biologists discov- ered a rare tiny plant growth called Shamatosi embedded among the trees near the Rio Negro. For a number of years, researchers have explored potential medical uses for these tiny plants.

Dr. Dominquez has been working with the roots of the Shamatosi plant in response to incidents involving radiation exposure. The worldwide expansion of nuclear facilities, the lessons from the 1986 Chernobyl disaster, and the resulting cases of thyroid cancer among thousands

of children and adolescents, led to intensive research by Dominguez and his colleagues to provide the swiftest response with the most powerful medicine. For years, Potassium iodide (KI) was issued in kits provided by organizations such as the Centers for Disease Control. However, KI was found deficient in protecting many body parts, such as the liver and intestines. Dominguez discovered the tiny Shamatosi plant, and his research indicated the potential for medicines from the root of this plant to provide additional protection, even for incidents of large-scale or prolonged exposure. The March 2011 Tohoku earthquake and tsunami, and the resultant radiation exposure caused by the meltdown at the Fukushima Daiichi nuclear power plant, intensified concerns among scientists to find and develop a new medicine. Dominguez needs as many plants as possible.

DBR, the Brazilian timber company, has possession of several thousand Shamatosi plants from this year’s season that have been replanted in portable crates. Your company, Radiology, Inc., has authorized your team to bid $1.5 million to obtain the plants. You cannot go over this budget. Your team will meet with a team from Pharmacology, Inc., which also wants to purchase the Shamatosi plants from DBR, about a possible agreement for purchasing and using the plants for research.

CASE FOR ANAlYSIS | why is Cooperation So Hard?

Armando Bronaldo immigrated to the United States six years ago after working as design leader for an Italian company specializing in home sound systems. Armed with a vision and 15 years of experience, he founded his own company, Technologia, as the supplier of sound translation components including the base radiator, dome tweeter (for high frequency), composite cone (for midrange sound), the binding post (for sound translator delivery), and ohms impedance (for conducting sound through the speakers). As it builds its reputation for quality and supply chain service and delivery, Technologia relies heavily on continuing a solid relationship with AUD, a manufacturer of home sound systems, under the management of CEO Audie Richards. AUD was the company’s first contractual partner, currently accounting for 50 percent of the small supplier’s business. The initial agreement with AUD has grown and the current business relationship brings a steady stream of orders that has enabled Bronaldo, even in a tough economy, to add workers over the last three years. Bronaldo loves the reliability of selling to AUD, but he sometimes questions whether the business relationship is overbalanced in favor of the powerful manufacturer.

“I think in the beginning Audie played his hand well, knowing that we were a start-up and trying to secure a solid customer base. In my eagerness to get the contract and in trying to please the head of a big company, I found myself saying ‘Yes’ and carrying out his wishes and demands,” Bronaldo admits. “Because we were a young company and because he is, by far, our biggest customer, I think he got into the habit of assuming the focus would remain on his needs and his profits throughout the business relationship. But now, with our feet under us as a company, I think it is time to look again at the relationship between the two companies.”

Richards is satisfied with the present arrangement he has with Technologia and sees himself as both partner and mentor, as he recently explained to a colleague. “Bronaldo came to this country and started his company and I was willing to give him a chance, set up our logistics, and make it possible for him to grow his company. I think it’s worked out very well for AUD. And now he talks about wanting to change the way we do things. I’m suspicious about what he has in mind. But he needs us more than we need him. Look, I’ve got a good supplier; he gets lots of business from us; I see no reason to change it.”

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206 Part 3: Open System Design Elements

Although the relationship and dialogue at the top man- agement level is strained, mid-level managers at both com- panies do talk and are eager to explore and implement a new vendor managed inventory (VMI) system that builds a partnership of strong interdependence and equity. Instead of sending purchase orders, VMI involves sharing daily electronic information about AUD’s sales, so inventory is replaced automatically by Technologia. Mid-level managers Larry Stansell (AUD) and Victoria Santos (Technologia) reg- ularly correspond and meet to find potential areas for close cooperation, information sharing, and problem feedback.

“I know that Richards is suspicious, but it really is time for these two guys to take a new look at this business relationship and how they can address issues that could be beneficial to both,” Santos says. “The playing field has changed. Technologia is stronger.”

“But the relationship has not changed and I don’t think it will until Bronaldo finds a way to reduce his de- pendence on AUD. In the meantime, flexibility, information sharing, and reconsidering a range of cost-efficient options is important,” Stansell admits, “But we have to start with the discussion of whether AUD calls all the shots between our two organizations.”

“Yes, and that discussion must include logistical is- sues,” Santos says.

“Delivery, the disagreements about the pallets . . .” “Richards set up all of that initially—what would

work best for delivery to AUD,” Santos says. “But Bronaldo insists that PM rather than AM pick-ups would be better and that a change in pallet companies, from Bradley Pack- aging to Eastmont Packaging, would cut costs per trip by reducing mileage. Plus Eastmont has a new custom-made pallet that provides greater load stabilization necessary for high-tech components. The savings for Technologia would be shared with AUD.”

“But Bradley has a long-time business relationship of its own with AUD,” Stansell points out.

“So, what we’re saying here is that it is not just a discus- sion about these two organizations, but a consideration of the whole supply chain. The cost of lost flexibility, the lack of shared information. It’s costing both of them. And the sudden spikes in production requests by AUD, in response to its retail customers, create unnecessary problems in pro- duction planning at Technologia and unnecessary stress for the management and workers at both companies.”

“VMI could be a powerful tool that empowers and brings value to both sides,” Stansell says. “Through this sys- tem, Technologia will be able to create orders for us based on direct access to our orders and demand information— both short and long-range needs. . . .”

“And then, we can work together, determining the most cost-efficient way to manage and deliver the inven- tory,” Santos continues. “We’ll look at the entire supply chain to see where changes and even minor tweaks can be made to bring down costs and make the partnership strong, but there would have to be equal give and take.”

“Flexibility on both sides is necessary to make this work,” Stansell points out. “This is not a competition. No- body has to be right.”

“But getting top management on board to make this work is our real challenge,” Santos says. “And we have to start looking ahead. VMI could be a stepping-stone to Jointly Managed Inventory (JMI), an even deeper collabora- tion, allowing the increased tactical planning and the real integration of Technologia and AUD’s point of sale systems. That will offer optimal cost sharing and real time sales data, allowing us to stay ahead of the curve in production plan- ning as well as logistics to meet AUD’s needs in real time.”

“So, what’s our next step?” Stansell asks. “How can we make this happen?”

CASE FOR ANAlYSIS | Oxford Plastics Company78

Oxford Plastics manufactures high-quality plastics and res- ins for use in a variety of products, from lawn ornaments and patio furniture to automobiles. The Oxford plant located near Beatty, a town of about 45,000 in a south- eastern state, employs about 3,000 workers. It plays an im- portant role in the local economy and, indeed, that of the entire state, which offers few well-paying factory jobs.

In early 2004, Sam Henderson, plant manager of the Beatty facility, notified Governor Tom Winchell that Oxford

was ready to announce plans for a major addition to the fac- tory—a state-of-the-art color lab and paint shop that would enable better and faster matching of colors to customer re- quirements. The new shop would keep Oxford competitive in the fast-paced global market for plastics, as well as bring the Beatty plant into full compliance with updated U.S. En- vironmental Protection Agency (EPA) regulations.

Plans for the new facility were largely complete. The biggest remaining task was identifying the specific

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Chapter 5: Interorganizational Relationships 207

location. The new color lab and paint shop would cover approximately 25 acres, requiring Oxford to purchase some additional land adjacent to its 75-acre factory campus. Henderson was somewhat concerned with top management’s preferred site because it fell outside the current industrial zoning boundary, and, moreover, would necessitate destruction of several 400- to 500-year-old beech trees. The owner of the property, a nonprofit agency, was ready to sell, whereas property located on the other side of the campus might be more difficult to obtain in a timely manner. Oxford was on a tight schedule to get the project completed. If the new facility wasn’t up and running in a timely manner, there was a chance the EPA could force Oxford to stop using its old process—in effect, shutting down the factory.

The governor was thrilled with Oxford’s decision to build the new shop in Beatty and he urged Henderson to immediately begin working closely with local and state officials to circumvent any potential problems. It was es- sential, he stressed, that the project not be bogged down or thwarted by conflict among different interest groups, as it was too important to the economic development of the region. Governor Winchell assigned Beth Fried- lander, director of the Governor’s Office of Economic Development, to work closely with Henderson on the project. However, Winchell was not willing to offer his commitment to help push through the rezoning, as he had been an enthusiastic public supporter of environ- mental causes.

Following his conversation with Governor Winchell, Henderson sat down to identify the various people and organizations that would have an interest in the new color lab project and that would need to collaborate in order for it to proceed in a smooth and timely manner. They are as follows:

Oxford Plastics • Mark Thomas, vice president of North American Op-

erations. Thomas would be flying in from Oxford’s Michigan headquarters to oversee land purchase and negotiations regarding the expansion.

• Sam Henderson, Beatty plant manager, who has spent his entire career at the Beatty facility, beginning on the factory floor fresh out of high school.

• Wayne Talbert, local union president. The union is strongly in favor of the new shop being located in Beatty because of the potential for more and higher- wage jobs.

State Government • Governor Tom Winchell, who can exert pressure on lo-

cal officials to support the project. • Beth Friedlander, director of the Governor’s Office of

Economic Development. • Manu Gottlieb, director of the State Department of

Environmental Quality.

City Government • Mayor Barbara Ott, a political newcomer who has

been in office for less than a year and who campaigned on environmental issues.

• Major J. Washington, the Chamber of Commerce chair of local economic development.

Public • May Pinelas, chairman of Historic Beatty who argues

vociferously that the future of the region lies in historic and natural preservation and tourism.

• Tommy Tompkins, president of the Save Our Future Foundation, a coalition of private individuals and repre- sentatives from the local university who have long been involved in public environmental issues and have success- fully thwarted at least one previous expansion project.

Henderson is feeling torn about how to proceed. He thinks to himself, “To move forward, how will I build a coalition among these diverse organizations and groups?” He understands the need for Oxford to move quickly, but he wants Oxford to have a good relationship with the peo- ple and organizations that will surely oppose destruction of more of Beatty’s natural beauty. Henderson has always liked finding a win-win compromise, but there are so many groups with an interest in this project that he’s not sure where to start. Maybe he should begin by working closely with Beth Friedlander from the governor’s office—there’s no doubt this is an extremely important project for the state’s economic development. On the other hand, it’s the local people who are going to be most affected and most involved in the final decisions. Oxford’s vice president has suggested a press conference to announce the new shop at the end of the week, but Henderson is worried about putting the news out cold. Perhaps he should call a meeting of interested parties now and let everyone get their feelings out into the open? He knows it could get emotional, but he wonders if things won’t get much uglier later on if he doesn’t.

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208 Part 3: Open System Design Elements

NOTES

1. Based on Shelly Banjo and Suzanne Kapner, “Retailers to Implement Bangladesh Factory Plan,” The Wall Street Journal, August 20, 2013, B3.

2. Fernando Napolitano, “The Megacommunity Approach to Tackling the World’s Toughest Problems,” Strategy + Business, August 24, 2010, http://www.strategy-business.com /article/10305?gko=73c6d (accessed August 1, 2011).

3. Christine Oliver, “Determinants of Interorganizational Relationships: Integration and Future Directions,” Academy of Management Review 15 (1990), 241–265.

4. James Moore, The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems (New York: HarperCollins, 1996).

5. Mark Gerencser, Reginald Van Lee, Fernando Napolitano, and Christopher Kelly, Megacommunities: How Leaders of Government, Business, and Non-Profits Can Tackle Today’s Global Challenges Together (New York: Palgrave Macmillan, 2008).

6. Jonathan Hughes and Jeff Weiss, “Simple Rules for Making Alliances Work,” Harvard Business Review, November 2007, 122–131; Howard Muson, “Friend? Foe? Both? The Confusing World of Corporate Alliances,” Across the Board, March–April 2002, 19–25; and Devi R. Gnyawali and Ravindranath Madhavan, “Cooperative Networks and Competitive Dynamics: A Structural Embeddedness Perspective,” Academy of Management Review 26, no. 3 (2001), 431–445.

7. Katie Merx, “Automakers Interconnected Around World,” Edmonton Journal, April 6, 2007, H14; and Keith Bradsher, “Ford Agrees to Sell Volvo to a Fast-Rising Chinese Company,” The New York Times Online, March 28, 2010, http://www.nytimes.com/2010/03/29/business/global/29auto .html (accessed August 1, 2011).

8. Thomas Petzinger, Jr., The New Pioneers: The Men and Women Who Are Transforming the Workplace and Marketplace (New York: Simon & Schuster, 1999), 53–54.

9. James Moore, “The Death of Competition,” Fortune, April 15, 1996, 142–144.

10. Brian Goodwin, How the Leopard Changed Its Spots: The Evolution of Complexity (New York: Touchstone, 1994), 181, quoted in Petzinger, The New Pioneers, 53.

11. Jessica E. Lessin, Lorraine Luk, and Na Juro Osawa, “Apple Finds It Difficult to Divorce Samsung,” The Wall Street Journal, June 29, 2013, A1.

12. Shira Ovide and Anupreeta Das, “Microsoft Takes a Side in PC War,” The Wall Street Journal, February 6, 2013, B1.

13. Greg Ferenstein, “In a Cutthroat World, Some Web Giants Thrive by Cooperating,” The Washington Post, February 19, 2011, http://www.washingtonpost.com/business/in-a -cutthroat-world-some-web-giants-thrive-by -cooperating/2011/02/19/ABmYSYQ_story.html (accessed February 19, 2011); and Jessica E. Vascellaro and Yukari Iwatani Kane, “Apple, Google Rivalry Heats Up,” The Wall Street Journal, December 11, 2009, B1.

14. Sumantra Ghoshal and Christopher A. Bartlett, “Changing the Role of Top Management: Beyond Structure and Process,” Harvard Business Review, January–February 1995, 86–96.

15. Ann Zimmerman and Dana Mattioli, “Retail’s New Odd Couple,” The Wall Street Journal, July 11, 2012, B1.

16. Ian Urbina, “In Gulf, It Was Unclear Who Was in Charge of Oil Rig,” The New York Times, June 5, 2010, http://www .nytimes.com/2010/06/06/us/06rig.html (accessed August 5, 2011).

17. “Toward a More Perfect Match: Building Successful Leaders by Effectively Aligning People and Roles,” Hay Group Working Paper (2004); and “Making Sure the Suit Fits,” Hay Group Research Brief (2004). Available from Hay Group, The McClelland Center, 116 Huntington Avenue, Boston, MA 02116, or at http://www.haygroup.com.

18. Hughes and Weiss, “Simple Rules for Making Alliances Work.” 19. Dana Priest and William M. Arkin, “Top Secret America,

A Washington Post Investigation; Part II: National Security Inc.,” July 20, 2010, http://projects.washingtonpost.com /top-secret-america/articles/national-security-inc/1/ (accessed November 28, 2011).

20. J. Pfeffer and G. R. Salancik, The External Control of Organizations: A Resource Dependence Perspective (New York: Harper & Row, 1978); and Amy J. Hillman, Michael C. Withers, and Brian J. Collins, “Resource Dependence Theory: A Review,” Journal of Management 35, no. 6 (2009), 1404–1427.

21. Paul Ziobro, “Mattel Puts a Target on Lego,” The Wall Street Journal, February 28, 2014, http://online.wsj.com/news /articles/SB10001424052702303801304579410671597945030 (accessed March 10, 2014).

22. Peter Drucker, quoted in Rajesh Kumar and Anoop Nathwani, “Business Alliances: Why Managerial Thinking and Biases Determine Success,” Journal of Business Strategy 33, no 5 (2012), 44–50.

23. Patrick Hull, “Joint Ventures Provide Opportunities for Entrepreneurs,” Forbes, July 21, 2013, http://www.forbes .com/sites/patrickhull/2013/06/21/joint-ventures-provide -opportunities-for-entrepreneurs/ (accessed March 10, 2014).

24. James R. Hagerty, “Whirlpool Expands in China,” The Wall Street Journal, March 19, 2012, http://online.wsj.com/news /articles/SB10001424052702303812904577291793985890430 (accessed March 12, 2014).

25. Leslie Kaufman, “NBC’s News Unit Teams with Video Clip Start-Up,” The New York Times, January 13, 2014, B3.

26. Ellen Byron, “Theory & Practice: Tight Supplies, Tight Partners,” The Wall Street Journal, January 10, 2011, B5.

27. Eva Dou, “Apple Shifts from Foxconn to Pegatron,” The Wall Street Journal, May 30, 2013, B5.

28. Ashleigh Barry and Marcey Goulder, “As ‘Vaping Bars’ Thrive, Jury Remains Out on E-Cigarettes,” The Columbus Dispatch, March 9, 2014, http://www .dispatch.com/content/stories/business/2014/03/09 /as-vaping-bars-thrive-jury-remains-out-on-e-cigarettes .html?utm_source=rss&utm_medium=rss&utm _campaign=as-vaping-bars-thrive-jury-remains-out-on-e -cigarettes (accessed March 11, 2014)

29. “About SFATA,” Smoke Free Alternatives Trade Association Website, http://www.sfata.org/about-sfata/ (accessed March 11, 2014).

Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 5: Interorganizational Relationships 209

30. Brian L. Connelly and Erik J. Van Slyke, “The Power and Peril of Board Interlocks,” Business Horizons 55 (2012), 403–408.

31. Greg Bensinger and David Benoit, “Ichan Targets Silicon Valley Directors’ Club,” The Wall Street Journal Online, February 24, 2014, http://online.wsj.com/news/articles/SB10 001424052702304610404579402831365897274 (accessed March 10, 2014).

32. Brad Stone, The Everything Store: Jeff Bezos and the Age of Amazon (New York: Little Brown and Company, 2013), 245.

33. Evelyn M. Rusli, “Facebook Takes Aim at Apps Makers,” The Wall Street Journal, March 18, 2013, B1.

34. Mike Ramsey, “Toyota Tries to Break Reliance on China,” The Wall Street Journal, January 14, 2011, B1.

35. Mitchell P. Koza and Arie Y. Lewin, “The Co-Evolution of Network Alliances: A Longitudinal Analysis of an International Professional Service Network,” Center for Research on New Organizational Forms, Working Paper 98–09–02; and Kathy Rebello with Richard Brandt, Peter Coy, and Mark Lewyn, “Your Digital Future,” BusinessWeek, September 7, 1992, 56–64.

36. Steve Lohr, “Big Medical Groups Begin Patient Data-Sharing Project,” The New York Times, April 6, 2011, http://bits .blogs.nytimes.com/2011/04/06/big-medical-groups-begin -patient-data-sharing-project/ (accessed April 6, 2011).

37. Eugene Geh, “Understanding Strategic Alliances from the Effectual Entrepreneurial Firm’s Perspective—An Organization Theory Perspective,” SAM Advanced Management Journal (Autumn 2011), 27–36.

38. Saul Berman and Peter Korsten, “Embracing Connectedness: Insights from the IBM 2012 CEO Study,” Strategy & Leadership 41, no. 2 (2013), 46–57; Christine Oliver, “Determinants of Interorganizational Relationships: Integration and Future Directions,” Academy of Management Review, 15 (1990), 241–265; and Ken G. Smith, Stephen J. Carroll, and Susan Ashford, “Intra- and Interorganizational Cooperation: Toward a Research Agenda,” Academy of Management Journal 38 (1995), 7–23.

39. Paul W. Beamish and Nathaniel C. Lupton, “Managing Joint Ventures,” Academy of Management Perspectives, May 2009, 75–94.

40. Timothy M. Stearns, Alan N. Hoffman, and Jan B. Heide, “Performance of Commercial Television Stations as an Outcome of Interorganizational Linkages and Environmental Conditions,” Academy of Management Journal 30 (1987), 71–90; David A. Whetten and Thomas K. Kueng, “The Instrumental Value of Interorganizational Relations: Antecedents and Consequences of Linkage Formation,” Academy of Management Journal 22 (1979), 325–344; G. Ahuja, “Collaboration Networks, Structural Holes, and Innovation: A Longitudinal Study,” Administrative Science Quarterly 45 (2000), 425–455; and Corey C. Phelps, “A Longitudinal Study of the Influence of Alliance Network Structure and Composition on Firm Exploratory Innovation,” Academy of Management Journal 53, no. 4 (2010), 890–913.

41. Lindsay Brooke, “Ford-G.M. Teamwork on Transmissions,” The New York Times, April 21, 2013, AU4.

42. Shira Ovide and Don Clark, “Oracle, Microsoft Strike Deal to Make Core Software Work Easily Together,” The Wall Street Journal, June 25, 2013, B4.

43. Jeanne Whalen, “Roche, AstraZeneca Agree to Share Drug Research Data,” The Wall Street Journal, June 26, 2013, B3.

44. Monica Langley and Jonathan D. Rockoff, “Drug Companies Join NIH in Study of Alzheimer’s, Diabetes, Rheumatoid Arthritis, Lupus,” The Wall Street Journal, February 3, 2014, http://online.wsj.com/news/articles/SB10 001424052702303519404579353442155924498 (accessed March 12, 2014).

45. Keith G. Provan and H. Brinton Milward, “A Preliminary Theory of Interorganizational Network Effectiveness: A Comparative Study of Four Community Mental Health Systems,” Administrative Science Quarterly 40 (1995), 1–33.

46. Peter Smith Ring and Andrew H. Van de Ven, “Developmental Processes of Corporate Interorganizational Relationships,” Academy of Management Review 19 (1994), 90–118; Jeffrey H. Dyer, “How Chrysler Created an American Keiretsu,” Harvard Business Review, July– August 1996, 42–56; Peter Grittner, “Four Elements of Successful Sourcing Strategies” Management Review, October 1995, 41–45; Myron Magnet, “The New Golden Rule of Business,” Fortune, February 21, 1994, 60–64; and Mick Marchington and Steven Vincent, “Analysing the Influence of Institutional, Organizational and Interpersonal Forces in Shaping Inter-Organizational Relationships,” Journal of Management Studies 41, no. 6 (September 2004), 1029–1056.

47. Travis Hessman, “Collaborating with the Competition,” Industry Week, June 2013, 52, 54.

48. Anna Wilde Mathews, “Cleveland Clinic, Hospital Operator Forge Alliance,” The Wall Street Journal, March 21, 2013, B8.

49. Philip Siekman, “The Snap-Together Business Jet,” Fortune, January 21, 2002, 104[A]–104[H].

50. This section draws from Joel A. C. Baum, “Organizational Ecology,” in Stewart R. Clegg, Cynthia Hardy, and Walter R. Nord, eds., Handbook of Organization Studies (Thousand Oaks, CA: Sage, 1996); Jitendra V. Singh, Organizational Evolution: New Directions (Newbury Park, CA: Sage, 1990); Howard Aldrich, Bill McKelvey, and Dave Ulrich, “Design Strategy from the Population Perspective,” Journal of Management 10 (1984), 67–86; Howard E. Aldrich, Organizations and Environments (Englewood Cliffs, NJ: Prentice Hall, 1979); Michael Hannan and John Freeman, “The Population Ecology of Organizations,” American Journal of Sociology 82 (1977), 929–964; Dave Ulrich, “The Population Perspective: Review, Critique, and Relevance,” Human Relations 40 (1987), 137–152; Jitendra V. Singh and Charles J. Lumsden, “Theory and Research in Organizational Ecology,” Annual Review of Sociology 16 (1990), 161–195; Howard E. Aldrich, “Understanding, Not Integration: Vital Signs from Three Perspectives on Organizations,” in Michael Reed and Michael D. Hughes, eds., Rethinking Organizations: New Directions in Organizational Theory and Analysis (London: Sage, 1992); Jitendra V. Singh, David J. Tucker, and Robert J. House, “Organizational Legitimacy and the Liability of Newness,” Administrative Science

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210 Part 3: Open System Design Elements

Quarterly 31 (1986), 171–193; and Douglas R. Wholey and Jack W. Brittain, “Organizational Ecology: Findings and Implications,” Academy of Management Review 11 (1986), 513–533.

51. Derek S. Pugh and David J. Hickson, Writers on Organizations (Thousand Oaks, CA: Sage, 1996); and Lex Donaldson, American Anti-Management Theories of Organization (New York: Cambridge University Press, 1995).

52. Jim Collins, “The Secret of Enduring Greatness,” Fortune, May 5, 2008, 72–76; Julie Schlosser and Ellen Florian, “In the Beginning; Fifty Years of Amazing Facts,” Fortune, April 5, 2004, 152–159; and “The Fortune 500; 500 Largest U. S. Corporations,” Fortune, May 23, 2011, F1–F26.

53. Hannan and Freeman, “The Population Ecology of Organizations.”

54. Quoted in Brad Stone, The Everything Store, p. 65. 55. Brad Stone, The Everything Store; Julie Bosman, “The

Bookstore’s Last Stand,” The New York Times, January 29, 2012, BU1; and Jeffrey A. Trachtenberg and Martin Peers, “Barnes & Noble Seeks Next Chapter,” The Wall Street Journal Online, January 6, 2012, http://online.wsj.com/news /articles/SB10001424052970203513604577142481239801336 (accessed January 6, 2012).

56. Damon Darlin, “Always Pushing Beyond the Envelope,” The New York Times, August 8, 2010, BU5.

57. Miguel Bustillo, “As Big Boxes Shrink, They Also Rethink,” The Wall Street Journal, March 3, 2011, B1.

58. David J. Tucker, Jitendra V. Singh, and Agnes G. Meinhard, “Organizational Form, Population Dynamics, and Institutional Change: The Founding Patterns of Voluntary Organizations,” Academy of Management Journal 33 (1990), 151–178; Glenn R. Carroll and Michael T. Hannan, “Density Delay in the Evolution of Organizational Populations: A Model and Five Empirical Tests,” Administrative Science Quarterly 34 (1989), 411–430; Jacques Delacroix and Glenn R. Carroll, “Organizational Foundings: An Ecological Study of the Newspaper Industries of Argentina and Ireland,” Administrative Science Quarterly 28 (1983), 274–291; Johannes M. Pennings, “Organizational Birth Frequencies: An Empirical Investigation,” Administrative Science Quarterly 27 (1982), 120–144; David Marple, “Technological Innovation and Organizational Survival: A Population Ecology Study of Nineteenth-Century American Railroads,” Sociological Quarterly 23 (1982), 107–116; and Thomas G. Rundall and John O. McClain, “Environmental Selection and Physician Supply,” American Journal of Sociology 87 (1982), 1090–1112.

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60. Jessica E. Vascellaro and Evan Ramstad, “The Two-Horse Smartphone Race,” The Wall Street Journal, April 24, 2012, B1.

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63. J. Meyer and B. Rowan, “Institutionalized Organizations: Formal Structure as Myth and Ceremony,” American Journal of Sociology 83 (1990), 340–363; and Royston Greenwood and Danny Miller, “Tackling Design Anew: Getting Back to the Heart of Organizational Theory,” Academy of Management Perspectives, November 2010, 78–88.

64. Mark C. Suchman, “Managing Legitimacy: Strategic and Institutional Approaches,” Academy of Management Review 20 (1995), 571–610.

65. Richard J. Martinez and Patricia M. Norman, “Whither Reputation? The Effects of Different Stakeholders,” Business Horizons 47, no. 5 (September–October 2004), 25–32.

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69. This section is based largely on DiMaggio and Powell, “The Iron Cage Revisited”; Pugh and Hickson, Writers on Organizations; and W. Richard Scott, Institutions and Organizations (Thousand Oaks, CA: Sage, 1995).

70. Janet Adamy, “Yum Uses McDonald’s as Guide in Bid to Heat Up Sales,” The Wall Street Journal, December 13, 2007, A21; and Nick Wingfield and Robert A. Guth, “IPod, TheyPod: Rivals Imitate Apple’s Success,” The Wall Street Journal, September 18, 2006, B1.

71. Kai-Yu Hsieh and Freek Vermeulen, “Me Too or Not Me? The Influence of the Structure of Competition on Mimetic Market Entry,” Academy of Management Annual Meeting Proceedings (2008), 1–6.

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74. Jeffrey Pfeffer and Robert I. Sutton, “The Trouble with Benchmarking,” Across the Board 43, no. 4 (July–August 2006), 7–9.

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Chapter 5: Interorganizational Relationships 211

75. Karen Donovan, “Pushed by Clients, Law Firms Step Up Diversity Efforts,” The New York Times, July 21, 2006, C6.

76. Miguel Bustillo, “Wal-Mart to Assign New ‘Green’ Ratings,” The Wall Street Journal, July 16, 2009, B1.

77. Based on Donald D. Bowen, Roy J. Lewicki, Francine S. Hall, and Douglas T. Hall, “The Ugli Orange Case,” Experiences in Management and Organizational Behavior, 4th ed. (Chicago, IL: Wiley, 1997), 134–136; “Amazon Rainforest,” BluePlanetBiomes.org, http://www.blueplanetbiomes.org /amazon.htm (accessed August 24, 2011); and “Rainforest

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78. Based in part on “Mammoth Motors’ New Paint Shop,” a role play originally prepared by Arnold Howitt, executive director of the A. Alfred Taubman Center for State and Local Government at the Kennedy School of Government, Harvard University, and subsequently edited by Gerald Cormick, a principal in the CSE Group and senior lecturer for the Graduate School of Public Affairs at the University of Washington.

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212

Entering the Global Arena Motivations for Global Expansion • Stages of International Development • Global Expansion Through International Alliances and Acquisitions

The Challenges of Global Design Increased Complexity and Differentiation • Increased Need for Coordination • More Difficult Transfer of Knowledge and Innovation

Designing Structure to Fit Global Strategy Strategies for Global Versus Local Opportunities • International Division • Global Product Division Structure • Global Geographic Division Structure • Global Matrix Structure

Additional Global Coordination Mechanisms Global Teams • Headquarters Planning • Expanded Coordination Roles • Benefits of Coordination

The Transnational Model of Organization

Design Essentials

Learning Objectives After reading this chapter you should be able to: 1. Discuss organizational motivations for entering

the global arena. 2. Explain the stages of international development. 3. Recognize the three major challenges global

design faces. 4. Understand globalization versus multidomestic

strategies. 5. Describe structural design options for

international operations. 6. Identify mechanisms for global coordination,

knowledge transfer, and resolving the tension between global uniformity and local responsiveness.

7. Understand the transnational model of organizing.

Designing Organizations for the International Environment6Chapter

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Chapter 6: Designing Organizations for the International Environment 213

British grocery retailer Tesco isn’t accustomed to failure, but after spending five years and a billion pounds (about $1.61 billion), Tesco managers began preparing to sell or close the company’s 199 Fresh & Easy markets and get out of the United States for good. “It’s likely . . . that our presence in America will come to an end,” Tesco CEO Philip Clarke said when he made the announcement. Fresh & Easy was a novel format for Americans—stores that were larger than convenience stores but smaller than supermarkets and that focused on selling fresh foods. As it turned out, Americans found the format neither fresh nor easy. Managers imported British favorites instead of adapting to American tastes, and each store carried the same selection of prepackaged meals and other products, no matter its location. There was no deli section where food could be made to order. Prepackaged sandwiches are commonplace to the British, but to American shoppers they seemed like something from a vending machine. The timing didn’t help either. Fresh & Easy opened in the United States just before the subprime mortgage crisis and subsequent recession devastated many of the areas in California, Arizona, and Nevada where it located its earliest stores. The chain never turned a profit.1

That’s the reality of international business. When an organization decides to do business in another country, managers face a whole new set of challenges and roadblocks. They sometimes find that transferring their domestic success internationally requires a totally different approach. Tesco, a highly successful grocery retailer in the United Kingdom, has also had problems in other countries, particularly Poland, the Czech Republic, Slovakia, and China, although it has been successful in some global markets. In general, food retailers that succeed in overseas markets do so by buying local companies that already have strong businesses with local managers in place, such as when Walmart bought British supermarket chain Asda in 1999. In the fall of 2013, Yucaipa Companies of Los Angeles agreed to buy 150 Fresh & Easy stores, mostly in California.2

Before reading this chapter, please check whether you agree or disagree with each of the following statements:

1 The only way an organization can reasonably expect to be successful in different countries is to customize its products and services to suit the local interests, preferences, and values in each country.

I AGREE I DISAGREE

2 It is an especially difficult challenge to work on a global team to coordinate one’s own activities and share new ideas and insights with colleagues in different divisions around the world.

I AGREE I DISAGREE

3 The most advanced multinational corporations have developed systems for maintaining tight headquarters control over subsidiaries in dozens of countries. I AGREE I DISAGREE

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214 Part 3: Open System Design Elements

Other companies have also struggled in the international arena. Deere & Com- pany, the world’s largest maker of farm equipment, is trying hard to penetrate Rus- sia’s farm equipment market, but the Russian government passed a law excluding farm machinery built outside the country from financing, so farmers had no way to buy from Deere. The company has now opened a plant near Moscow but still faces tremendous risks and uncertainties in Russia. Giant retailer Walmart entered South Korea with high hopes in 1996, but 10 years later it sold all its South Korean stores to a local retailer and withdrew from that country. Similarly, the company abandoned the German market after spending eight years trying to break into the competitive discount retailing environment in that country.3 It is not the only suc- cessful organization to have pulled out of one or another foreign market battered and bruised, its managers scratching their heads over what went wrong.

Succeeding on a global scale isn’t easy. Managers have to make tough decisions about strategic approach, how best to get involved in international markets, and how to design the organization to reap the benefits of international expansion. Despite the challenges, managers in most organizations think the potential rewards outweigh the risks. U.S.-based firms set up foreign operations to provide goods and services needed by consumers in other countries, as well as to obtain lower costs or technical know-how for producing products and services to sell domestically. In return, companies from Japan, Germany, China, the United Kingdom, and other countries compete with U.S. organizations on their own turf as well as abroad. Understanding and addressing the challenges of international business is more important today than ever before.

Purpose of This Chapter

This chapter explores how managers design an organization for the international environment. We begin by looking at some of the primary motivations for organiza- tions to expand internationally, the typical stages of international development, and the use of alliances and acquisitions as ways to expand internationally. Then, the chapter discusses some of the specific design challenges global organizations face, examines global strategic approaches, considers the application of various structural designs for global advantage, and looks at coordination mechanisms used in global organizations. Finally, the chapter takes a look at the transnational model, a type of global organization that achieves high levels of the varied capabilities needed to suc- ceed in a complex and volatile international environment.

Entering the Global Arena Only a few decades ago, many companies could afford to ignore the international environment. Not today. The world is rapidly developing into a unified global field, and every company and manager needs to think globally. Brazil, Russia, India, and China (often referred to as BRIC) as well as other emerging economies are grow- ing rapidly as providers of both products and services to the United States, Canada, Europe, and other developed nations. At the same time, these regions are becoming major markets for the products and services of North American firms.4 China, with the fastest-growing middle class in history, is the largest or second-largest market for a variety of products and services, including mobile phones, automobiles, con- sumer electronics, luxury goods, and Internet use.5

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Chapter 6: Designing Organizations for the International Environment 215

Alay Mulally, CEO of U.S.-based Ford Motor Company, spends about a third of his time on matters related to China. Mulally is planning to build five additional plants in that country and double the number of dealerships.6 China also has 1.22 billion mobile phone subscribers, and leading smartphone manufacturers Apple and South Korea’s Samsung have new competition from Chinese mobile phone maker Xiaomi, as well as China’s Lenovo and Acer, which recently entered the smartphone market.7 Over the next few decades, the BRIC countries will have tremendous spending power as around a billion people become part of a new middle class.8 For today’s companies, the whole world is a source of business threats and opportunities. The BookMark discusses some of the factors contributing to our increasingly interconnected world and how this interconnection affects organizations.

Motivations for Global Expansion

Economic, technological, and competitive forces have combined to push many com- panies from a domestic to a global focus. Extraordinary advances in communications, technology, and transportation have created a new, highly competitive landscape.9

The World Is Flat: A Brief History of the Twenty-First Century By Thomas L. Friedman

The global competitive playing field is being leveled. How fast is globalization happening? Three-time Pulitzer-Prize winning New York Times columnist Thomas L. Friedman started working on the second edition of his best-selling book, The World Is Flat, before the first edition was barely off the press. However, Friedman asserts that the forces caus- ing this accelerated phase of globalization actually began to unfold in the final years of the twentieth century.

WHAT MAKES THE WORLD GO FLAT? Friedman outlines 10 forces that flattened the world, which he calls flatteners. Many of these forces are directly or indi- rectly related to advanced technology, including the following:

• Work flow software. A dizzying array of software programs enable computers to easily communicate with one an- other. That’s what makes it possible for a company like animation studio Wild Brain to make films with a team of production employees spread all over the world or for Boeing airplane factories to automatically resupply global customers with parts. It means companies can create global virtual offices as well as outsource pieces of their operations to whoever can do the job best and most ef- ficiently, no matter in which country they are located.

• Supply chaining. Work flow software also enhances supply chaining, the horizontal collaboration among suppliers, retailers, and customers that became a

phenomenon in the 1990s. In turn, the more supply chains grow and proliferate, the flatter the world be- comes. Supply chaining forces the adoption of com- mon standards and technologies among companies so that every link can interact seamlessly.

• The steroids. Friedman refers to a variety of new technol- ogies as steroids “because they are amplifying and tur- bocharging all the other flatteners.” Perhaps the most significant element is the wireless revolution, which en- ables you to “take everything that has been digitized, made virtual and personal, and do it from anywhere.” As Alan Cohen, senior vice president at Airespace, says, “Your desk goes with you everywhere you are now. And the more people have the ability to push and pull in- formation from anywhere to anywhere faster, the more barriers to competition and communication disappear.”

HOW TO BENEFIT FROM A FLATTER WORLD A flatter, interconnected world means employees and orga- nizations can collaborate and compete more successfully than ever, whatever their size and wherever they are located. But the benefits of a flatter world are not automatic. Fried- man offers strategies for how companies can align them- selves with the new reality of globalization. He warns U.S. companies (and employees) that they should embrace the idea that there will no longer be such a thing as an Ameri- can firm or an American job. In a flat world, the best compa- nies are the best global collaborators.

The World Is Flat, by Thomas L. Friedman, is published by Farrar, Straus & Giroux.

BookMark 6.0 Have You Read THis Book?

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216 Part 3: Open System Design Elements

The importance of the global environment for today’s organizations is reflected in the shifting global economy. As one indication, Fortune magazine’s list of the Global 500, the world’s 500 largest companies by revenue, indicates that economic clout is being diffused across a broad global scale. Exhibit 6.1 lists the number of companies on the Global 500 for a variety of countries in 2006, 2008, and 2013. Note the general decline in North America and Western Europe and the increase in countries such as China, Brazil, Taiwan, and Russia. China, in particular, is coming on strong. China’s GDP surpassed Japan’s in the second half of 2010, making that country the second-largest economy in the world (after the United States).10 Consider that in 1993, China had only three companies on the Fortune Global 500 list and now has 89. Japan, on the other hand, has declined in importance, dropping from 149 companies in 1993 down to 64 by 2008 and 62 by 2013.11

As power continues to shift, organizations are viewing participation in global business as a necessity. Indeed, in some industries a company can be successful only by succeeding on a global scale. In general, three primary factors motivate companies to expand internationally: economies of scale, economies of scope, and

Number of Companies on the Global 500 List

2006 2008 2013

United States 170 153 132

Japan 70 64 62

China 20 29 89

France 38 39 31

Germany 35 37 29

Britain 38 34 26

Switzerland 12 14 14

South Korea 12 15 2

Netherlands 14 13 11

Canada 14 14 9

Italy 10 10 8

Spain 9 11 8

India 6 7 8

Taiwan 3 6 6

Australia 8 8 8

Brazil 4 5 8

Russia 5 5 7

Mexico 5 5 3

Sweden 6 6 3

Singapore 1 1 2

Source: Based on data from “Global 500,” Fortune magazine’s annual ranking of the world’s largest corporations for 2006, 2008, and 2013, http://money.cnn.com/magazines/fortune/global500/ (accessed December 7, 2011, and March 14, 2014).

exHiBiT 6.1 The Shifting Global Economy as Reflected in the Fortune Global 500

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Chapter 6: Designing Organizations for the International Environment 217

low-cost production factors.12 Recall from Chapter 2 that companies are always striving for greater efficiency and effectiveness, and expanding globally is one way to achieve these goals.

Economies of Scale. Building a global presence expands an organization’s scale of operations, enabling it to realize economies of scale. The trend toward large organizations was initially sparked by the Industrial Revolution, which created pressure in many industries for larger factories that could seize the benefits of economies of scale offered by new technologies and production methods. Through large-volume production, these industrial giants were able to achieve the lowest possible cost per unit of production. However, for many companies, domestic markets no longer provide the high level of sales needed to maintain enough volume to achieve scale economies. For farm equipment manufacturers such as Deere & Company, for example, growth comes primarily from overseas, where more land is coming under cultivation and more farmers are mechanizing. Most farm equipment in North America is relatively new, according to a recent report on the farm machinery market. “While there could be some growth left [in North America], we’re nearer to the peak than the trough,” said the report. Deere is looking to the BRIC countries to lift sales outside the United States so the company can achieve scale economies.13

The Hollywood movie industry has also recently expanded its international outlook as sales of movie tickets and DVDs have declined in the United States and increased in other countries. The studios are using more international stars and retooling scripts to appeal to an international audience. One film industry veteran said, “No studio head is going to make a big expensive movie . . . unless it has worldwide appeal. You can’t pay back that production cost on the domestic model alone.”14 International ticket sales now account for up to 80 percent of a movie’s total gross. Paramount Pictures has tried hard to make “Star Trek Into Darkness,” the latest in the franchise, successful overseas. Cast members and producers traveled around the globe to do advanced marketing. Paramount went out of its way to cast foreign actors, and the writers tried to craft a story that would keep loyal fans interested but not turn off people in other countries who knew nothing about the other movies.15 Domestic markets have become saturated for many U.S. companies, and the only potential for growth lies overseas. Starbucks has targeted Asia for rapid international growth, planning to open thousands of stores in China, India, and Vietnam.16 Asia has been a successful source of growth for Starbucks, but Vietnam, unlike elsewhere in Asia, has its own deep-rooted coffee culture and the company is having to adapt how it brews and serves coffee to succeed.17 Economies of scale also enable companies to obtain volume discounts from suppliers, lowering the organization’s cost of production.

Economies of Scope. A second factor is the enhanced potential for exploiting economies of scope. Scope refers to the number and variety of products and services a company offers as well as the number and variety of regions, countries, and markets it serves. Hollywood’s DreamWorks SKG sold a 50 percent stake to India’s Reliance Big Entertainment because the company has a presence in every entertainment platform. It can sell DreamWorks movies through its theaters, its satellite networks, its movie rental service, its radio stations, and its mobile phones.18

Briefcase As an organization manager, keep this guideline in mind: Consider building an international pres- ence to realize econo- mies of scale, exploit economies of scope, or obtain scarce or low- cost production factors such as labor and raw materials.

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218 Part 3: Open System Design Elements

Companies that have a presence in multiple countries gain marketing power and synergy compared to the same-size firm that has a presence in fewer countries. For example, an advertising agency with a presence in several global markets gains a competitive edge serving large companies that span the globe. Or consider the case of McDonald’s, which has to obtain nearly identical ketchup and sauce packets for its restaurants around the world. A supplier that has a presence in every coun- try McDonald’s serves has an advantage because it provides cost, consistency, and convenience benefits to McDonald’s, which does not have to deal with a number of local suppliers in each country. Economies of scope can also increase a company’s market power as compared to competitors, because the company develops broad knowledge of the cultural, social, economic, and other factors that affect its custom- ers in varied locations and can provide specialized products and services to meet those needs. Amway had to change everything about the company to survive and prosper in China, and the expanded scope has helped the company thrive in other areas as well.

In PractIce amway

Amway started in 1959 with a direct sales model of independent entrepreneurs selling straight to consumers. By the late 1980s, more than half of Amway’s revenues were coming from outside the United States, so when the company began selling in the People’s Republic of China in 1995, it already had experience in that part of the world. Within a few years, China was a $200 million business and growing fast. Then, China pulled the plug, outlawing direct selling because of unethical actions of some non-Amway sellers.

Amway could be put out of business. Or, argued Eva Cheng, who ran Amway China at the time, it could cooperate with the Chinese government to find a solution. Over the next several years, regulatory changes in China required that Amway ask hard questions and repeatedly revise its business model. In fact, the company changed its business model five times in order to do business in China. For one thing, the company established physi- cal stores, selling products to people who came in off the street, something it had never done before. Rather than importing products from the United States, it began manufacturing them in China. Managers changed their entire distributor compensation system in China. They also began doing brand advertising since they could no longer rely on the word-of- mouth marketing that drove direct sales. Amway took the long-term view, and today, China is the company’s largest market.

The changes Amway made in China were a huge leap in scope at the time, but it has since successfully used some of them in other markets. In addition, being forced to revise the business model made managers realize the importance of regularly questioning the business model and adapting to succeed in different global markets.19

Low-Cost Production Factors. The third major force motivating global expansion relates to factors of production. One of the earliest, and still one of the most power- ful, motivations for U.S. companies to invest abroad is the opportunity to obtain raw materials, labor, and other resources at the lowest possible cost. Organizations have long turned overseas to secure raw materials that were scarce or unavailable in their home country. In the early twentieth century, for example, tire companies went abroad to develop rubber plantations to supply tires for America’s growing automobile industry. Today, U.S. paper manufacturers such as Weyerhaeuser and

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Chapter 6: Designing Organizations for the International Environment 219

International Paper Co., forced by environmental concerns to look overseas for new timberlands, are managing millions of acres of tree farms in New Zealand and other areas.20

Many companies also turn to other countries as a source of cheap labor. Apple’s iPhones and iPads are made overseas by contract manufacturers such as Foxconn Technologies and Pegatron Corporation. Despite criticism of their labor practices, it is unlikely any of those jobs will come back to the United States. When he talked with President Barack Obama at a dinner in California in February 2011, Steve Jobs told Obama the scale, speed, and flexibility of the factories and the skills and diligence of the workers overseas were almost as important as the low costs.21

Textile manufacturing in the United States is now practically nonexistent as companies have lowered costs by shifting most production to Asia, Mexico, Latin America, and the Caribbean. Manufacturing of non-upholstered furniture has rapidly followed the same pattern, with companies closing plants in the United States and importing high-quality wooden furniture from China, where as many as 30 workers can be hired for the cost of one cabinetmaker in the United States.22 Mexico is taking center stage in the production of cars. One in 10 cars sold in the United States in 2011 was made in Mexico.23 But the trend isn’t limited to manufacturing. A growing number of service firms in India write software; perform consulting work; and handle technical support, accounting, and data processing for some of the biggest corporations in the United States. One index lists more than 900 business services companies in India that employ around 575,000 people.24

Stages of International Development

No company can become a global giant overnight. Managers have to consciously adopt a strategy for global development and growth. Organizations enter foreign markets in a variety of ways and follow diverse paths. However, the shift from domestic to global typically occurs through stages of development, as illustrated in Exhibit 6.2.25 In stage one, the domestic stage, the company is domestically oriented,

exHiBiT 6.2 Four Stages of International Evolution

I. Domestic

II. International

III. Multinational

IV. Global

Strategic orien- tation

Domestically oriented

Export-oriented, multidomestic

Multinational Global

Stage of devel- opment

Initial foreign involvement

Competitive positioning

Explosion Global

Structure Domestic struc- ture plus export department

Domestic structure plus international division

Worldwide geo- graphic product structure

Matrix, transna- tional structure

Market poten- tial

Moderate, mostly domes- tic

Large, multido- mestic

Very large, multinational

Whole world

Sources: Based on Nancy J. Adler, International Dimensions of Organizational Behavior, 4th ed. (Cincinnati, OH: South-Western, 2002), 8–9; and Theodore T. Herbert, “Strategy and Multinational Organization Structure: An Interorganizational Relationships Perspective,” Academy of Management Review 9 (1984), 259–271.

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220 Part 3: Open System Design Elements

but managers are aware of the global environment and may want to consider initial foreign involvement to expand production volume and realize economies of scale. Market potential is limited and is primarily in the home country. The structure of the company is domestic, typically functional or divisional, and initial foreign sales is handled through an export department. The details of freight forwarding, customs problems, and foreign exchange are handled by outsiders. Candy company Hershey is an example of a company in this stage. The company is domestically oriented, and managers are just beginning to consider expanding foreign markets, particularly China. To better cater to Chinese tastes, Hershey plans to open the Shanghai-based Asia Innovation Center.26

In stage two, the international stage, the company takes exports seriously and begins to think multidomestically. Multidomestic means competitive issues in each country are independent of other countries; the company deals with each country individually. The concern is with international competitive positioning compared with other firms in the industry. At this point, an international division has replaced the export department, and specialists are hired to handle sales, service, and warehousing abroad. Multiple countries are identified as a potential market. Purafil, with headquarters in Doraville, Georgia, manufactures air filters that remove pollution and cleanse the air in 60 different countries.27 The company first began exporting in the early 1990s and now earns 60 percent of its revenues from overseas. A service example is AlertDriving, a firm that provides online training courses to companies with vehicle fleets. The company must tailor its products and marketing to the expectations, driving habits, and geographical nuances in the 20 or so countries where it exports.28

In stage three, the multinational stage, the company has extensive experience in a number of international markets and has established marketing, manufacturing, or research and development (R&D) facilities in several foreign countries. The organization obtains a large percentage of revenues from sales outside the home country. Explosive growth occurs as international operations take off, and the company has business units scattered around the world along with suppliers, manufacturers, and distributors. Companies in the multinational stage include Siemens of Germany, Sony of Japan, and Coca-Cola of the United States. Aditya Birla Group is an example of a multinational based in India. The company began in 1850 as the Birla family’s trading company. Starting in the 1970s in Southeast Asia, the Birla Group has expanded around the world, operating in 33 countries and producing and selling such products as fiber, chemicals, cement, metals, yarns and textiles, apparel, fertilizer, and carbon black. In 2010, around 60 percent of the company’s revenues came from outside India.29

The fourth and ultimate stage is the global stage, which means the company transcends any single country. The business is not merely a collection of domestic industries; rather, subsidiaries are interlinked to the point where competitive position in one country significantly influences activities in other countries.30 Truly global companies no longer think of themselves as having a single home country and, indeed, have been called stateless corporations.31 This represents a new and dramatic evolution from the multinational company of the 1960s and 1970s. At this stage, ownership, control, and top management tend to be dispersed among several nationalities.32 Nestlé SA provides a good example. The company gets most of its sales from outside the “home” country of Switzerland, and its 280,000 employees are spread all over the world. CEO Paul Bulcke is Belgian, Chairman Peter Brabeck-Letmathe was born in Austria, and more than half of the company’s

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Chapter 6: Designing Organizations for the International Environment 221

managers are non-Swiss. Nestlé has hundreds of brands and has production facilities or other operations in almost every country in the world.33 How effective would you be managing in a global corporation and interacting with people from many different cultures? Complete the questionnaire in the “How Do You Fit the Design?” box to assess your level of cultural intelligence.

HOW DO YOu FIT THE DESIGN?

WHAT IS YOuR CuLTuRAL INTELLIGENCE? Instructions: To what extent does each of the following statements characterize your behavior? Please honestly answer each item below as Mostly True or Mostly False for you.

Mostly True

Mostly False

1. I think about how I’m going to relate to people from a different culture before I meet them. ___ ___

2. I understand the major religions and how they impact other cultures. ___ ___

3. I know about the geography, history, and cultural leaders of several countries. ___ ___

4. I regularly discuss world events with family and friends. ___ ___

5. I seek out opportunities to interact with people from different cultures. ___ ___

6. I can adapt to living in a different culture with relative ease. ___ ___

7. I am confident that I can befriend locals in a culture that is unfamiliar to me. ___ ___

8. I find work on a multicultural team very satisfying. ___ ___

9. I regularly associate with people from cultural backgrounds different from me. ___ ___

10. I alter my facial expressions and gestures as needed to facilitate a cross-culture interaction. ___ ___

11. I am quick to change the way I behave when a cross-culture encounter seems to require it. ___ ___

12. I take pleasure in talking with someone whose English is limited. ___ ___

Scoring and Interpretation: The scores for these questions pertain to some aspect of cultural intelligence, which is a manager’s capability to function well in situations characterized by cultural diversity. Give yourself 1 point for each Mostly True item as indicated below:

Cognitive CQ, items 1–4. Score = ____. Emotional CQ, items 5–8. Score = ____. Behavioral CQ, items 9–12. Score = ____.

Cognitive CQ pertains to the head, emotional CQ pertains to the heart, and behavioral CQ pertains to the body. If you have sufficient international experience and CQ to have scored 3–4 on all three parts, then consider yourself at a high level of CQ. If you scored 1–2 on all three parts, it is time to learn more about other national cultures. Hone your observational skills, take courses, look for international travel opportuni- ties, and learn to pick up on clues about how people from a different country respond to various situations. Compare your scores to other students. If you are not fascinated by diverse people and cultures, how might you develop greater empathy for people who are differ- ent from you?

Sources: Based on P. Christopher Earley and Elaine Mosakowski, “Cultural Intelligence,” Harvard Business Review, October 2004, 139–146; Soon Ang, Lynn Van Dyne, Christine Koh, K. Yee Ng, Klaus J. Templer, Cheryl Tay, and N. Anand Chandrasekar, “Cultural Intel- ligence: Its Measurement and Effects on Cultural Judgment and Decision Making, Cultural Adaptation, and Task Performance,” Man- agement and Organization Review 3 (2007), 335–371; and David C. Thomas and Kerr Inkson, Cultural Intelligence: People Skills for Global Business (San Francisco: Berrett-Koehler, 2004).

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222 Part 3: Open System Design Elements

Global companies operate in truly global fashion, and the entire world is their marketplace. Global companies such as Nestlé, Royal Dutch/Shell, Unilever, and Matsushita Electric may operate in more than a hundred countries. The structural problem of holding together this huge complex of subsidiaries scattered thousands of miles apart is immense. Organization structure for global companies can be ex- tremely complex and often evolves into an international matrix or transnational model, which will be discussed later in this chapter.

Global Expansion Through International Alliances and Acquisitions

One of the most popular ways companies get involved in international operations is through international alliances. Companies in rapidly changing industries such as media and entertainment, pharmaceuticals, biotechnology, and software might have hundreds of these relationships.34

Typical alliances include licensing, joint ventures, and acquisitions.35 Recall our discussion of these techniques from the previous chapter as types of resource- dependence relationships. They are also used for expanding internationally. For example, when entering new markets, particularly in developing areas of the world, retailers such as Saks Fifth Avenue and Barneys New York limit their risks by licensing their names to foreign partners. Saks has licensed stores in Riyadh and Dubai, Saudi Arabia, and in Mexico, for instance, and Barneys has a licensed store in Japan. Both firms, as well as other U.S.-based department stores, are currently making a strong international push in light of weak sales and stiff competition in the United States.36 As described in the previous chapter, a joint venture is a separate entity created with two or more active firms as sponsors. This is a popular approach to sharing development and production costs and penetrating new markets.37 Joint ventures may be with either customers or competitors. Competing firms Sprint, Deutsche Telecom, and Telecom France cooperate with each other and with several smaller firms in a joint venture that serves the telecommunication needs of global corporations in 65 countries.38 Navistar International Corporation, based in Warrenville, Illinois, formed a joint venture with rival Mahindra & Mahindra Ltd., a fast-growing equipment maker in India, to build trucks and buses for export.39 Walmart thought it got a foothold in India’s fast-growing but difficult retail market through a joint venture with Bharti Enterprises to establish Bharti Walmart Private Limited.40 Unfortunately, the problems engulfing India’s economy, charges of corruption, and government regulations that created obstacles caused the two firms to end their partnership in late 2013, with Walmart buying out its part of the venture.41

Companies often seek joint ventures to achieve production cost savings through economies of scale, to share complementary technological strengths, to distribute new products and services through another country’s distribution channels, or to take advantage of a partner’s knowledge of local markets. However, when they can persuade senior managers of foreign companies to stay on, many companies prefer acquisitions because they offer greater control than joint ventures. Walmart, for instance, established a joint venture with Seiyu Ltd., a national grocery chain in Japan, and then acquired the chain in full several years ago after it gained more experience in the Japanese market.42 Acquisitions have been China’s preferred way of expanding internationally.

Briefcase As an organization manager, keep this guideline in mind: Develop international strategic alliances, such as licensing and joint ventures, as fast and inexpensive ways to become involved in international sales and operations.

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Chapter 6: Designing Organizations for the International Environment 223

Home-grown Chinese brands have struggled internationally, but Chinese companies have learned that they can succeed by buying strong brands overseas and keeping them healthy. In many cases, the Chinese companies keep local managers and let them run the companies. When China’s property conglomerate Dalian Wanda Group Corporation bought AMC Entertainment Holdings Inc., for example, it sent a financial team to the United States, but it let U.S. management decide how to use their strategic budget.44

The Challenges of Global Design Managers taking their companies international face a tremendous challenge in how to capitalize on the incredible opportunities that global expansion presents. Exhibit 6.3 illustrates the three primary challenges global organizational design faces: greater complexity and differentiation, an increased need for integration, and more difficulty transferring knowledge and innovation. Organizations have to accept an extremely high level of environmental complexity in the international domain and address the many differences that occur among countries. For instance, each country has its own history, culture, laws, and regulatory system. People eat different foods, observe different religions, have different attitudes, and subscribe to different social customs.45 This environmental complexity and country variations require greater organizational differentiation, as described in Chapter 4.

At the same time, organizations must find ways to effectively achieve coordination and collaboration among far-flung units and facilitate the development and transfer of organizational knowledge and innovation for global learning.46 Although many small companies are involved in international business, most international companies grow very large, creating a huge coordination problem. Exhibit 6.4 provides some understanding of the size and impact of international firms by comparing the revenues of several large multinational companies with the gross domestic product (GDP) of selected countries.

In PractIce China’s International expansion

Perhaps China’s biggest international acquisition success story is Lenovo, which acquired the personal computer business, including ThinkPad laptops, from IBM in 2005. The com- pany struggled for a few years, but Lenovo kept several key managers of the IBM unit and split headquarters between Beijing and Morrisville, North Carolina, where the IBM unit had been located. These moves helped put the company on solid footing. Since Lenovo took over, ThinkPad sales have doubled and profit margins have remained above 5 percent.

Chinese companies have also acquired a number of other foreign firms, including Volvo, AMC movie theaters, Ferretti Italian luxury yachts, and Smithfield Foods, which has long supplied U.S. grocery stores with Smithfield hams, Eckrich sausages, Armour meatballs, and Farmland bacon. The $4.7 billion purchase of Smithfield by Shuanghui International Holdings Ltd. was the largest Chinese acquisition to date, but Chinese companies probably will not stop there. Although China didn’t start investing in developed markets in earnest until the 2000s, the rate at which Chinese investment is increasing and the diversity of industries and geographical areas are astounding. These acquisitions will likely reshape the global business landscape.43

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224 Part 3: Open System Design Elements

Increased Complexity and Differentiation

When organizations enter the international arena, they encounter a greater level of internal and external complexity than anything experienced on the domestic front. Companies have to create a structure to operate in numerous countries that differ in economic development, language, political systems and government regulations, cultural norms and values, and infrastructure such as transportation and commu- nication facilities. For example, we mentioned computer maker Lenovo earlier as

exHiBiT 6.3 Challenges of Global Design

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Complexity and Differentiation

Need for Coordination

Transfer of Knowledge and Innovation

Company Revenue* Country Annual GDP†

Walmart 421.89 billion Norway 414.46 billion

ExxonMobil 354.67 billion Thailand 318.85 billion

Chevron 196.34 billion Czech Republic 192.15 billion

Fannie Mae 153.83 billion Peru 152.83 billion

General Electric 151.63 billion New Zealand 140.43 billion

Berkshire Hathaway 136.19 billion Hungary 128.96 billion

General Motors 135.59 billion Bangladesh 104.92 billion

Bank of America 134.19 billion Vietnam 103.57 billion

exHiBiT 6.4 Comparison of Leading Multinationals and Selected Countries, 2010 (in U.S. dollars)

*This size comparison is assuming revenues were valued at the equivalent of GDP. †Gross domestic product.

Source: Based on Vincent Trivett, “25 US Mega Corporations: Where They Rank If They Were Countries” (with data from Fortune/CNNMoney and IMF), June 27, 2011, BusinessInsider.com, http://www.businessinsider.com/25- corporations-bigger-tan-countries-2011-6?op=1 (accessed April 30, 2014).

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Chapter 6: Designing Organizations for the International Environment 225

a Chinese company, but Lenovo is incorporated in Hong Kong, it has nine opera- tional hubs, and its top managers and corporate functions are spread around the world. The CEO is in Singapore; the chairman in Raleigh, North Carolina; and the chief financial officer in Hong Kong. Worldwide marketing is coordinated in India.47

All the complexity in the international environment is mirrored in a greater internal organizational complexity. Recall from Chapter 4 that as environments become more complex and uncertain, organizations grow more highly differentiated, with many specialized positions and departments to cope with specific sectors in the environment. Top management might need to set up specialized departments to deal with the diverse government, legal, and accounting regulations in various countries, for example. In India, Internet companies such as Google, Yahoo, and Facebook are expected to help enforce certain standards and take down content considered incendiary, but the rules can be difficult to interpret. India is a democracy and in principle supports freedom of speech on the Internet as well as in print. Yet with the country’s volatile mix of religions and ethnic politics, the Indian government reserves the right to impose “reasonable restrictions” on free speech to maintain public order. Most companies want to follow local laws and sentiments, but they also want to exercise discretion regarding what they believe should be allowable, so they often use teams of lawyers and other experts to monitor complaints and decide how to respond.48

In addition to departments to deal with diverse laws and regulations, compa- nies operating internationally need more boundary-spanning departments to sense and respond to the external environment. Some companies disperse operations such as engineering, design, manufacturing, marketing, and sales around the world. In particular, many organizations have set up global product development systems to achieve greater access to international expertise and design products that are better suited to global markets. A Deloitte Research study found that 48 percent of North American and Western European manufacturers surveyed had set up engineering operations in other countries.49 International organizations also might implement a variety of strategies, a broader array of activities, and a much larger number of products and services on an international level.

Increased Need for Coordination

As organizations become more differentiated, with multiple products, divisions, departments, and positions scattered across numerous countries, managers face a tremendous coordination challenge. Coordination refers to the quality of collabo- ration across organizational units. The question is how to achieve the integration and collaboration that is necessary for a global organization to reap the benefits of economies of scale, economies of scope, and labor and production cost efficiencies that international expansion offers. Recall from Chapter 4 that even in a domestic firm, high differentiation among departments requires that more time and resources be devoted to achieving coordination because employees’ attitudes, goals, and work orientations differ widely. Imagine what it must be like for an international organi- zation, whose operating units are divided not only by goals and work attitudes but by geographic distance, time differences, cultural values, and perhaps even language as well. Companies must find ways to share information, ideas, new products, and

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226 Part 3: Open System Design Elements

technologies across the organization. All organizations working globally face the challenge of getting all the pieces working together in the right way at the right time and in the right place.

More Difficult Transfer of Knowledge and Innovation

The third piece of the international challenge is for organizations to learn from their international experiences by sharing knowledge and innovations across the enterprise. The diversity of the international environment offers extraordinary opportunities for learning, development of diverse capabilities, and startling innovations in products and services. Essilor International SA, the world’s largest manufacturer of ophthalmic corrective lenses, for example, engineers its lenses in Germany, makes blanks from high-transparency polymers in the United States, and adds microthin coatings in Japan.50

Some experts believe a great percentage of radical innovations will come from companies in emerging markets such as China and India in the coming years.51 The old approach to innovation was for innovations in products and services to come primarily from developed countries and gravitate to less developed areas of the world, but a new approach referred to as trickle-up innovation or reverse innovation has companies paying attention more than ever to the need for mechanisms that encourage sharing across the international enterprise. Consider products for the healthcare profession. GE Healthcare had a solid presence in China, but its high-end ultrasound machines and other products didn’t meet the needs of healthcare practitioners working in poorly funded, low-tech hospitals or clinics in rural villages. Price, portability, and ease of use were the important criteria. GE Healthcare formed a semiautonomous “local growth team” in China that, drawing on local talent and combining product development, sourcing, manufacturing, and marketing in one business unit, created a portable ultrasound machine that sold for less than 15 percent of the cost of the company’s high- end ultrasound machines. GE now sells the product around the world, and it grew to a $278 million global product line within six years.52 GE’s CEO Jeffrey Immelt says, “If we don’t come up with innovations in poor countries and take them global, new competitors from the developing world—like Mindray, Suzlon, and Goldwind—will.”53 Exhibit 6.5 lists some additional examples of trickle-up innovation.

Organizational units in each location acquire the skills and knowledge to meet environmental challenges that arise in that particular locale. As the trend toward trickle-up innovation shows, much of that knowledge, which may be related to product improvements, operational efficiencies, technological advancements, or myriad other competencies, is relevant across multiple coun- tries, so organizations need systems that promote the transfer of knowledge and innovation across the global enterprise. A classic example comes from Procter & Gamble (P&G). Liquid Tide was one of P&G’s most successful U.S. product launches in the 1980s, but the product came about from the sharing of innova- tions developed in diverse parts of the firm. Liquid Tide incorporated a technol- ogy for helping to suspend dirt in wash water from P&G headquarters in the United States, the formula for its cleaning agents from P&G technicians in Japan, and special ingredients for fighting mineral salts present in hard water from com- pany scientists in Brussels.54

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Chapter 6: Designing Organizations for the International Environment 227

Getting employees to transfer ideas and knowledge across national boundaries can be exceedingly challenging. When Luxembourg-based steelmaker Arcelor Mittal wanted its Burns Harbor, Indiana, mill to begin using hypermodern equipment and techniques similar to a mill in Gent, Belgium, to boost productivity and profitabil- ity, employees weren’t overjoyed. They had long been accustomed to using paper and pencil to calculate the right mix of iron ore, coking coal, and limestone for every batch of steel; they resisted attending classes to learn to follow a comput- er’s instructions. In a process called “twinning,” two mills of similar size, age, and product mix are benchmarked against each other, with the weaker company told to copy the practices of the stronger one. So ArcelorMittal flew more than 100 U.S. engineers and managers to Gent, Belgium, and told them to “do as the Belgians do.” Today, the Burns Harbor mill has record output, with productivity approach- ing the level of the Belgian mill. Workers say twinning has helped avoid catastrophe and that their jobs are different, but better.55 Many organizations tap only a frac- tion of the potential that is available from the cross- border transfer of knowledge and innovation. People scattered at different locations around the world sometimes have trouble building trusting relationships. Other reasons include:56

• Language barriers, cultural dissimilarities, and geographic distances can prevent managers from spotting the knowledge and opportunities that exist across dis- parate country units.

• Sometimes managers don’t appreciate the value of organizational integration and want to protect the interests of their own division rather than cooperate with other divisions.

Company Innovation and Application

Groupe Danone Built tiny plants in Bangladesh that produce one-hundredth of the yogurt a typical Danone factory produces and then discovered that they can operate almost as efficiently as the firm’s large factories, spurring Danone to adapt the concept to other markets

Nestlé Took the Maggi brand dried noodles created as a low-cost meal for rural Pakistan and India and repositioned it as a budget-friendly health food in Australia and New Zealand

General Electric Created an inexpensive portable electrocardiogram machine for sale in India, where medical practitioners face power fluctuations, lack of funding and space for big machines, high levels of dust, and difficulty replacing parts in expensive equipment, and now sells it in the United States as well as other countries around the world

Hewlett-Packard Has a team in India looking for ways to migrate web-interface applications created for mobile phones in Asia and Africa to developed markets in the United States and Europe

John Deere John Deere India developed a high-quality low-cost tractor for farmers in India that is now increasingly in demand in the United States among farmers reeling from the recession and that will play a big role in Deere’s expansion in Russia

Sources: These examples are from Michael Fitzgerald, “As the World Turns,” Fast Company, March 2009, 33–34; Reena Jana, “Inspirations from Emerging Economies,” BusinessWeek, March 23 & 30, 2009, 38–41; Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, “How GE Is Disrupting Itself,” Harvard Business Review, October 2009, 3–11; and Navi Radjou, “Polycentric Innovation: A New Mandate for Multinationals,” The Wall Street Journal Online, November 9, 2009, http://online.wsj.com/article/SB125774328035737917.html (accessed November 13, 2009).

exHiBiT 6.5 Examples of Trickle-Up Innovation

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228 Part 3: Open System Design Elements

• Divisions sometimes view knowledge and innovation as power and want to hold onto it as a way to gain an influential position within the global firm.

• The “not-invented-here” syndrome makes some managers reluctant to tap into the know-how and expertise of other units.

• Much of an organization’s knowledge is in the minds of employees and cannot easily be written down and shared with other units.

Organizations have to encourage both the development and the sharing of knowledge, implement systems for tapping into knowledge wherever it exists, and share innovations to meet global challenges. Managers strive to find the right strat- egy and structure for their particular situations.

Designing Structure to Fit Global Strategy As we discussed in Chapter 3, an organization’s structure must fit its situation by providing sufficient information processing for coordination and control while focusing employees on specific functions, products, or geographic regions. Organi- zation design for international firms follows a similar logic, with special interest in global versus local strategic opportunities.

Strategies for Global Versus Local Opportunities

When organizations venture into the international domain, managers attempt to formulate a coherent global strategy that will provide synergy among worldwide operations for the purpose of achieving common organizational goals. One dilemma they face is choosing whether to emphasize global standardization versus local responsiveness. Managers must decide whether they want each global affiliate to act autonomously or whether activities should be standardized across countries. These decisions are reflected in the choice between a globalization versus a multidomestic global strategy.

The globalization strategy means that product design, manufacturing, and marketing strategy are standardized throughout the world, which is less costly than creating different products for different markets.57 For example, Black & Decker became much more competitive internationally when it standardized its line of power hand tools. Some products, such as Coca-Cola, are naturals for globalization because only advertising and marketing need to be tailored for different regions. In general, services are less suitable for globalization because different customs and habits often require a different approach to providing service. Meliá Hotels International, the largest hotel chain in Spain and one of the top 20 hotel companies worldwide, for example, partners with local companies in joint ventures and other partnerships to acquire the know-how to operate in 35 different countries, including China, Bulgaria, the United States, Indonesia, Greece, Croatia, Brazil, Egypt, and the United Kingdom.58 A lack of local knowledge was part of Walmart’s trouble in the South Korean market. The retailer continued to use Western-style displays and marketing strategies, whereas successful South Korean retailers build bright, eye-catching displays and hire clerks to promote their goods using megaphones and hand-clapping. Walmart similarly flubbed in Indonesia, where it closed its stores after only a year. Customers didn’t like

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Chapter 6: Designing Organizations for the International Environment 229

the brightly lit, highly organized stores, and because no haggling was permitted, they perceived the goods as being overpriced.59

Other companies have also begun shifting away from a strict globalization strategy. Economic and social changes, including a backlash against huge global corporations, have prompted consumers to be less interested in global brands and more in favor of products that have a local feel.60 However, a globalization strategy can save a company money because it helps reap economy-of-scale efficiencies by standardizing product design and manufacturing, using common suppliers, introducing products around the world faster, coordinating prices, and eliminating overlapping facilities.61 Gillette Company, which makes grooming products such as the Mach3 shaving system for men and the Venus razor for women, has large production facilities that use common suppliers and processes to manufacture products whose technical specifications are standardized around the world.62

1 The only way an organization can reasonably expect to be successful in different countries is to customize its products and services to suit the local interests, preferences, and values in each country.

ANSWER: Disagree. It is the case that people around the world often want products and services that are tailored to their local needs and interests, and many organizations are quite successful by responding to local market demands. However, other international organizations attain competitive advantages by using the same product design and marketing strategies in many countries throughout the world.

assess YouR answeR

A multidomestic strategy means that competition in each country is handled independently of competition in other countries. Thus, a multidomestic strategy would encourage product design, assembly, and marketing tailored to the specific needs of each country. Some companies have found that their products do not thrive in a single global market. For instance, people in different countries have very different expectations for personal-care products such as deodorant or toothpaste. Many people in parts of Mexico use laundry detergent for washing dishes. Even American fast food chains, once considered ultimate examples of standardization for a world market, have felt the need to be more responsive to local and national differences. The menus at McDonald’s restaurants vary widely around the world, for example, although procurement and distributions systems are standardized and centralized.63 When KFC (Yum Brands) entered Asia in 1973, it tried to use a globalization strategy, but the 11 restaurants it opened closed within two years. Managers tried again with a multidomestic strategy and achieved remarkable success, particularly in China, where the chain gained a 40 percent market share, compared to 16 percent for McDonald’s.64

Different global organization designs are better suited to the need for either global standardization or local responsiveness. Research on more than 100 inter- national firms based in Spain provided support for the connection between inter- national structure and strategic focus.65 The model in Exhibit 6.6 illustrates how organization design and international strategy fit the needs of the environment.66

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230 Part 3: Open System Design Elements

Companies can be characterized by whether their product and service lines have potential for globalization, which means advantages through worldwide standardization. Companies that sell similar products or services across many countries have a globalization strategy. On the other hand, some companies have products and services appropriate for a multidomestic strategy, which means local-country advantages through differentiation and customization to meet local needs.

As indicated in Exhibit 6.6, when forces for both global standardization and local responsiveness in many countries are low, simply using an international division with the domestic structure is an appropriate way to handle international business. For some industries, however, technological, social, or economic forces may create a situation in which selling standardized products worldwide provides a basis for competitive advantage because it enables the company to keep costs lower than if it had to provide products tailored to each market. In these cases, a global product structure is appropriate. This structure provides product managers with authority to handle their product lines on a global basis and enables the company to take advantage of a unified global marketplace. In other cases, companies can gain competitive advantages through local responsiveness—by responding to unique needs in the various countries in which they do business. For these companies, a worldwide geographic structure is appropriate. Each country or region will have subsidiaries that modify products and services to fit that locale. A good illustration is the advertising firm of Ogilvy & Mather, which divides its operations into four primary geographic regions because advertising approaches need to be modified to fit the tastes, preferences, cultural values, and government regulations in different

Sources: Based on Christopher A. Bartlett and Sumantra Ghoshal, Text, Cases, and Readings in Cross-Border Man- agement, 3rd ed. (New York: Irwin McGraw-Hill, 2000), 395; Roderick E. White and Thomas A. Poynter, “Organizing for Worldwide Advantage,” Business Quarterly, Summer 1989, 84–89; Gunnar Hedlund, “The Hypermodern MNC—A Heterarchy?” Human Resource Management 25, no. 1 (Spring 1986), 9–36; and J. M. Stopford and L. T. Wells, Jr., Managing the Multinational Enterprise (New York: Basic Books, 1972).

Low

Low

High

High

Forces for Global

Uniformity

Forces for Local Fit and

Responsiveness

Global Product

Structure

International Division

Global Geographic

Structure

Global Matrix

Structure

Globalization Strategy:

Export Strategy: Multidomestic Strategy:

Both Globalization and Multidomestic Strategy:

exHiBiT 6.6 Model to Fit Organization Structure to International Advantages

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Chapter 6: Designing Organizations for the International Environment 231

parts of the world.67 Children are frequently used to advertise products in the United States, but this approach in France is against the law. The competitive claims of rival products regularly seen on U.S. television would violate government regulations in Germany.68

In many instances, companies need to respond to both global and local opportunities simultaneously, in which case the global matrix structure can be used. Part of the product line may need to be standardized globally and other parts tailored to the needs of local countries. In reality, there has been an escalating tension for most companies between the need for global uniformity and the need for local fit and responsiveness. Here’s what Panasonic has done to address the tension.

In PractIce panasonic

Panasonic established its first manufacturing joint venture in China in 1987 and soon had more than 40 China-based manufacturing operations. By the early 2000s, China was Pana- sonic’s manufacturing hub for home appliances, but the goal was to achieve efficiency and low costs in making products for export. Most product development was done in Japan, and little effort was made to understand the Chinese market for appliances.

Then, Panasonic managers noticed that the Chinese company Haier was quickly outpac- ing it, growing 20 to 30 percent annually while Panasonic’s growth in China stayed flat. They realized they needed to adjust their strategy to keep from falling behind not just in China but in all their markets. Over time, Panasonic learned to treat the goal of meeting local consumers’ needs as equally important as the goal of achieving competitive advantage through uniformity with global integrated operations. The company created the Shanghai- based China Lifestyle Research Center, which was Panasonic’s first real effort to develop a deep understanding of consumer lifestyles in any market outside of Japan. From the begin- ning the director of the center embraced the tension between global uniformity and local adaptation. One adaptation for the Chinese market was slimmer refrigerators to fit in the smaller 55-centimeter-wide spaces typical of kitchens there. Sales zoomed.

Over time, as knowledge flowed from China to the rest of the company and from the various business units to China, Panasonic began initiatives to better understand consum- ers in other diverse markets all over the world. Today, the company continues its “tension- embracing philosophy” of being both efficient on a worldwide scale and local in its focus on consumer needs.69

Thus, even companies that don’t use a matrix structure as shown in Exhibit 6.6 often use various mechanisms to address the tension between the need for global uniformity and the need for local responsiveness. Now let’s discuss each of the struc- tures in Exhibit 6.6 in more detail.

International Division

As companies begin to explore international opportunities, they typically start with an export department that grows into an international division. The international division has a status equal to the other major departments or divisions within the company and is illustrated in Exhibit 6.7. Whereas the domestic divisions are typically organized along functional or product lines, the international division is organized according to geographic interests, as illustrated in Exhibit 6.7. The international division has its own hierarchy to handle business (licensing,

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232 Part 3: Open System Design Elements

joint ventures) in various countries, selling the products and services created by the domestic divisions, opening subsidiary plants, and in general moving the organization into more sophisticated international operations.

Although functional structures are often used domestically, they are less frequently used to manage a worldwide business.70 Lines of functional hierarchy running around the world would extend too long, so some form of product or geographic structure is used to subdivide the organization into smaller units. Firms typically start with an international department and, depending on their strategy, later use product or geographic division structures or a matrix. One study found that 48 percent of organizations identified as global leaders use divisional structures, while 28 percent reported using matrix structures.71

Global Product Division Structure

In a global product structure, the product divisions take responsibility for global operations in their specific product area. This is one of the most commonly used structures through which managers attempt to achieve global goals because it provides a fairly straightforward way to effectively manage a variety of businesses

exHiBiT 6.7 Domestic Hybrid Structure with International Division

CEO

Human Resources

Electrical Products Division

Scienti c Products Division

Medical Products Division

International Division

Europe (Sales)

Brazil (Subsidiary)

Mideast (Sales)

Staff (Legal, Licensing)

Corporate Finance

Research & Development

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Chapter 6: Designing Organizations for the International Environment 233

and products around the world. Managers in each product division can focus on organizing for international operations as they see fit and directing employees’ energy toward their own division’s unique set of global problems or opportunities.72 In addition, the structure provides top managers at headquarters with a broad perspective on competition, enabling the entire corporation to respond more rapidly to a changing global environment.73 Service companies can also use a divisional structure. For example, Italian bank UniCredit, with headquarters in Milan and more than 9,600 branches in 22 countries, has three product divisions: Family and SME (household and small and mid-sized business banking), Corporate and Investment Banking, and Private Banking and Asset Management. The company also has one geographic-based division to focus on operations and growth in Central and Eastern European countries.74

With a global product structure, each division’s manager is responsible for planning, organizing, and controlling all functions for the production and distri- bution of its products or services for any market around the world. As we saw in Exhibit 6.6, the global product structure works best when the company has oppor- tunities for worldwide production and sale of standard products for all markets, thus providing economies of scale and standardization of production, marketing, and advertising.

Eaton Corporation has used a form of worldwide product structure, as illustrated in Exhibit 6.8. In this structure, the automotive components group, industrial group, and so on are responsible for the manufacture and sale of products worldwide. The vice president of the international division is responsible for coordinators in each region, including a coordinator for Japan, Australia, South America, and northern Europe. The coordinators find ways to share facilities and improve production and delivery across all product lines sold in their regions. These coordinators fulfill the same function as integrators described in Chapter 3.

exHiBiT 6.8 Partial Global Product Structure Used by Eaton Corporation

Source: Based on New Directions in Multinational Corporate Organization (New York: Business International Corp., 1981).

Chairman

President International

Regional Coordinators

Global Truck

Components Group

Global Materials Handling

Group

Global Instruments

Product Group

Global Automotive Components

Group

Global Industrial

Group

Finance Administration

&Engineering Law

Corporate Relations

&

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234 Part 3: Open System Design Elements

The product structure is great for standardizing production and sales around the globe, but it also has problems. Often the product divisions do not work well together, competing instead of cooperating in some countries; and some countries may be ignored by product managers. The solution adopted by Eaton Corporation of using country coordinators who have a clearly defined role is a superb way to overcome these problems. Haier uses a radical type of product structure that breaks the company into 2,000 semiautonomous teams of 10 to 30 employees, each with its own P&L, and each focused on coordinating a specific product or project across several countries.75

Global Geographic Division Structure

A regionally based organization is well suited to companies that want to emphasize adaptation to regional or local market needs through a multidomestic strategy, as illustrated earlier in Exhibit 6.6. The global geographic structure divides the world into geographic regions, with each geographic division reporting to the CEO. Each division has full control of functional activities within its geographic area. For example, Nestlé, with headquarters in Switzerland, puts great emphasis on the autonomy of regional managers who know the local culture. The largest branded food company in the world, Nestlé rejects the idea of a single global market and has used a partial geographic structure to focus on the local needs and competition in each country. Local managers have the authority to tinker with a product’s flavoring, packaging, portion size, or other elements as they see fit. Many of the company’s 8,000 brands are registered in only one country.76

Companies that use this type of structure have typically been those with mature product lines and stable technologies. They can find low-cost manufacturing within countries as well as meet different needs across countries for marketing and sales. However, several business and organizational trends have led to a broadening of the kinds of companies that use the global geographic structure.77 The growth of service organizations has outpaced manufacturing for several years, and services by their nature must occur on a local level. Starbucks Coffee Company uses a three-region organization structure: China and Asia Pacific, which consists of the Japan, Korea, Hong Kong, Thailand, Malaysia, Singapore, Indonesia, Philippines, Australia, and New Zealand markets; the Americas, which includes the United States, Canada, Mexico, and Latin America; and EMEA, which encompasses, Europe, the United Kingdom, Russia, the Middle East, and Africa.78

In addition, to meet new competitive threats, many manufacturing firms are emphasizing the ability to customize their products to meet specific needs, which requires a greater emphasis on local and regional responsiveness. All organizations are compelled by current environmental and competitive challenges to develop closer relationships with customers, which may lead companies to shift from product-based to geographic-based structures. India’s Bupharm, a young and growing pharmaceuticals company, created geographic divisions for its sales operation, such as Asia Pacific, Latin America, and Europe, to help the company better serve customers in the 40 countries where it does business.79

The problems encountered by senior management using a global geographic structure result from the autonomy of each regional division. For example, it is difficult to do planning on a global scale—such as new-product R&D—because

Briefcase As an organization manager, keep these guidelines in mind: Choose a global prod- uct structure when the organization can gain competitive advantages through a globalization strategy (global unifor- mity). Choose a global geographic structure when the company has advantages with a multidomestic strategy (local fit and respon- siveness). Use an inter- national division when the company is primar- ily domestic and has only a few international operations.

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Chapter 6: Designing Organizations for the International Environment 235

The success of the international business development group prompted Colgate’s top management to add two additional coordinating positions—a vice president of corporate development to focus on acquisitions and a worldwide sales and marketing group that coordinates sales and marketing initiatives across all geographic locations. With these worldwide positions added to the structure, Colgate maintains its focus on each region and achieves global coordination for overall planning, faster product introductions, and enhanced sales and marketing efficiency.80

Global Matrix Structure

We’ve discussed how Eaton used a global product division structure and found ways to coordinate across worldwide divisions. Colgate-Palmolive used a global geographic division structure and found ways to coordinate across geographic re- gions. Each of these companies emphasized a single dimension. Recall from Chap- ter 3 that a matrix structure provides a way to achieve vertical and horizontal

In PractIce Colgate- palmolive Company

For several years, Colgate-Palmolive Company, which manufactures and markets personal- care, household, and specialty products, used a global geographic structure of the form illustrated in Exhibit 6.9. Colgate has a long, rich history of international involvement and has relied on regional divisions in North America, Europe, Latin America, the Far East, and the South Pacific to stay on the competitive edge. Well over half of the company’s total sales are generated outside of the United States.

The regional approach supports Colgate’s cultural values, which emphasize individual autonomy, an entrepreneurial spirit, and the ability to act locally. Each regional president reports directly to the chief operating officer, and each division has its own staff functions such as human resources (HR), finance, manufacturing, and marketing. Colgate handled the problem of coordination across geographic divisions by creating an international business development group that is responsible for long-term company planning and worldwide product coordination and communication. It used several product team leaders, many of whom had been former country managers with extensive experience and knowledge. The product leaders are essentially coordinators and advisors to the geographic divisions; they have no power to direct, but they have the ability and the organizational support needed to exert substantial influence. The addition of this business development group quickly reaped positive results in terms of more rapid introduction of new products across all countries and better, lower-cost marketing.

each division acts to meet only the needs of its region. New domestic technologies and products can be difficult to transfer to international markets because each division thinks it will develop what it needs. Likewise, it is difficult to rapidly introduce products developed offshore into domestic markets, and there is often duplication of line and staff managers across regions. Because regional divisions act to meet specific needs in their own areas, tracking and maintaining control of costs can be a real problem. The following example illustrates how executives at Colgate-Palmolive overcame some of the problems associated with the geographic structure.

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236 Part 3: Open System Design Elements

coordination simultaneously along two dimensions. A global matrix structure is similar to the matrix described in Chapter 3, except that for multinational corpora- tions the geographic distances for communication are greater and coordination is more complex.

The matrix works best when pressure for decision making balances the interests of both product standardization and geographic localization and when coordina- tion to share resources is important. The matrix can support a mixed globaliza- tion and multidomestic strategy, as illustrated in Exhibit 6.6; that is, it can enable a global firm to achieve aspects of both global uniformity and local diversification and responsiveness.81 For many years, ABB (Asea Brown Boveri), a global leader in power and automation technologies, with headquarters in Zurich, used a global matrix structure that worked extremely well to coordinate a 150,000-employee company operating in approximately 100 countries.

exHiBiT 6.9 Global Geographic Structure of Colgate-Palmolive Company

Chairman, President, & CE0

Latin America

Chief Operating Of�cer

South-Paci�c Region

Far East

International Business

Development

Worldwide Sales &

Marketing

Corporate Development

Corporate Staff

Europe North

America

Human Resources

Finance

Manufacturing

Marketing

Human Resources

Finance

Manufacturing

Marketing

Human Resources

Finance

Manufacturing

Marketing

Human Resources

Finance

Manufacturing

Marketing

Human Resources

Finance

Manufacturing

Marketing

Source: Based on Robert J. Kramer, Organizing for Global Competitiveness: The Geographic Design (New York: The Conference Board, 1993), 30.

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Chapter 6: Designing Organizations for the International Environment 237

In PractIce aBB Group

ABB has given new meaning to the notion of “being local worldwide.” ABB has used a com- plex global matrix structure similar to Exhibit 6.10 to achieve worldwide economies of scale combined with local flexibility and responsiveness.

At the top are the chief executive officer and an executive committee of 10 top manag- ers, who hold frequent meetings around the world. Along one side of the matrix are product division managers for Power Products, Power Systems, Discrete Automation and Motion, Low Voltage Products, and Process Automation. Each division manager is responsible for handling business on a global scale, allocating export markets, establishing cost and qual- ity standards, and creating mixed-nationality teams to solve problems. Each division is sub- divided into smaller units over which the division manager also has responsibility.

Along the other side of the matrix is a regional structure; ABB has eight regional manag- ers for Northern Europe; Central Europe; Mediterranean; North America; South America; India, Middle East, and Africa; North Asia; and South Asia. Under the regional managers are country managers who run local companies that cross business areas and are responsible for local balance sheets, income statements, and career ladders.

The matrix structure converges at the level of the local companies. The presidents of local companies report to two bosses—the product division leader, who coordinates on a global scale, and the regional president, who runs the company of which the local organization is a subsidiary.

ABB’s philosophy is to decentralize things to the lowest levels. Global managers are gen- erous, patient, and multilingual. They must work with teams made up of different nationali- ties and be culturally sensitive. They craft strategy and evaluate performance for people and subsidiaries around the world. Regional managers, by contrast, are line managers responsi- ble for several country subsidiaries. They must cooperate with product division managers to achieve worldwide efficiencies and the introduction of new products. Finally, the presidents of local companies have both a global boss—the product division manager—and a regional boss, and they learn to coordinate the needs of both.82

exHiBiT 6.10 Global Matrix Structure

Local Divisions or Subsidiary Companies

International Executive Committee

Northern Europe

Low Voltage Products

South Asia South America Mediterranean Business Areas

Regional Managers

Discrete Automation

Power Systems

© C

en ga

ge L

ea rn

in g®

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238 Part 3: Open System Design Elements

ABB is a large, successful company that achieved the benefits of both product and geographic organizations through this matrix structure. However, over the past several years, as ABB has faced increasingly complex competitive issues, leaders have transformed the company toward a complex structure called the transnational model, which will be discussed later in this chapter.

In the real world, as with the domestic hybrid structure, many international firms such as ABB, Colgate, UniCredit, Nestlé, or Eaton Corporation apply a global hybrid or mixed structure, in which two or more different structures or elements of different structures are used. Hybrid structures are typical in highly volatile environments. UniCredit, for example, combines elements of functional, geographic, and product divisions to respond to dynamic market conditions in the multiple countries where it operates.83

There is no ideal structure, and organizations that operate on a global scale frequently have to make adjustments to their structures to overcome the challenges of doing business in a global environment. In the following sections, we will look at some additional coordination mechanisms used to address the challenges of operat- ing on a global scale.

Additional Global Coordination Mechanisms There are many instances of well-known companies that have trouble transferring successful ideas, products, and services from their home country to the international domain. As we discussed earlier in the chapter, greater complexity and differentia- tion, an increased need for coordination, and more difficult transfer of knowledge and innovation present challenges for global organization design. In addition, man- agers have to address the tension between the desire to achieve worldwide efficiency and uniformity and the desire to achieve local fit and responsiveness in each market they serve. Managers meet these global challenges in a variety of ways. Some of the most common are the use of global teams, stronger headquarters planning and con- trol, and specific coordination roles.

Global Teams

One of the most valuable mechanisms for global coordination and the transfer of knowledge and innovation has been the use of global teams. In addition to these uses of teams, today’s organizations are using teams specifically to address the tension between global uniformity and local responsiveness.84 Global teams, also called transnational teams, are cross-border work groups made up of multiskilled, multinational members whose activities span multiple countries.85 Typically, teams are of two types: intercultural teams, whose members come from different countries and meet face to face, and virtual global teams, whose members remain in separate locations around the world and conduct their work electronically.86 Heineken formed the European Production Task Force, a 13-member team made up of multinational members, to meet regularly and come up with ideas for optimizing the company’s production facilities across Europe.87 German steelmaker ThyssenKrupp uses global virtual teams, applying sophisticated computer networks and software to link and coordinate team members working across three continents to run a virtually integrated steel operation.88

However, building effective global teams is not easy. Cultural and language differences can create misunderstandings, and resentments and mistrust can quickly

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Chapter 6: Designing Organizations for the International Environment 239

derail the team’s efforts. Consider what happened in one virtual team made up of members from India, Israel, Canada, the United States, Singapore, Spain, Brussels, Great Britain, and Australia:

Early on . . . team members were reluctant to seek advice from teammates who were still strangers, fearing that a request for help might be interpreted as a sign of incompetence. Moreover, when teammates did ask for help, assis- tance was not always forthcoming. One team member confessed to carefully calculating how much information she was willing to share. Going the extra mile on behalf of a virtual teammate, in her view, came at a high price of time and energy, with no guarantee of reciprocation.89

As this quote shows, it is easy for an “us against them” mentality to develop, which is just the opposite of what organizations want from global teams.90 No wonder when the executive council of CIO magazine asked global chief information officers to rank their greatest challenges, managing virtual global teams ranked as the most pressing issue.91 L’Oréal, the French global cosmetics giant, is one of the most effective companies at building teams that improve coordination, transfer knowledge and innovation, help resolve the tension between uniformity and local responsiveness, and thwart the “us against them” mentality.

In PractIce L’Oréal

The global–local tension is often greatest when product development requires subtle, complex knowledge that can’t be easily codified and written down. This so-called tacit knowledge resides in people’s minds and is usually revealed only in action and interaction, which means it is subject to misinterpretation when it crosses borders. The cosmetics firm L’Oréal exemplifies this tension as well as any other company, because personal-care needs are unique to each culture. Yet the company has managed to be both very global and very local. It has offices in 130 countries, and in 2012 more than half of the company’s sales came from new markets outside the United States and Europe, mostly in developing countries.

The upper management team has always been strongly rooted in L’Oréal’s home culture, so how does the firm bridge its products to other cultures? Product development is the firm’s competitive advantage, so L’Oréal recruits and builds product development teams that report to managers who have mixed cultural backgrounds. A team of three or four people will usually have at least two who are multicultural, such as a Lebanese-Spanish- American manager working with a French-Irish-Cambodian or an Indian-American-French proj- ect manager. Product development teams share their ideas with each other and with top management as work progresses over the period of about a year. “Their background is a kind of master class in holding more than one idea at a time,” said one director. “They think as if they were French, American, or Chinese, and all of these together at once.”

How does that flexible perspective lead to knowledge transfer and innovation? A French- Irish-Cambodian manager working on skin care noticed that many tinted face creams in Asia had a lifting effect. At the time, most face creams in Europe were either tinted, and considered makeup, or lifting, and considered skin care. The manager drew on his knowledge of Asian beauty trends and suggested a tinted cream for the French market that was a huge success.

As the firm grows around the world, some of these multicultural managers are beginning to find their way into senior management in the company, a sign that the approach is working. L’Oréal is beginning to place multicultural managers at the center of interactions among brands, regions, and functions and is increasingly encouraging the flow of knowledge from subsidiaries back to the home country as well as the old way from the home country to far-flung subsidiaries.92

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240 Part 3: Open System Design Elements

Headquarters Planning

A second approach to achieving stronger global coordination is for headquarters to take an active role in planning, scheduling, and control to keep the widely distributed pieces of the global organization working together and moving in the same direction. In one survey, 70 percent of global companies reported that the most important function of corporate headquarters was to “provide enterprise leadership.”93 For example, Panasonic’s Global Consumer Marketing organization, described in the earlier In Practice, is directed from the top of the organization. Top leaders make decisions about resource allocation to further the goals of embracing the global– local tension. If top leaders don’t make decisions that both further the cultivation of a global mindset and promote greater understanding of local markets in various countries, instead acting as mere observers, the goals aren’t likely to be met.94

Without strong leadership, highly autonomous divisions can begin to act like independent companies rather than coordinated parts of a global whole. To counteract this, top management may delegate responsibility and decision-making authority in some areas, such as adapting products or services to meet local needs, while maintaining strong control through centralized systems in other areas to provide the coordination and integration needed.95 Plans, schedules, and formal rules and procedures can help ensure greater communication among divisions and with headquarters as well as foster cooperation and synergy among far-flung units to achieve the organization’s goals in a cost-efficient way. Top managers can provide clear strategic direction, guide far-flung operations, and resolve competing demands from various units.

Expanded Coordination Roles

Organizations may also implement structural solutions to achieve stronger coordination and collaboration.96 Creating specific organizational roles or positions for coordination is a way to integrate all the pieces of the enterprise to achieve a strong competitive position. In successful international firms, the role of top functional managers, for example, is expanded to include responsibility for coordinating across countries, identifying and linking the organization’s expertise and resources worldwide. In an international organization, the manufacturing manager has to be aware of and coordinate with manufacturing operations of the company in various parts of the world so that the company achieves manufacturing efficiency and shares technology and ideas across units. A new manufacturing

2 It is an especially difficult challenge to work on a global team to coordinate one’s own activities and share new ideas and insights with colleagues in different divisions around the world.

ANSWER: Agree. The problems of different languages, locations, cultural values, and business practices make membership on an international team especially difficult. Global teams can be effective only if members have the patience and skills to surmount the barriers and openly share information and ideas. Global teams perform better when they are made up of people who are culturally astute and genuinely want to coordinate and communicate with their counterparts in other countries.

assess YouR answeR

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Chapter 6: Designing Organizations for the International Environment 241

technology developed to improve efficiency in a company’s Brazilian operations may be valuable for European and North American plants as well. Manufacturing managers are responsible for being aware of new developments wherever they occur and for using their knowledge to improve the organization. Similarly, marketing managers, HR managers, and other functional managers at an international company are involved not only in activities for their particular location but in coordinating with their sister units in other countries as well.

Whereas functional managers coordinate across countries, country managers coordinate across functions. A country manager for an international firm has to co- ordinate all the various functional activities located within the country to meet the problems, opportunities, needs, and trends in the local market, enabling the organi- zation to achieve multinational flexibility and rapid response. The country manager in Venezuela for a global consumer products firm such as Colgate-Palmolive would coordinate everything that goes on in that country, from manufacturing to HR to marketing, to ensure that activities meet the language, cultural, government, and legal requirements of Venezuela. The country manager in Ireland or Canada would do the same for those countries. Country managers also help with the transfer of ideas, trends, products, and technologies that arise in one country and might have significance on a broader scale. Some organizations also use business integrators to provide coordination on a regional basis that might include several countries. These managers reach out to various parts of the organization to resolve problems and coordinate activities across groups, divisions, or countries.

Another coordination role is that of formal network coordinator to coordinate information and activities related to key customer accounts. These coordinators would enable a manufacturing organization, for example, to provide knowledge and integrated solutions across multiple businesses, divisions, and countries for a large retail customer such as Tesco, Walmart, or Carrefour. Top managers in success- ful global firms also encourage and support informal networks and relationships to keep information flowing in all directions. Much of an organization’s information exchange occurs not through formal systems or structures but through informal channels and relationships. By supporting these informal networks, giving people across boundaries opportunities to get together and develop relationships, and then ways to keep in close touch, executives enhance organizational coordination.97

Benefits of Coordination

International companies have a hard time staying competitive without strong inter-unit coordination and collaboration. Those firms that stimulate and support collaboration are typically better able to leverage dispersed resources and capabilities to reap operational and economic benefits.98 Benefits that result from inter-unit collaboration include the following:

• Cost savings. Collaboration can produce real, measurable results in the way of cost savings from the sharing of best practices across global divisions. For example, at BP, a business unit head in the United States improved inventory turns and cut the working capital needed to run U.S. service stations by learning the best practices from BP operations in the United Kingdom and the Netherlands.

• Better decision making. By sharing information and advice across divisions, managers can make better business decisions that support their own unit as well as the organization as a whole.

Briefcase As an organization manager, keep these guidelines in mind: Use mechanisms such as global teams, head- quarters planning, and specific coordination roles to provide needed coordination and inte- gration among far-flung international units. emphasize information and knowledge sharing to help the organization learn and improve on a global scale.

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242 Part 3: Open System Design Elements

• Greater revenues. By sharing expertise and products among various divisions, organizations can reap increased revenues. BP again provides an example. More than 75 people from various units around the world flew to China to assist the team developing an acetic acid plant there. As a result, BP finished the project and began realizing revenues sooner than project planners had expected.

• Increased innovation. The sharing of ideas and technological innovations across units stimulates creativity and the development of new products and services. McDonald’s is taking an approach called “freedom within a framework” that allows regional and national managers to develop practices and products suited to the local area. The company then makes sure international managers have plenty of both formal and informal ways to communicate and share ideas. The Big Tasty, a whopping 5.5-oz. beef patty slathered in barbeque sauce and topped with three slices of cheese, was created in a test kitchen in Germany and launched in Sweden, but as word spread, the sandwich was adopted by restaurants in places like Brazil, Italy, and Portugal, where it became a huge hit.99

The Transnational Model of Organization Because traditional approaches have been inadequate to meet the demands of a rapidly changing, complex global environment, many large international companies are moving toward a transnational model of organization, which is highly differentiated to address the increased complexity of the global environment yet offers very high levels of coordination, learning, and transfer of organizational knowledge and innovations. The transnational model represents the most advanced kind of international organization. It reflects the ultimate in both organizational complexity, with many diverse units, and organizational coordination, with mechanisms for integrating the varied parts. The transnational model is useful for large, multinational companies with subsidiaries in many countries that try to exploit both global and local advantages as well as technological advancements, rapid innovation, and global learning and knowledge sharing. Rather than building capabilities primarily in one area, such as global efficiency, local responsiveness, or global learning, the transnational model seeks to achieve all three simultaneously. Dealing with multiple, interrelated, complex issues requires a complex form of organization and structure.

The transnational model represents the most current thinking about the kind of structure needed by highly complex global organizations such as Philips NV, illustrated in Exhibit 6.11. Incorporated in the Netherlands, Philips has hundreds of operating units all over the world and is typical of global companies such as Unilever, Matsushita, or Procter & Gamble.100 Large professional service firms such as KPMG and PricewaterhouseCoopers (PwC) also use the transnational structure. PwC, for example, has more than 160,000 people in 757 offices in 151 countries. The company provides a highly diversified range of knowledge-based services that have to be customized to specific clients in specific locales, so local offices need discretion and autonomy. At the same time, PwC needs consistent operating standards and control systems worldwide.101

The units of a transnational organization network, as illustrated in Exhibit 6.11, are far-flung. Achieving coordination, a sense of participation and involvement by subsidiaries, and a sharing of information, knowledge, new technology, and customers is a tremendous challenge. For example, a global corporation like Philips,

Briefcase As an organization manager, keep these guidelines in mind: appreciate cultural value differences and strive to use coordina- tion mechanisms that are in tune with local values. When broader coordination mecha- nisms are needed, focus on education and corpo- rate culture as ways to gain understanding and acceptance.

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Chapter 6: Designing Organizations for the International Environment 243

Source: Republished with permission of Academy of Management (NY), from Sumantra Ghoshal and Christopher Bartlett, “The Multinational Corporation as an Interorganizational Network,” The Academy of Management Review, 15 (1990), 603–625; permission conveyed through Copyright Clearance Center, Inc.

CANADA

BRAZIL

EL SALVADOR ECUADOR

CHILE

BOLIVIA

VENEZUELA

COLOMBIA

PARAGUAY

PORTUGAL

SWEDEN

SWITZERLAND

FINLAND

SPAIN

NORWAY

LUXEMBOURG FRANCE GREECE

EGYPT KENYA SOUTH AFRICA

DEM. REP. CONGO

TUNISIA

NIGERIA TANZANIA MOROCCO

PAKISTAN

BANGLADESH

INDIA

THAILAND

SINGAPORE

TAIWAN

KOREA

HONG KONG IRAQ

SYRIA

LEBANON

AUSTRALIA

NEW ZEALAND

AUSTRIA

HOLLAND

U.K.

U.S.A.

JAPAN

PHILIPPINES

ZIMBABWEIRELAND ZAMBIA

URUGUAY

ARGENTINA

MEXICO

PERU

TURKEY

BELGIUM DENMARK

ITALY

INDONESIA

MALAYSIA

IRAN

ISRAEL

FRG

exHiBiT 6.11 International Organizational Units and Interlinkages Within Philips NV

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244 Part 3: Open System Design Elements

Unilever, or PwC is so large that size alone is a huge problem in coordinating global operations. In addition, some subsidiaries become so large that they no longer fit a narrow strategic role defined by headquarters. While being part of a larger organization, individual units need some autonomy for themselves and the ability to have an impact on other parts of the organization.

3The most advanced multinational corporations have developed systems for maintaining tight headquarters control over subsidiaries in dozens of countries. ANSWER: Disagree. To succeed as part of a huge global firm, individual units need flexibility and autonomy. Most of the alignment in a transnational orga- nization is achieved through common culture and values, shared vision and goals, and interdependent relationships among subsidiaries. Managers have to stretch out of their familiar comfort zone to succeed internationally, which sometimes means giving up control in the traditional sense.

assess YouR answeR

Briefcase As an organization manager, keep this guideline in mind: Strive toward a trans- national model of organization when the company has to re- spond to multiple global forces simultaneously and needs to promote worldwide integration, learning, and knowl- edge sharing.

The transnational model addresses these challenges by creating an integrated network of individual operations that are linked together to achieve the multi- dimensional goals of the overall organization.102 The management philosophy is based on interdependence rather than either full divisional independence or total dependence of these units on headquarters for decision making and control. The transnational model is more than just an organization chart. It is a managerial state of mind, a set of values, a shared desire to make a worldwide learning system work, and an idealized structure for effectively managing such a system. The following characteristics distinguish the transnational organization from other global organi- zation forms such as the matrix, described earlier.

1. Assets and resources are dispersed worldwide into highly specialized operations that are linked together through interdependent relationships. Resources and capa- bilities are widely distributed to help the organization sense and respond to diverse stimuli such as market needs, technological developments, or consumer trends that emerge in different parts of the world. To manage this increased complexity and differentiation, managers forge interdependent relationships among the vari- ous product, functional, or geographic units. Mechanisms such as cross-subsidiary teams, for example, compel units to work together for the good of their own unit as well as the overall organization. Rather than being completely self-sufficient, each group has to cooperate to achieve its own goals. At PwC, for example, the client management system connects teams of people drawn from various units, ser- vice lines, and areas of expertise around the world. Such interdependencies encour- age the collaborative sharing of information and resources, cross-unit problem solving, and collective implementation demanded by today’s competitive interna- tional environment. Materials, people, products, ideas, resources, and information are continually flowing among the dispersed parts of the integrated network. In addition, managers actively shape, manage, and reinforce informal information networks that cross functions, products, divisions, and countries.

2. Structures are flexible and ever-changing. The transnational operates on a princi- ple of flexible centralization. It may centralize some functions in one country, some in another, yet decentralize still other functions among its many geographically

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Chapter 6: Designing Organizations for the International Environment 245

dispersed operations. An R&D center may be centralized in Holland and a pur- chasing center may be located in Sweden, while financial accounting responsibili- ties are decentralized to operations in many countries. A unit in Hong Kong may be responsible for coordinating activities across Asia, while activities for all other countries are coordinated by a large division headquarters in London. The trans- national model requires that managers be flexible in determining structural needs based on the benefits to be gained. Some functions, products, and geographic re- gions by their nature may need more central control and coordination than others. In addition, coordination and control mechanisms will change over time to meet new needs or competitive threats. Some companies have begun setting up mul- tiple headquarters in different countries as the organization gets too large and too complex to manage from one place and to get closer to important markets. Irdeto Holdings BV, for example, has headquarters in both Hoofddorp, the Netherlands, and Beijing, and the CEO moved to China with his family. IBM created a growth- markets headquarters in Shanghai that is responsible for Asia (non-Japan), Latin America, Russia, Eastern Europe, the Middle East, and Africa. Japan’s Nissan lo- cated global headquarters for its luxury Infiniti brand in Hong Kong.103

3. Subsidiary managers initiate strategy and innovations that become strategy for the corporation as a whole. In traditional structures, managers have a strategic role only for their division. In a transnational structure, various centers and subsidiaries can shape the company from the bottom up by developing creative responses and initiating programs in response to local needs, then dispersing those innovations worldwide. Transnational companies recognize each of the worldwide units as a source of capabilities and knowledge that can be used to benefit the entire organization. In addition, environmental demands and opportunities vary from country to country, and exposing the whole organization to this broader range of environmental stimuli triggers greater learning and innovation.

4. Unification and coordination are achieved primarily through corporate culture, shared vision and values, and management style, rather than through formal structures and systems. A study by Hay Group found that one of the defining characteristics of companies that succeed on a global scale is that they successfully coordinate worldwide units and subsidiaries around a common strategic vision and values rather than relying on formal coordination systems alone.104 Achieving unity and coordination in an organization in which employees come from a variety of different national backgrounds, are separated by time and geographic distance, and have different cultural norms is more easily accomplished through shared understanding than through formal systems. Top leaders build a context of shared vision, values, and perspectives among managers who in turn cascade these elements through all parts of the organization. Selection and training of managers emphasizes flexibility and open-mindedness. In addition, people are often rotated through different jobs, divisions, and countries to gain broad experience and become socialized into the corporate culture. Achieving coordination in a transnational organization is a much more complex process than simple centralization or decentralization of decision making. It requires shaping and adapting beliefs, culture, and values so that everyone participates in information sharing and learning.

Taken together, these characteristics facilitate strong coordination, organizational learning, and knowledge sharing on a broad global scale. The transnational model is truly a complex and messy way to conceptualize organization structure, but it is becoming increasingly relevant for large, global firms that treat the whole world

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246 Part 3: Open System Design Elements

as their playing field and do not have a single country base. The autonomy of organizational parts gives strength to smaller units and allows the firm to be flexible in responding to rapid change and competitive opportunities on a local level, while the emphasis on interdependency enables global efficiencies and organizational learning. Each part of the transnational company is aware of and closely integrated with the organization as a whole so that local actions complement and enhance other company parts.

Design Essentials

■ This chapter examined how managers design organizations for a complex in- ternational environment. Almost every company today is affected by significant global forces, and many are developing overseas operations to take advantage of global markets. Three primary motivations for global expansion are to real- ize economies of scale, exploit economies of scope, and achieve scarce or low- cost factors of production such as labor, raw materials, or land. One popular way to become involved in international operations is through strategic alli- ances with international firms. Alliances include licensing, joint ventures, and acquisitions.

■ Organizations typically evolve through four stages, beginning with a domestic orientation, shifting to an international orientation, then changing to a multina- tional orientation, and finally moving to a global orientation that sees the whole world as a potential market. Organizations typically use an export department, then use an international department, and eventually develop into a worldwide geographic or product structure.

■ Succeeding on a global scale is not easy. Three primary challenges facing global organizational design are addressing environmental complexity through greater organizational complexity and differentiation, achieving integration and coordi- nation among the highly differentiated units, and implementing mechanisms for the transfer of knowledge and innovations.

■ Organizations try to match their design to fit their strategic goals. Geographic structures are most effective for organizations that can benefit from a multido- mestic strategy, meaning that products and services will do best if tailored to local needs and cultures. A product structure supports a globalization strategy, which means that products and services can be standardized and sold world- wide. Huge global firms might use a matrix structure to respond to both local and global forces simultaneously. Many firms use hybrid structures by combin- ing elements of two or more different structures to meet the dynamic conditions of the global environment.

■ Additional coordination mechanisms to address the problem of integration and knowledge transfer are through global teams, stronger headquarters planning and control, and specific coordination roles. Teams can also be a good way to help resolve the tension between the desire for global uniformity and the desire for local responsiveness.

■ Companies operating globally need broad coordination methods, and some are moving toward the transnational model of organization. The transnational model is based on a philosophy of interdependence. It is highly differentiated

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Chapter 6: Designing Organizations for the International Environment 247

yet offers very high levels of coordination, learning, and transfer of knowledge across far-flung divisions. The transnational model represents the ultimate global design in terms of both organizational complexity and organizational integration. Each part of the transnational organization is aware of and closely integrated with the organization as a whole so that local actions complement and enhance other company parts.

KEY CONCEPTS

domestic stage economies of scale economies of scope factors of production global companies global geographic structure global matrix structure

global product structure global stage global teams globalization strategy international division international stage joint venture

multidomestic multidomestic strategy multinational stage standardization transnational model

DISCuSSION QuESTIONS

1. Name some companies that you think could succeed to- day with a globalization strategy and explain why you selected those companies. How does the globalization strategy differ from a multidomestic strategy?

2. Why do you think the tension between a desire for global uniformity and local responsiveness is greater today than in the past?

3. Many American companies enter China through joint ventures with local firms, but China is succeeding in the United States primarily with a strategy of buying companies outright. What are some factors that might account for this difference?

4. Do you think it makes sense for a transnational orga- nization to have more than one headquarters? What might be some advantages associated with two head- quarters, each responsible for different things? Can you think of any drawbacks?

5. What are some of the primary reasons a company de- cides to expand internationally? Identify a company in the news that has recently built a new overseas facility. Which of the three motivations for global expansion described in the chapter do you think best explains the company’s decision? Discuss.

6. When would an organization consider using a matrix structure? How does the global matrix differ from the domestic matrix structure described in Chapter 3?

7. Name some of the elements that contribute to greater com- plexity for international organizations. How do organiza- tions address this complexity? Do you think these elements apply to a company such as Spotify that wants to expand its music streaming service internationally? Discuss.

8. Traditional values in Mexico support high power dis- tance and a low tolerance for uncertainty. What would you predict about a company that opens a division in Mexico and tries to implement global teams character- ized by shared power and authority and the lack of for- mal guidelines, rules, and structure?

9. Do you believe it is possible for a global company to si- multaneously achieve the goals of global efficiency and integration, national responsiveness and flexibility, and the worldwide transfer of knowledge and innovation? Discuss.

10. Compare the description of the transnational model in this chapter to the elements of organic versus mecha- nistic organization designs described in Chapter 1. Do you think the transnational model seems workable for a huge global firm? Discuss.

CHAPTER 6 WORKSHOP Made in the U.S.A.?

In March 2011, ABC World News ran a special series called “Made in America.” In the opening program, correspondents David Muir and Sharyn Alfonsi removed all foreign made products from a family’s Dallas, Texas, home and found that

there was virtually nothing left when they finished. How many items in your home were made in America? For this exercise, pick three different consumer products from your home (e.g., a shirt, a toy or game, a phone, a shoe, a sheet

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248 Part 3: Open System Design Elements

or pillowcase, a coffeemaker). Try to find the following in- formation for each product, as shown in the table. To find this information, use websites, articles on the company from

various business newspapers and magazines, and the labels on the items or user manuals. You could also try calling the company and talking with someone there.

Product

What country do materials come

from?

Where is it manufactured or

assembled?

Which country does the marketing and

advertising?

In what different countries is the product sold?

1.

2.

3.

What can you conclude about international products and organizations based on your analysis?

CASE FOR ANALYSIS | TopDog Software105

At the age of 39, after working for nearly 15 years at a leading software company on the West Coast, Ari Weiner and his soon-to-be-wife, Mary Carpenter, had cashed in their stock options, withdrawn all their savings, maxed out their credit cards, and started their own business, naming it TopDog Software after their beloved Alaskan malamute. The two had developed a new software package for root cause analysis (RCA) applications that they were certain was far superior to anything on the market at that time. TopDog’s software was particularly effective for use in design engineering organizations because it provided a highly efficient way to eliminate problems in new digital manufacturing processes, including product development, software engineering, hardware design, manufacturing, and installation. The software, which could be used as a standalone product or easily integrated with other software packages, dramatically expedited problem identification and corrective actions in the work of design engineering firms. The use of TopDog’s RCA software would find an average of 30 to 50 root cause problems and provide 20 to 30 corrective actions that lowered defect rates by 50 percent, saving tens and sometimes hundreds of thousands of dollars with each application.

The timing proved to be right on target. RCA was just getting hot, and TopDog was poised to take advantage of the trend as a niche player in a growing market. Weiner and Carpenter brought in two former colleagues as partners and were soon able to catch the attention of a venture capitalist firm to gain additional funding. Within a couple of years, TopDog had 28 employees and sales had reached nearly $4 million.

Now, though, the partners are facing the company’s first major problem. TopDog’s head of sales, Samantha Jenkins, has learned of a new company based in Norway that is beta testing a new RCA package that promises to outpace TopDog’s—and the Norway-based company,

FastData, has been talking up its global aspirations in the press. “If we stay focused on the United States and they start out as a global player, they’ll kill us within months!” Sam moaned. “We’ve got to come up with an international strategy to deal with this kind of competition.”

In a series of group meetings, off-site retreats, and one- on-one conversations, Weiner and Carpenter have gathered opinions and ideas from their partners, employees, advisors, and friends. Now they have to make a decision—should TopDog go global? And if so, what approach would be most effective? There’s a growing market for RCA software overseas, and new companies such as FastData will soon be cutting into TopDog’s U.S. market share as well. Samantha Jenkins isn’t alone in her belief that TopDog has no choice but to enter new international markets or get eaten alive. Others, however, are concerned that TopDog isn’t ready for that step. The company’s resources are already stretched to the limit, and some advisors have warned that rapid global expansion could spell disaster. TopDog isn’t even well established in the United States, they argue, and expanding internationally could strain the company’s capabilities and resources. Others have pointed out that none of the managers has any international experience, and the company would have to hire someone with significant global exposure to even think about entering new markets.

Although Mary tends to agree that TopDog for the time being should stay focused on building its business in the United States, Ari has come to believe that global expansion of some type is a necessity. But if TopDog does eventually decide on global expansion, he wonders how on earth they should proceed in a huge, complex world environment. Sam, the sales manager, is arguing that the company should set up its own small foreign offices from scratch and staff them primarily with local people. Building a U.K. office and an Asian office, she asserts, would give TopDog an ideal base for

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Chapter 6: Designing Organizations for the International Environment 249

penetrating markets around the world. However, it would be quite expensive, not to mention the complexities of dealing with language and cultural differences, legal and government regulations, and other matters. Another option would be to establish alliances or joint ventures with small European and Asian companies that could benefit from adding RCA applications to their suite of products. The companies could share expenses in setting up foreign production facilities and a global sales and distribution network. This would be a much less costly operation and would give TopDog the benefit of the expertise of the foreign partners. However, it might also require lengthy negotiations and would certainly mean giving up some control to the partner companies.

One of TopDog’s partners is urging still a third, even lower-cost approach, that of licensing TopDog’s software to foreign distributors as a route to international expansion. By giving foreign software companies rights to produce, market, and distribute its RCA software, TopDog could build brand identity and customer awareness while keeping a tight rein on expenses. Ari likes the low-cost approach, but he wonders if licensing would give TopDog enough participation and control to successfully develop its international presence. As another day winds down, Weiner and Carpenter are no closer to a decision about global expansion than they were when the sun came up.

CASE FOR ANALYSIS | Rhodes Industries

David Javier was reviewing the consulting firm’s proposed changes in organization structure for Rhodes Industries (RI). As Javier read the report, he wondered whether the changes recommended by the consultants would do more harm than good for RI. Javier had been president of RI for 18 months, and he was keenly aware of the organizational and coordination problems that needed to be corrected in order for RI to improve profits and growth in its interna- tional businesses.

Company Background Rhodes Industries was started in the 1950s in Southern Ontario, Canada, by Robert Rhodes, an engineer who was an entrepreneur at heart. He started the business by first making pipe and then glass for industrial uses. As soon as the initial business was established, however, he quickly branched into new areas such as industrial sealants, coat- ings, and cleaners, and even into manufacturing mufflers and parts for the trucking industry. Much of this expan- sion occurred by acquiring small firms in Canada and the United States during the 1960s. RI had a conglomerate- type structure with rather diverse subsidiaries scattered around North America, all reporting directly to the On- tario headquarters. Each subsidiary was a complete local business and was allowed to operate independently so long as it contributed profits to RI.

During the 1970s and 1980s, the president at the time, Clifford Michaels, brought a strong international focus to RI. His strategy was to acquire small companies worldwide with the belief that they could be formed into a cohesive unit that would bring RI synergies and profits through low cost of manufacturing and by serving businesses in inter- national markets. Some of RI’s businesses were acquired

simply because they were available at a good price, and RI found itself in new lines of business such as consumer products (paper and envelopes) and electrical equipment (switchboards, light bulbs, and security systems), in addition to its previous lines of business. Most of these products had local brand names or were manufactured for major interna- tional companies such as General Electric or Corning Glass.

During the 1990s, a new president of RI, Sean Rhodes, the grandson of the founder, took over the business and ad- opted the strategy of focusing RI on three lines of business— Industrial Products, Consumer Products, and Electronics. He led the acquisition of more international businesses that fit these three categories and divested a few businesses that didn’t fit. Each of the three divisions had manufactur- ing plants as well as marketing and distribution systems in North America, Asia, and Europe. The Industrial Products division included pipe, glass, industrial sealants and coat- ings, cleaning equipment, and truck parts. The Electronics division included specialty light bulbs, switchboards, com- puter chips, and resistors and capacitors for original equip- ment manufacturers. Consumer Products included dishes and glassware, paper and envelopes, and pencils and pens.

Structure In 2004 David Javier replaced Sean Rhodes as president. He was very concerned about whether a new organization structure was needed for RI. The current structure was based on three major geographic areas—North America, Asia, and Europe—as illustrated in Exhibit 6.12. The vari- ous autonomous units within those regions reported to the office of the regional vice president. When several units existed in a single country, one of the subsidiary presi- dents was also responsible for coordinating the various

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250 Part 3: Open System Design Elements

businesses in that country, but most coordination was done through the regional vice president. Businesses were largely independent, which provided flexibility and motivation for the subsidiary managers.

The headquarters functional departments in Ontario were rather small. The three central departments—Corporate Relations and Public Affairs, Finance and Acquisitions, and Legal and Administrative—served the corporate business worldwide. Other functions such as HR management, new product development, marketing, and manufacturing all existed within individual subsidiaries and there was little coordination of these functions across geographic regions. Each business devised its own way to develop, manufacture, and market its products in its own country and region.

Organizational Problems The problems Javier faced at RI, which were confirmed in the report on his desk, fell into three areas. First, each subsidiary acted as an independent business, using its own reporting systems and acting to maximize its own profits. This autonomy made it increasingly difficult to consolidate financial reports worldwide and to gain the efficiencies of uniform information and reporting systems.

Second, major strategic decisions were made to benefit individual businesses or for a country’s or region’s local in- terests. Local projects and profits received more time and resources than did projects that benefited RI worldwide. For example, an electronics manufacturer in Singapore re- fused to increase production of chips and capacitors for sale in the United Kingdom because it would hurt the bot- tom line of the Singapore operation. However, the econo- mies of scale in Singapore would more than offset shipping costs to the United Kingdom and would enable RI to close expensive manufacturing facilities in Europe, increasing RI’s efficiency and profits.

Third, there had been no transfer of technology, new product ideas, or other innovations within RI. For example, a cost-saving technology for manufacturing light bulbs in Canada had been ignored in Asia and Europe. A techni- cal innovation that provided homeowners with cell phone access to home security systems developed in Europe had been ignored in North America. The report on Javier’s desk stressed that RI was failing to disperse important innovations throughout the organization. These ignored innovations could provide significant improvements in both manufacturing and marketing worldwide. The report said, “No one at RI understands all the products and locations in a way that allows RI to capitalize on manufacturing

exHiBiT 6.12 Rhodes Industries Organization Chart

President and CE0

Corporate Relations and Public Affairs

Vice President Asia

Vice President North America

Vice President Europe

Finance and Acquisitions

Legal and Administrative

Asian Subsidiaries

North American Subsidiaries

European Subsidiaries

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Chapter 6: Designing Organizations for the International Environment 251

improvements and new product opportunities.” The report also said that better worldwide coordination would reduce RI’s costs by 7 percent each year and increase market po- tential by 10 percent. These numbers were too big to ignore.

Recommended Structure The report from the consultant recommended that RI try one of two options for improving its structure. The first alternative was to create a new international department at headquarters with the responsibility to coordinate tech- nology transfer and product manufacturing and marketing worldwide (Exhibit 6.13). This department would have a product director for each major product line—Industrial, Consumer, and Electronics—who would have authority to coordinate activities and innovations worldwide. Each product director would have a team that would travel to each region and carry information on innovations and im- provements to subsidiaries in other parts of the world.

The second recommendation was to reorganize into a worldwide product structure, as shown in Exhibit 6.14. All subsidiaries worldwide associated with a product line would report to the product line business manager. The business manager and staff would be responsible for de- veloping business strategies and for coordinating all manu- facturing efficiencies and product developments worldwide for its product line.

This worldwide product structure would be a huge change for RI. Many questions came to Javier’s mind. Would the subsidiaries still be competitive and adaptive in local markets if forced to coordinate with other sub- sidiaries around the world? Would business managers be able to change the habits of subsidiary managers toward more global behavior? Would it be a better idea to appoint product director coordinators as a first step or jump to the business manager product structure right away? Javier had a hunch that the move to worldwide product coordination made sense, but he wanted to think through all the poten- tial problems and how RI would implement the changes.

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exHiBiT 6.13 Proposed Product Director Structure

President and CEO

Corporate Relations and Public Affairs

International Product Directors

Vice President Asia

Vice President North America

Vice President Europe

Finance and Acquisitions

Legal and Administrative

Asian Subsidiaries

North American Subsidiaries

European Subsidiaries

Asia Europe North

America

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252 Part 3: Open System Design Elements

NOTES

1. Paul Sonne and Peter Evans, “The $1.6 Billion Grocery Flop: Tesco Poised to Quit U.S.,” The Wall Street Journal, December 5, 2012, http://online.wsj.com/news/articles/SB10 001424127887324640104578160514192695162 (accessed December 6, 2012); and Shan Li, “Tesco May Sell All Fresh & Easy Stores,” Los Angeles Times, December 6, 2012, http:// articles.latimes.com/2012/dec/06/business/la-fi-tesco-fresh- easy-20121206 (accessed December 6, 2012).

2. Stuart Pfeifer, “Ron Burkle’s Yucaipa Buying Fresh & Easy Stores from Tesco,” Los Angeles Times, September 10, 2013, http://articles.latimes.com/2013/sep/10/business/la-fi-burkle -fresh-easy-20130911 (accessed March 14, 2014).

3. Bob Tita, “Deere Enhances Focus on Russia,” The Wall Street Journal, March 24, 2011, http://online.wsj.com/ article/SB100014240527487046047045762206840038 08072.html (accessed August 9, 2011);Choe Sang-Hun, “Wal-Mart Selling Stores and Leaving South Korea,” The New York Times, May 23, 2006, C5; and Miguel Bustillo, Robb Stewart, and Paul Sonne, “Wal-Mart Bids $4.6 Billion for South Africa’s Massmart,” The Wall Street Journal, September 28, 2010), http://online.wsj.com/article/SB100014 24052748704654004575517300108186976.html (accessed September 28, 2010).

4. Michael A. Hitt and Xiaoming He, “Firm Strategies in a Changing Global Competitive Landscape,” Business Horizons 51 (2008), 363–369.

5. George Stalk and David Michael, “What the West Doesn’t Get About China,” Harvard Business Review, June 2011, 25–27; and Zoe McKay, “Consumer Spending in China: To Buy or Not To Buy,” Forbes.com, June 15, 2012, www.forbes .com/sites/insead/2012/06/15/consumer-spending-in-china -to-buy-or-not-to-buy/ (accessed June 29, 2012); and Adam Davidson, “Come On, China, Buy Our Stuff!” The New York Times, January 25, 2012, www.nytimes.com/2012/01/29 /magazine/come-on-china-buy-our-stuff.html?pagewanted=all (accessed June 29, 2012).

6. Mike Ramsey, “Ford’s CEO Revs up Auto Maker’s China Role,” The Wall Street Journal, April 16, 2013, B7.

7. Ian DeMartino, “Xiaomi Soars Past Apple and Samsung, Best Selling Smartphone in China in December,” GizChina .com, http://www.gizchina.com/2014/02/08/xiaomi-soars -past-apple-samsung-best-selling-smartphone-china -december/ (accessed March 14, 2014); and Bruce Einhorn, “Lenovo Takes on Apple and Samsung in Smartphone Market,” Bloomberg BusinessWeek, January 30, 2014, http://www.businessweek.com/articles/2014-01-30

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exHiBiT 6.14 Proposed Worldwide Business Manager Structure

President and CE0

Corporate Relations and Public Affairs

Worldwide Business Manager— Industrial Products

Worldwide Business Manager— Consumer Products

Worldwide Business Manager— Electronic Products

Finance and Acquisitions

Legal and Administrative

Industrial Products Subsidiaries Worldwide

Consumer Products Subsidiaries Worldwide

Electronic Products Subsidiaries Worldwide

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Chapter 6: Designing Organizations for the International Environment 253

/lenovo-takes-on-apple-and-samsung-in-smartphone-market (accessed March 14, 2014).

8. Qamar Rizvi, “Going International: A Practical, Comprehensive Template for Establishing a Footprint in Foreign Markets,” Ivey Business Journal, May–June 2010, http://www.iveybusinessjournal.com/topics/global-business /going–international-a-practical-comprehensive-template -for-establishing-a-footprint-in-foreign-markets (accessed August 9, 2011).

9. Michael A. Hitt and Xiaoming He, “Firm Strategies in a Changing Global Competitive Landscape,” Business Horizons 51 (2008), 363–369.

10. D. Barboza, “China Passes Japan as Second-Largest Economy,” The New York Times, August 14, 2010, http:// www.nytimes.com/2010/08/16/business/global/16yuan.html (accessed August 12, 2011).

11. Jenny Mero, “Power Shift,” Fortune, July 21, 2008, 161; and “The Fortune Global 500,” Fortune, http://money.cnn.com /magazines/fortune/global500/2013/ (accessed March 14, 2014).

12. This discussion is based heavily on Christopher A. Bartlett and Sumantra Ghoshal, Transnational Management: Text, Cases, and Readings in Cross-Border Management, 3rd ed. (Boston: Irwin McGraw-Hill, 2000), 94–96; and Anil K. Gupta and Vijay Govindarajan, “Converting Global Presence into Global Competitive Advantage,” Academy of Management Executive 15, no. 2 (2001), 45–56.

13. Shruti Date Singh with Ganesh Nagarajan, “Small Is Beautiful,” Bloomberg Businessweek (September 26–October 2, 2011), 33–34.

14. Lauren A.E. Schuker, “Plot Change: Foreign Forces Transform Hollywood Films,” The Wall Street Journal, July 31, 2010, A1.

15. Brooks Barnes, “Paramount Hopes New ‘Star Trek’ Is a Global Crowd-Pleaser,” The New York Times, May 3, 2013, B1.

16. Mariko Sanchanta, “Starbucks Plans Major China Expansion,” The Wall Street Journal, April 13, 2010, http://online.wsj.com /article/SB100014240527023046042045751814908912316 72.html (accessed April 16, 2010); and Paul Beckett, Vibhuti Agarwal, and Julie Jargon, “Starbucks Brews Plan to Enter India,” The Wall Street Journal, January 14, 2011, http://online .wsj.com/article/SB1000142405274870358340457607959355 8838756.html (accessed July 16, 2011).

17. James Hookway, “Starbucks Brings Its Culture to Vietnam,” The Wall Street Journal, May 18, 2013, B3.

18. Eric Bellman, “Indian Firm Takes a Hollywood Cue, Using DreamWorks to Expand Empire,” The Wall Street Journal, September 22, 2009, B1.

19. Doug DeVos, “How I Did It . . . Amway’s President on Reinventing the Business to Succeed in China,” Harvard Business Review, April 2013, 41–44.

20. Jim Carlton, “Branching Out; New Zealanders Now Shear Trees Instead of Sheep,” The Wall Street Journal, May 29, 2003, A1, A10.

21. Charles Duhigg and Keith Bradsher, “How U.S. Lost Out on iPhone Work,” The New York Times, January 22, 2012, A1; and David Barboza and Charles Duhigg, “China Plant Again Faces Labor Issue on iPhones,” The New York Times, September 11, 2012, B1.

22. Dan Morse, “Cabinet Decisions; in North Carolina, Furniture Makers Try to Stay Alive,” The Wall Street Journal, February 20, 2004, A1.

23. Nicholas Casey, “In Mexico, Auto Plants Hit the Gas,” The Wall Street Journal, November 20, 2012, A1.

24. Keith H. Hammonds, “Smart, Determined, Ambitious, Cheap: The New Face of Global Competition,” Fast Company, February 2003, 91–97; and W. Michael Cox and Richard Alm, “China and India: Two Paths to Economic Power,” Economic Letter, Federal Reserve Bank of Dallas (August 2008), http://dallasfed.org/assets/documents/research /eclett/2008/el0808.pdf (accessed October 14, 2014).

25. Based on Nancy J. Adler, International Dimensions of Organizational Behavior, 4th ed. (Cincinnati, OH: South-Western, 2002); Theodore T. Herbert, “Strategy and Multinational Organizational Structure: An Interorganizational Relationships Perspective,” Academy of Management Review 9 (1984), 259–271; and Laura K. Rickey, “International Expansion—U.S. Corporations: Strategy, Stages of Development, and Structure” (unpublished manuscript, Vanderbilt University, 1991).

26. Colum Murphy and Laurie Burkitt, “Hershey Launches New Brand in China,” The Wall Street Journal, May 21, 2013, B1.

27. Julia Boorstin, “Exporting Cleaner Air,” segment of “Small and Global,” Fortune Small Business, June 2004, 36–48; and Purafil website, http://www.purafil.com/company/facts.aspx (accessed August 8, 2011).

28. Emily Maltby, “Expanding Abroad? Avoid Cultural Gaffes,” The Wall Street Journal, January 19, 2010.

29. Vikas Sehgal, Ganesh Panneer, and Ann Graham, “A Family-Owned Business Goes Global,” Strategy + Business (September 13, 2010), http://www.strategy-business.com /article/00045?gko=aba49 (accessed August 9, 2011).

30. Michael E. Porter, “Changing Patterns of International Competition,” California Management Review 28 (Winter 1986), 9–40.

31. William J. Holstein, “The Stateless Corporation,” BusinessWeek, May 14, 1990, 98–115.

32. Nancy J. Adler, International Dimensions of Organizational Behavior, 4th ed. (Cincinnati, OH: South-Western, 2002), 8–9; and William Holstein, Stanley Reed, Jonathan Kapstein, Todd Vogel, and Joseph Weber, “The Stateless Corporation,” BusinessWeek, May 14, 1990, 98–105.

33. Deborah Ball, “Boss Talk: Nestlé Focuses on Long Term,” The Wall Street Journal, November 2, 2009; Transnationale website, http://www.transnationale.org/companies/nestle .php (accessed March 17, 2010); Company-Analytics website, http://www.company-analytics.org/company/nestle.php (accessed March 17, 2010); and Nestle website, http://www .nestle.com (accessed March 17, 2010).

34. Debra Sparks, “Partners,” BusinessWeek, Special Report: Corporate Finance, October 25, 1999, 106–112.

35. David Lei and John W. Slocum, Jr., “Global Strategic Alliances: Payoffs and Pitfalls,” Organizational Dynamics, 19, no. 3 (Winter 1991), 17–29.

36. Vanessa O’Connell, “Department Stores: Tough Sell Abroad,” The Wall Street Journal, May 22, 2008, B1.

37. Paul W. Beamish and Nathaniel C. Lupton, “Managing Joint Ventures,” Academy of Management Perspectives, 23, no. 2 (May 2009), 75–94; Stratford Sherman, “Are Strategic Alliances Working?” Fortune, September 21, 1992, 77–78; and David Lei, “Strategies for Global Competition,” Long- Range Planning 22 (1989), 102–109.

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254 Part 3: Open System Design Elements

38. Cyrus F. Freidheim, Jr., The Trillion-Dollar Enterprise: How the Alliance Revolution Will Transform Global Business (New York: Perseus Books, 1998).

39. Pete Engardio, “Emerging Giants,” BusinessWeek, July 31, 2006, 40–49.

40. Eric Bellman and Kris Hudson, “Wal-Mart to Enter India in Venture,” The Wall Street Journal, November 28, 2006, A3.

41. Neha Thirani Bagri, “Wal-Mart Drops Ambitious Expansion Plan for India,” The Wall Street Journal, October 20, 2013, B3.

42. Shelly Banjo, “Japan Ready for Wal-Mart,” The Wall Street Journal, September 28, 2012, B6.

43. Laurie Burkitt, “USA Inc., a Division of China Corp.,” The Wall Street Journal, May 31, 2013, B1; and Joel Backaler, “What the Shuanghui-Smithfield Acquisition Means for Chinese Overseas Investment,” Forbes, November 5, 2013, http://www.forbes.com/sites/joelbackaler/2013/11/05/what -the-shuanghui-smithfield-acquisition-means-for-chinese -overseas-investment/ (accessed March 18, 2014).

44. Burkitt, “USA Inc., A Division of China Corp.” 45. C.K. Prahalad and Hrishi Bhattacharyya, “Twenty Hubs

and No HQ,” Strategy + Business (February 26, 2008), http://www.strategy-business.com/article/08102?gko=8c379 (accessed July 25, 2009).

46. The discussion of these challenges is based on Bartlett and Ghoshal, Transnational Management.

47. Phred Dvorak, “Why Multiple Headquarters Multiply,” The Wall Street Journal, November 19, 2007, B1.

48. Amol Sharma and Jessica E. Vascellaro, “Google and India Test the Limits of Liberty,” The Wall Street Journal, January 4, 2010, A16.

49. Peter Koudal and Gary C. Coleman, “Coordinating Operations to Enhance Innovation in the Global Corporation,” Strategy & Leadership 33, no. 4 (2005), 20–32; and Steven D. Eppinger and Anil R. Chitkara, “The New Practice of Global Product Development,” MIT Sloan Management Review 47, no. 4 (Summer 2006), 22–30.

50. Yves Doz and Keeley Wilson, “Leading Ideas: Overcoming the Global Innovation Trade-Off,” Strategy + Business 69 (Winter 2012), http://www.strategy-business.com/article/00145?pg=all (accessed March 18, 2014).

51. David W. Norton and B. Joseph Pine II, “Unique Experiences: Disruptive Innovations Offer Customers More ‘Time Well Spent,’ ” Strategy & Leadership 37, no. 6 (2009), 4; and “The Power to Disrupt,” The Economist, April 17, 2010, 16.

52. Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, “How GE Is Disrupting Itself,” Harvard Business Review, October 2009, 3–11; C.K. Prahalad and Hrishi Bhattacharyya, “How to Be a Truly Global Company,” Strategy + Business 64 (Autumn 2011), http://www.strategy -business.com/article/11308?pg=all (accessed March 19, 2014); Daniel McGinn, “Cheap, Cheap, Cheap,” Newsweek.com, January 21, 2010, http://www.newsweek.com/2010/01/20 /cheap-cheap-cheap.html (accessed September 3, 2010); and Reena Jana, “Inspiration from Emerging Economies,” BusinessWeek, March 23 & 30, 2009, 38–41.

53. Jeffrey Immelt, quoted in Vijay Govindarajan and Chris Trimble, “Reverse Innovation: Is It in Your Strategic Plan?” Leadership Excellence, May 2012, 7.

54. P. Ingrassia, “Industry Is Shopping Abroad for Good Ideas to Apply to Products,” The Wall Street Journal, April 29, 1985, A1.

55. John W. Miller, “Indiana Steel Mill Revived with Lessons from Abroad,” The Wall Street Journal, May 21, 2012, A1.

56. Based on Gupta and Govindarajan, “Converting Global Presence into Global Competitive Advantage”; Yves Doz and Keeley Wilson, “Leading Ideas: Overcoming the Global Innovation Trade-Off,” Strategy + Business 69 (Winter 2012), http://www.strategy-business.com/article/00145?pg=all (accessed March 18, 2014); Giancarlo Ghislanzoni, Risto Penttinen, and David Turnbull, “The Multilocal Challenge: Managing Cross-Border Functions,” The McKinsey Quarterly, March 2008, http://www.mckinseyquarterly .com/The_multilocal_challenge_Managing_cross-border _functions_2116 (accessed August 11, 2011); and Bert Spector, Henry W. Lane, and Dennis Shaughnessy, “Developing Innovation Transfer Capacity in a Cross- National Firm,” The Journal of Applied Behavioral Science 45, no. 2 (June 2009), 261–279.

57. Kenichi Ohmae, “Managing in a Borderless World,” Harvard Business Review, May–June 1989, 152–161.

58. Paloma Almodóvar Martínez and José Emilio Navas López, “Making Foreign Market Entry Decisions,” Global Business and Organizational Excellence, January–February 2009, 52–59.

59. Choe Sang-Hun, “Wal-Mart Selling Stores and Leaving South Korea”; and Constance L. Hays, “From Bentonville to Beijing and Beyond,” The New York Times, December 6, 2004, C6.

60. Conrad de Aenlle, “Famous Brands Can Bring Benefit, or a Backlash,” The New York Times, October 19, 2003, Section 3, 7.

61. Cesare R. Mainardi, Martin Salva, and Muir Sanderson, “Label of Origin: Made on Earth,” Strategy + Business 15 (Second Quarter 1999), 42–53; and Joann S. Lublin, “Place vs. Product: It’s Tough to Choose a Management Model,” The Wall Street Journal, June 27, 2001, A1, A4.

62. Mainardi, Salva, and Sanderson, “Label of Origin.” 63. Prahalad and Bhattacharyya, “How to Be a Truly Global

Company.” 64. William Mellor, “Local Menu, Managers Are KFC’s

Secret in China,” The Washington Post, February 12, 2011, http://www.washingtonpost.com/wp-dyn/content /article/2011/02/12/AR2011021202412.html (accessed February 13, 2011); and Julie Jargon and Laurie Burkitt, “KFC’s Crisis in China Tests Ingenuity of Man Who Built Brand,” The Wall Street Journal, January 12, 2014, http:// online.wsj.com/news/articles/SB10001424052702303754404 579312681624114274 (accessed March 19, 2014).

65. José Pla-Barber, “From Stopford and Wells’s Model to Bartlett and Ghoshal’s Typology: New Empirical Evidence,” Management International Review 42, no. 2 (2002), 141–156.

66. Sumantra Ghoshal and Nitin Nohria, “Horses for Courses: Organizational Forms for Multinational Corporations,” Sloan Management Review 34, no. 2 (Winter 1993), 23–35; and Roderick E. White and Thomas A. Poynter, “Organizing for Worldwide Advantage,” Business Quarterly, Summer 1989, 84–89.

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Chapter 6: Designing Organizations for the International Environment 255

67. Robert J. Kramer, Organizing for Global Competitiveness: The Country Subsidiary Design (New York: The Conference Board, 1997), 12.

68. Laura B. Pincus and James A. Belohlav, “Legal Issues in Multinational Business: To Play the Game, You Have to Know the Rules,” Academy of Management Executive 10, no. 3, 1996, 52–61.

69. Toshiro Wakayama, Junjiro Shintaku, and Tomofumi Amano, “What Panasonic Learned in China,” Harvard Business Review, December 2012, 109–113.

70. John D. Daniels, Robert A. Pitts, and Marietta J. Tretter, “Strategy and Structure of U.S. Multinationals: An Exploratory Study,” Academy of Management Journal 27 (1984), 292–307.

71. Hay Group Study, reported in Mark A. Royal and Melvyn J. Stark, “Why Some Companies Excel at Conducting Business Globally,” Journal of Organizational Excellence, Autumn 2006, 3–10.

72. Robert J. Kramer, Organizing for Global Competitiveness: The Product Design (New York: The Conference Board, 1994).

73. Robert J. Kramer, Organizing for Global Competitiveness: The Business Unit Design (New York: The Conference Board, 1995), 18–19.

74. Tina C. Ambos, Bodo B. Schlegelmilch, Björn Ambos, and Barbara Brenner, “Evolution of Organisational Structure and Capabilities in Internationalising Banks,” Long Range Planning 42 (2009), 633–653; “Divisions,” UniCredit website, http://www.unicreditgroup.eu/en/Business/Strategic_Business _Areas.htm (accessed August 10, 2011); and “Organizational Model,” UniCredit website, http://www.unicreditgroup.eu/en /Business/Organizational_structure.htm (accessed August 10, 2011).

75. John Jullens, “How Emerging Giants Can Take on the World,” Harvard Business Review, December 2013, 121–125.

76. Carol Matlack, “Nestlé Is Starting to Slim Down at Last; But Can the World’s No. 1 Food Colossus Fatten Up Its Profits As It Slashes Costs?” BusinessWeek, October 27, 2003, 56.

77. Robert J. Kramer, Organizing for Global Competitiveness: The Geographic Design (New York: The Conference Board, 1993).

78. Starbucks Corporation 2012 Annual Report, http://www .google.com/url?sa=t&rct=j&q=starbucks%20company%20 structure%202012&source=web&cd=7&ved=0CDUQFjAG &url=http%3A%2F%2Fphx.corporate-ir.net%2FExternal.Fi le%3Fitem%3DUGFyZW50SUQ9NDkxNTE3fENoaWxkSU Q9NTI4OTE2fFR5cGU9MQ%3D%3D%26t%3D1&ei=zvY pU9GmLeWwygH3nYGACg&usg=AFQjCNE7nmyBSaYAZ PruBGBP-Gn6u797Lw (accessed March 19, 2013).

79. Rakesh Sharma and Jyotsna Bhatnagar, “Talent Management—Competency Development: Key to Global Leadership,” Industrial and Commercial Training 41, no. 3 (2009), 118–132.

80. Kramer, Organizing for Global Competitiveness: The Geographic Design, 29–31.

81. Jane XJ. Qiu and Lex Donaldson, “Stopford and Wells Were Right! MNC Matrix Structures Do Fit a ‘High-High’ Strategy,” Management International Review 52 (2012), 671–689.

82. “Group Structure,” ABB website, http://new.abb.com/about /abb-in-brief/group-structure (accessed March 10, 2014); William Taylor, “The Logic of Global Business: An Interview with ABB’s Percy Barnevik,” Harvard Business Review, March–April 1991, 91–105; Carla Rappaport, “A Tough Swede Invades the U.S.,” Fortune, January 29, 1992, 76–79; Raymond E. Miles and Charles C. Snow, “The New Network Firm: A Spherical Structure Built on a Human Investment Philosophy,” Organizational Dynamics 23, no. 4 (Spring 1995), 5–18; and Manfred F.R. Kets de Vries, “Making a Giant Dance,” Across the Board, October 1994, 27–32.

83. Ambos et al., “Evolution of Organisational Structure and Capabilities in Internationalising Banks”; and “Organizational Structure Map,” UniCredit website, http:// www.-nicreditgroup.eu/ucg-static/downloads/-Organizational _structure_map.pdf (accessed August 10, 2011).

84. Hae-Jung Hong and Yves Doz, “L’Oréal Masters Multiculturalism,” Harvard Business Review, June 2013, 114–199; and Prahalad and Bhattacharyya, “How to Be a Truly Global Company.”

85. Vijay Govindarajan and Anil K. Gupta, “Building an Effective Global Business Team,” MIT Sloan Management Review 42, no. 4 (Summer 2001), 63–71.

86. Charlene Marmer Solomon, “Building Teams Across Borders,” Global Workforce, November 1998), 12–17.

87. Charles C. Snow, Scott A. Snell, Sue Canney Davison, and Donald C. Hambrick, “Use Transnational Teams to Globalize Your Company,” Organizational Dynamics 24, no. 4 (Spring 1996), 50–67.

88. Robert Guy Matthews, “Business Technology: Thyssen’s High-Tech Relay—Steelmaker Uses Computer Networks to Coordinate Operations on Three Continents,” The Wall Street Journal, December 14, 2010, B9.

89. Benson Rosen, Stacie Furst, and Richard Blackburn, “Overcoming Barriers to Knowledge Sharing in Virtual Teams,” Organizational Dynamics 36, no. 3 (2007), 259–273.

90. Gupta and Govindarajan, “Converting Global Presence into Global Competitive Advantage”; and Nadine Heintz, “In Spanish, It’s Un Equipo; in English, It’s a Team; Either Way, It’s Tough to Build,” Inc., April 2008, 41–42.

91. Richard Pastore, “Global Team Management: It’s a Small World After All,” CIO, January 23, 2008, http://www.cio .com/article/174750/Global_Team_Management_It_s_a _Small_World_After_All (accessed May 20, 2008).

92. Hong and Doz, “L’Oréal Masters Multiculturalism.” 93. Robert J. Kramer, Organizing for Global Competitiveness:

The Corporate Headquarters Design (New York: The Conference Board, 1999).

94. Wakayama, Shintaku, and Amano, “What Panasonic Learned in China.”

95. Ghislanzoni et al., “The Multilocal Challenge.” 96. Based on Christopher A. Bartlett and Sumantra Ghoshal,

Managing Across Borders: The Transnational Solution, 2nd ed. (Boston: Harvard Business School Press, 1998), Chapter 11, 231–249.

97. See Jay Galbraith, “Building Organizations Around the Global Customer,” Ivey Business Journal, September–October 2001, 17–24, for a discussion of both formal and informal lateral networks in multinational companies.

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256 Part 3: Open System Design Elements

98. This section and the BP examples are based on Morten T. Hansen and Nitin Nohria, “How to Build Collaborative Advantage,” MIT Sloan Management Review 46, no. 1 (Fall 2004), 22ff.

99. Peter Gumbel, “Big Mac’s Local Flavor,” Fortune, May 5, 2008, 114–121.

100. Sumantra Ghoshal and Christopher Bartlett, “The Multinational Corporation as an Interorganizational Network,” Academy of Management Review 15 (1990), 603–625.

101. Royston Greenwood, Samantha Fairclough, Tim Morris, and Mehdi Boussebaa, “The Organizational Design of Transnational Professional Service Firms,” Organizational Dynamics 39, no. 2 (2010), 173–183.

102. The description of the transnational organization is based on Bartlett and Ghoshal, Transnational Management and Managing Across Borders.

103. Bettina Wassener, “Living in Asia Appeals to More Company Leaders,” The New York Times, June 21, 2012, B3; Nirmalya Kumar and Phanish Puranam, “Have You Restructured for Global Success?” Harvard Business Review, October 2011, 123–128; and Dvorak, “Why Multiple Headquarters Multiply.”

104. Royal and Stark, “Why Some Companies Excel at Conducting Business Globally.”

105. Based on Timo O.A. Lehtinen, Mika V. Mäntylä, and Jari Vanhanen, “Development and Evaluation of a Lightweight Root Cause Analysis Method (ARCA Method): Field Studies at Four Software Companies,” Information and Software Technology 53 (2011), 1045–1061; and Walter Kuemmerle, “Go Global—Or No?” Harvard Business Review, June 2001, 37–49.

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Pa r

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Internal Design Elements Chapter 7 Manufacturing and Service Technologies Chapter 8 Technology for Control, Social Business, and Big Data Chapter 9 Organization Size, Life Cycle, and Decline

4

Kj el

L ar

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M om

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258

C h

a p

TE r

Core Organization Manufacturing technology Manufacturing Firms • Strategy, Technology, and Performance

Contemporary applications Trends • The Smart Factory • Lean Manufacturing • Performance and Structural Implications

Core Organization Service technology Service Firms • Designing the Service Organization

Noncore Departmental technology Variety • Analyzability • Framework

Department Design

Workflow Interdependence among Departments Types • Structural Priority • Structural Implications

Sociotechnical Systems

Design Essentials

Learning Objectives after reading this chapter you should be able to: 1. Identify and define an organization’s core

technology. 2. Explain the impact of core technology on

organization design. 3. Describe Woodward’s model of technical

complexity, structure, and performance. 4. Understand lean manufacturing, kaizen, and

the smart factory. 5. Describe the nature of service technology and

its impact on organization design. 6. Recognize departmental technology and its

relationship to department design. 7. Identify three types of interdependence and the

respective structural priority. 8. Understand the sociotechnical systems

concept.

Manufacturing and Service Technologies7

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Chapter 7: Manufacturing and Service technologies 259

Before reading this chapter, please check whether you agree or disagree with each of the following statements:

1 Lean manufacturing is a super-efficient form of manufacturing that produces products of top quality. I aGrEE I DISaGrEE

2 the best way for a company to provide good service is to have abundant and clear rules and procedures and make sure everyone follows them to the letter. I aGrEE I DISaGrEE

3 the design characteristics and management processes that are effective for a television station’s sales department probably would not work so well for the news department.

I aGrEE I DISaGrEE

An auto parts factory sends engineers around the world to learn about new production methods. A team of airline employees studies the pit stop techniques used by NASCAR racing crews. A small clothing manufacturer in New York invests in a computerized German-made knitting machine. What do all these organizations have in common? They are looking for ways to provide goods and services more efficiently and effectively.

For many manufacturers in the United States, it’s a do-or-die situation. Manufacturing has been on the decline in the United States and other developed countries for years. The American manufacturing sector lost 5.8 million jobs between 1990 and 2012, according to data from the Bureau of Labor Statistics.1 However, some manufacturing companies are applying new technology to gain a new competitive edge. Manufacturing is returning to the United States, but with a twist. It is machines, not people, who are doing most of the work these days. Parkdale Mills in South Carolina, the country’s largest buyer of raw cotton, reopened in 2010 and produces about 2.5 million pounds of yarn a week with 140 workers. In 1980, that production level would have needed more than 2,000 employees. “With all the challenges we’ve had with cheap imports, we knew in order to survive, we’d have to take technology as far as we could,” said Anderson Warlick, Parkdale’s CEO. Other manufacturers are also looking at the United States as a better place to do business. A survey found that one-third of companies with manufacturing overseas were considering bringing at least some of their production back to the United States.2 It is all because of changing technology. In IBM’s 2012 CEO Study, technology topped the list of external forces that executives expect to significantly influence their organizations over the next few years.3

Service companies also need to keep pace with changing technology and continually strive for better approaches. Many service firms are fighting for their lives as global competition intensifies, and the cost of ineffective or outdated technology and procedures can be organizational decline and failure. This chapter explores both service and manufacturing technologies. technology refers to the work

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260 Part 4: Internal Design Elements

processes, techniques, machines, and actions used to transform organizational inputs (materials, information, ideas) into outputs (products and services).4 Technology is an organization’s production process and includes work procedures as well as machinery.

One important theme in this chapter is how core technology influences organization design. Understanding core technology provides insight into how an organization can be designed for efficient performance.5 An organization’s core technology is the work process that is directly related to the organization’s mission, such as teaching in a high school, medical services in a health clinic, or manufacturing at American Axle & Manufacturing (AAM). At AAM, the core technology begins with raw materials (e.g., steel, aluminum, and composite metals). Employees take action on the raw material to make a change in it (e.g., they cut and forge metals and assemble parts), thus transforming the raw material into the output of the organization (e.g., axles, drive shafts, crankshafts, and transmission parts). For a service organization like UPS, the core technology includes the production equipment (e.g., sorting machines, package handling equipment, trucks, and airplanes) and procedures for delivering packages and overnight mail. In addition, as at companies like UPS and AAM, computers and information technology have revolutionized work processes in both manufacturing and service organizations. The specific impact of new information technology on organizations will be described in Chapter 8.

Exhibit 7.1 features an example of core technology for a manufacturing plant. Note how the core technology consists of raw material inputs, a transformation work process (e.g., milling, inspection, assembly) that changes and adds value to the raw material and produces the ultimate product or service output that is sold to consumers in the environment. In today’s large, complex organizations, core work processes vary widely and sometimes can be hard to pinpoint. A core technology can

Exhibit 7.1 Core Transformation Process for a Manufacturing Company

Raw Material Inputs

Product or Service Outputs

Materials Handling

Milling Inspection

Assembly

Organization

Core Work Processes

Human Resources Accounting R & D Marketing

Core Technolog y

Noncore Departments

© C

en ga

ge L

ea rn

in g®

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Chapter 7: Manufacturing and Service technologies 261

be partly understood by examining the raw materials flowing into the organization,6 the variability of work activities,7 the degree to which the production process is mechanized,8 the extent to which one task depends on another in the workflow,9 or the number of new product or service outputs.10

Organizations are also made up of many departments, each of which may use a different work process (technology) to provide a good or service within the organization. A noncore technology is a department work process that is important to the organization but is not directly related to its primary mission. In Exhibit 7.1, noncore work processes are illustrated by the departments of human resources (HR), accounting, research and development (R&D), and marketing. Thus, R&D transforms ideas into new products, and marketing transforms inventory into sales, each using a somewhat different work process. The output of the HR department is people to work in the organization, and accounting produces accurate statements about the organization’s financial condition.

Purpose of this Chapter

In this chapter, we discuss both core and noncore work processes and their relationship to organization design. The nature of the organization’s work processes must be considered in designing the organization for maximum efficiency and effectiveness. The optimum organization design is based on a variety of elements. Exhibit 7.2 illustrates that forces affecting organization design come from both outside and inside the organization. External strategic needs, such as environmental conditions, strategic direction, and organizational goals, create top-down pressure for designing the organization in such a way as to fit the environment and accomplish goals. These pressures on design have been discussed in previous chapters. However, decisions about design should also take into consideration pressures from the bottom

Source: Based on David A. Nadler and Michael L. Tushman, with Mark B. Nadler, Competing by Design: The Power of Organizational Architecture (New York: Oxford University Press, 1997), 54.

Exhibit 7.2 Pressures Affecting Organization Design

Optimum Organization

Design

Operational Design Needs

(work processes)

Strategic Design Needs

(environment, strategic direction)

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262 Part 4: Internal Design Elements

up—from the work processes that are performed to produce the organization’s products or services. The operational work processes will influence the structural design associated with both the core technology and noncore departments. Thus, the subject with which this chapter is concerned is, “How should the organization be designed to accommodate and facilitate its operational work processes?”

The remainder of the chapter will unfold as follows. First, we examine how the technology for the organization as a whole influences organization structure and design. This discussion includes both manufacturing and service technologies. Second, we examine differences in departmental technologies and how the technologies influence the design and management of organizational subunits. Third, we explore how interdependence—flow of materials and information— among departments affects organization design.

Core Organization Manufacturing technology Manufacturing technologies include traditional manufacturing processes and con- temporary applications, such as the smart factory and lean manufacturing.

Manufacturing Firms

The first and most influential study of manufacturing technology was conducted by Joan Woodward, a British industrial sociologist. Her research began as a field study of management principles in south Essex. The prevailing management wisdom at the time (1950s) was contained in what were known as universal principles of management. These principles were “one best way” prescriptions that effective organizations were expected to adopt. Woodward surveyed 100 manufacturing firms firsthand to learn how they were organized.11 She and her research team visited each firm, interviewed managers, examined company records, and observed the manufacturing operations. Her data included a wide range of structural characteristics (e.g., span of control, levels of management), dimensions of management style (e.g., written versus verbal communications, use of rewards), and the type of manufacturing process. She also collected data that reflected the commercial success of the firms.

Woodward developed a scale and organized the firms according to the technical complexity of the manufacturing process. technical complexity represents the extent of mechanization of the manufacturing process. High technical complexity means most of the work is performed by machines. Low technical complexity means workers play a larger role in the production process. Woodward’s scale of technical complexity originally had 10 categories, as summarized in Exhibit 7.3. These categories were further consolidated into three basic technology groups, as follows:

• Group I: Small-batch and unit production. These firms tend to be job shop operations that manufacture and assemble small orders to meet specific needs of customers. Custom work is the norm. Small-batch production relies heavily on the human operator; it is thus not highly mechanized. One example of small-batch production is Hermes International’s Kelly handbag, named for the late actress Grace Kelly. Craftsmen stitch the majority of each $7,000 bag by hand and sign

Briefcase as an organization manager, keep these guidelines in mind: Use the categories de- veloped by Woodward to diagnose whether the production technol- ogy in a manufacturing firm is small batch, mass production, or continuous process. Use a more organic struc- ture with small-batch or continuous-process technologies and with smart manufactur- ing systems. Use a mechanistic structure with mass-production technologies.

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Chapter 7: Manufacturing and Service technologies 263

it when they finish.12 A traditional distribution center at Amazon might also be considered a small-batch service operation. Workers pick products off shelves and assemble orders one at a time for customers.

• Group II: Large-batch and mass production. Large-batch production is a manu- facturing process characterized by long production runs of standardized parts. Output often goes into inventory from which orders are filled because custom- ers do not have special needs. Examples include traditional assembly lines, such as for automobiles.

• Group III: Continuous-process production. In continuous-process production, the entire process is mechanized. There is no starting and stopping. This represents mechanization and standardization one step beyond those in an assembly line. Automated machines control the continuous process, and outcomes are highly predictable. Amazon’s new fully automated distribution centers could be con- sidered continuous-process production. Amazon recently bought Kiva Systems, which provides robots that bring all the items needed for a customer’s order to a worker. Other robots then take the filled boxes to the shipping door13. Other examples would include chemical plants, oil refineries, liquor producers, phar- maceuticals, and nuclear power plants. Royal Dutch Shell’s new “Pearl GTL”

Exhibit 7.3 Woodward’s Classification of 100 British Firms According to Their Systems of Production

1. Production of single pieces to customer orders

2. Production of technically complex units one by one

3. Fabrication of large equipment in stages

4. Production of pieces in small batches

5. Production of components in large batches subsequently assembled diversely

6. Production of large batches, assembly line type

7. Mass production

8. Continuous process production combined with the preparation of a product for sale by large-batch or mass production methods

9. Continuous process production of chemicals in batches

10. Continuous ƒow production of liquids, gases, and solid shapes

Low

High

Technical Complexity

Group II Large-batch and mass production

Group III Continuous process production

Group I Small-batch and unit production

Source: Adapted from Joan Woodward, Management and Technology (London: Her Majesty’s Stationery Office, 1958). Used with permission of Her Britannic Majesty’s Stationery Office.

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264 Part 4: Internal Design Elements

(gas-to-liquid) plant in Qatar provides an illustration. At the new processing facility, natural gas flows through a maze of pipes, storage tanks, gasification units, distillers, reactors, and other equipment, while highly skilled employees monitor operations from a central control room. GTL uses chemical processes to physically change the composition of gas molecules to produce a colorless, odorless fuel similar to diesel but without diesel’s pollutants.14

Using this classification of technology, Woodward’s data made sense. A few of her key findings are given in Exhibit 7.4. The number of management levels and the manager-to-total personnel ratio, for example, show definite increases as technical complexity increases from unit production to continuous process. This indicates that greater management intensity is needed to manage complex technology. The direct-to- indirect labor ratio decreases with technical complexity because more indirect workers are required to support and maintain complex machinery. Other characteristics, such as span of control, formalized procedures, and centralization, are high for mass-production technology because the work is standardized, but low for other technologies. Unit (small-batch) production and continuous-process technologies require highly skilled workers to run the machines and verbal communication to adapt to changing conditions. Mass production is standardized and routinized, so few exceptions occur, little verbal communication is needed, and employees are less skilled.

Overall, the structure and management systems in both unit production and continuous-process technology are characterized as organic, as defined in Chapter 1 and Chapter 4. They are more free-flowing and adaptive, with fewer formal procedures and less standardization. Mass production, however, is mechanistic, with standardized jobs and formalized procedures. Woodward’s discovery about technology thus provided substantial new insight into the causes of organization structure. In Joan Woodward’s own words, “Different technologies impose different kinds of demands on individuals and organizations, and those demands had to be met through an appropriate structure.”15

technology

Structural Characteristic Unit Production

Mass Production

Continuous Process

Number of management levels 3 4 6

Supervisor span of control 23 48 15

Direct/indirect labor ratio 9:1 4:1 1:1

Manager/total personnel ratio Low Medium High

Workers’ skill level High Low High

Formalized procedures Low High Low

Centralization Low High Low

Amount of verbal communication High Low High

Amount of written communication Low High Low

Overall structure Organic Mechanistic Organic

Source: Based on Management and Technology by Joan Woodward (London: Her Majesty’s Stationery Office, 1958).

Exhibit 7.4 Relationship Between Technical Complexity and Structural Characteristics

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Chapter 7: Manufacturing and Service technologies 265

Strategy, technology, and Performance

Another portion of Woodward’s study examined the success of the firms along dimensions such as profitability, market share, stock price, and reputation. As indicated in Chapter 2, the measurement of effectiveness is not simple or precise, but Woodward was able to rank firms on a scale of commercial success according to whether they displayed above-average, average, or below-average performance on strategic objectives.

Woodward compared the structure-technology relationship against commercial success and discovered that successful firms tended to be those that had complementary structures and technologies. Many of the organizational characteristics of the successful firms were near the average of their technology category, as shown in Exhibit 7.4. Below-average firms tended to depart from the structural characteristics for their technology type. Another conclusion was that structural characteristics could be interpreted as clustering into organic and mechanistic management systems, as defined in Chapters 1 and 4. Successful small-batch and continuous-process organizations had organic designs, and successful mass-production organizations had mechanistic designs. Subsequent research has replicated her findings.16

What this illustrates for today’s companies is that strategy, structure, and technology need to be aligned, especially when competitive conditions change.17 For example, consider changes in the mattress business that required Sealy to adopt a more organic design. With the increasing popularity of mattresses from Sleep Number and Tempur-Pedic, combined with the slowdown in the housing market, Sealy managers saw sales of the company’s high-end Stearns & Foster line decline significantly. Sealy revamped how it designs mattresses, using cross-functional teams and joining with design firm IDEO to design a prettier bed that differentiated Stearns & Foster and tapped into people’s belief that they were truly getting a premium product.18 The company also adopted lean manufacturing (discussed later in this chapter) to be more competitive in the new environment.

Failing to adopt appropriate new technologies to support strategy, or adopting a new technology and failing to realign strategy to match it, can lead to poor performance. Today’s increased global competition means more volatile markets, shorter product life cycles, and more sophisticated and knowledgeable consumers; and flexibility to meet these new demands has become a strategic imperative.19 Manufacturing companies can adopt new technologies to support the strategy of flexibility. However, organization design and management processes must also be realigned, as a highly mechanistic design hampers flexibility and prevents the company from reaping the benefits of the new technology.20

Contemporary applications The factory of today is far different from the industrial firms Woodward studied in the 1950s. In particular, computers and information technology have revolutionized all types of manufacturing—small batch, large batch, and continuous process. At the Marion, North Carolina, plant of Rockwell Automation’s Power Systems Division, for example, highly trained employees can quickly handle a build-on-demand unit

Briefcase as an organization manager, keep this guideline in mind: When adopting a new technology, realign strategy, structure, and management pro- cesses to achieve top performance.

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266 Part 4: Internal Design Elements

of one, thanks to computers, wireless technology, and radio-frequency identification (RFID) systems. In one instance, the Marion plant built, packaged, and delivered a replacement bearing for installation in an industrial air-conditioning unit in Texas only 15 hours after the customer called for help.21

trends

As illustrated by the earlier example of the Parkdale textile factory, technology has transformed today’s factories. For the most part, they no longer are hot, dusty, crowded shops full of overworked employees but rather streamlined, modern instal- lations where the air quality, temperature, and humidity are tightly controlled for the sake of sophisticated machinery. Technology has also transformed the service industry. Yet there are both good and bad aspects of the increasing complexity of technology.

Extreme Complexity. Boeing called the production of its 787 Dreamliner a “reinvention of manufacturing.” New technology enabled the plane to be made from composites, a first for the industry. It is 20 percent more fuel efficient and has 20 percent fewer emissions. But the launch of the plane was delayed by years, and when it did come out, it was plagued by one after another quality problem, including fuel leaks, a cracked cockpit window, wiring problems, and overheating batteries.22

Boeing isn’t the only company to suffer from pushing the boundaries of com- plex new technology. As another example, think about the problems in the cruise industry.

In PractIce Carnival

Cruise Lines

In the fall of 2013, a string of incidents at Carnival Cruise Lines had some customers vowing never to cruise with Carnival again. In the worst episode, an engine room fire left the Carnival Triumph stranded without power in the Gulf of Mexico with 4,200 people on board. As the four-day cruise doubled in length, food and water were scarce, passengers sweltered with no air-conditioning, and the media reported overflowing toilets and described the scene as “hellish.” Carnival managers are reevaluating the strategy of building ever larger ships that are almost too complex to handle when an emergency arises.

The dangers of that strategy became most visible when the Costa Concordia ran aground and capsized off the coast of Italy, killing 32 people. The accident revealed fatal flaws in Carnival’s safety and emergency procedures. Captain Francesco Schettino made many errors and is said to have contributed to the crisis by failing to respond for 45 minutes after the crew told him that the ship was flooding and its motors were dead. However, part of the danger also came from the huge size of the ship and the lack of industry oversight. Today’s largest cruise ships are nearly five times the size they were in 1985.23

The recent string of accidents in the cruise industry has prompted safety experts and regulators to push for more accountability, saying the strategy of building supersize ships is fraught with risk. “Given the size of today’s ships, any problem immediately becomes a very big problem,” said Michael Bruno, dean of the engineering school at the Stevens Institute of Technology.24 This chapter’s BookMark provides a historical look at the dangers of failing to understand and effectively manage highly complex technological advances.

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Chapter 7: Manufacturing and Service technologies 267

Inviting Disaster: Lessons from the Edge of Technology By James R. Chiles

Dateline: Paris, France, July 25, 2000. Less than two minutes after Air France Concorde Flight 4590 departs from Charles DeGaulle Airport, something goes horribly wrong. Trailing fire and billowing black smoke, the huge plane rolls left and crashes into a hotel, killing all 109 people aboard and four more on the ground. It’s just one of the technological disasters James R. Chiles describes in his book, Inviting Disaster: Lessons from the Edge of Technology.

One of Chiles’s main points is that advancing technology makes possible the creation of machines that strain the human ability to understand and safely operate them. For example, managers’ overconfidence that they understood blowout preventer technology contributed to the 2010 BP-Transocean oil rig disaster at Deepwater Horizon, and the inability to safely manage complex nuclear technology led to dangerous radiation leaks at Japan’s Fukushima Daiichi nuclear power plant following a 2011 earthquake and tsunami. Chiles asserts that the margins of safety are growing thinner as the energies we harness become more powerful and the time between invention and use grows shorter. He believes that today, “for every twenty books on the pursuit of success, we need a book on how things fly into tiny pieces despite enormous effort and the very highest ideals.” All complex systems, he reminds us, are destined to fail at some point.

HOW tHINGS FLy INtO PIECES: ExaMPLES OF SyStEM FraCtUrES Chiles uses historical calamities such as the sinking of the Titanic and modern disasters such as the explosion of the space shuttle Challenger to illustrate the dangers of system fracture, a chain of events that involves human error in response to malfunctions in complex machinery. Disaster begins when one weak point links up with others.

• Sultana (American steamboat on the Mississippi River near Memphis, Tennessee), April 25, 1865. The boat, designed to carry a maximum of 460 people,

was carrying more than 2,000 Union ex-prisoners nor th—as wel l as 200 addit ional crew and passengers—when three of the four boilers exploded, killing 1,800 people. One of the boilers had been temporarily patched to cover a crack, but the patch was too thin. Operators failed to compensate by resetting the safety valve.

• Piper Alpha (offshore drilling rig in the North Sea), July 6, 1988. The offshore platform processed large volumes of natural gas from other rigs via pipe. A daytime work crew, which didn’t complete the repair of a gas-condensate pump, relayed a verbal message to the next shift, but workers turned the pump on anyway. When the temporary seal on the pump failed, a fire trapped crewmen with no escape route, killing 167 crew and rescue workers.

• Union Carbide (India) Ltd. (release of highly toxic chemicals into a community), Bhopal, Madhya Pradesh, India, December 3, 1984. Three compet- ing theories exist for how water got into a storage tank, creating a violent reaction that sent highly toxic methyl isocyanate for herbicides into the environ- ment, causing an estimated 7,000 deaths: (1) poor safety maintenance, (2) sabotage, or (3) worker error.

WHat CaUSES SyStEM FraCtUrES? There is a veritable catalog of causes that lead to such disasters, from design errors, insufficient operator training, and poor planning to greed and mismanagement. Chiles wrote his book as a reminder that technology takes us into risky locales, whether it be outer space, up a 2,000-foot tower, or into a chemical processing plant. Chiles also cites examples of potential disasters that were averted by quick thinking and appropriate response. To help prevent system fractures, managers can create organizations in which people throughout the company are expert at picking out the subtle signals of real problems—and where they are empowered to report them and take prompt action.

Inviting Disaster: Lessons from the Edge of Technology, by James R. Chiles, is published by HarperBusiness.

BookMark 7.0 havE You REad this book?

What about People? At a Philips factory in China, hundreds of workers assemble electric shavers by hand. At a sister plant in the Netherlands, 128 robotic arms do the same work, guided by video cameras. The arms work so fast they are enclosed in cages to keep them from injuring the few humans supervising them. The factory in the Netherlands has about a tenth as many workers as the one in China. UPS and FedEx still employ tens of thousands of people to load and unload trucks, but robotic automation is in the near future.25 A new breed of dexterous robots are replacing workers in both manufacturing and service operations.

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268 Part 4: Internal Design Elements

The technological and the human systems of an organization are intertwined. So what happens to the people when robots or other machines take over doing the work? Like it or not, it is the wave of the future, and probably the only way manu- facturers in developed countries can compete with low-wage countries. Technologi- cal advances typically destroy some jobs but create others, but as we described in Chapter 4 and earlier in this chapter, recent technological advances are destroy- ing more jobs than they are creating. Even white-collar jobs in finance, human resources, and other functions are being replaced by sophisticated information tech- nology (IT). IT will be discussed in more detail in the next chapter.

Advanced technology is making companies more efficient and more productive, but there are some things robots can’t do. Harley-Davidson, for example, found that humans are much more flexible, as we described in a Chapter 1 In Practice example, so the company still uses people to build motorcycles that have 1,200 dif- ferent configurations. Human beings can adjust on the fly, whereas robots cannot. At Harley, and at other companies, robots do the simple and repetitive tasks and people handle the more complex and dynamic ones. Speaking of robots, “it’s not a one-for-one replacement,” says Rodney Brooks, a former MIT robotics professor. “People are so much better at certain things.”26

the Smart Factory

Two significant contemporary applications of advanced technology for mass production are the smart factory and lean manufacturing. Most of today’s factories use a variety of new manufacturing technologies, including robots, numerically controlled machine tools, RFID, wireless technology, and computerized software for product design, engineering analysis, and remote control of machinery. A study found, for example, that manufacturers in the United States use more than six times the amount of information-processing equipment (computers, etc.) as they used 20 years ago.27 This increase reflects the growing uncertainty and tough challenges manufacturing organizations face, including globalization of operations, increased competition, greater product complexity, and the need to coordinate with a larger number of business partners.28 The ultimate automated factories are referred to as smart factories.29 Also called digital factories, computer-integrated manufacturing, flexible manufacturing systems, advanced manufacturing technology, or agile manufacturing, smart factories link manufacturing components that previously stood alone. Thus, robots, machines, product design, and engineering analysis are coordinated by a single computer system in an interconnected web of information and production.30

The smart factory typically includes several subcomponents:

• Computer-aided design (CAD). Computers are used to assist in the drafting, design, and engineering of new parts. Designers guide their computers to draw specified configurations on the screen, including dimensions and component details. Hundreds of design alternatives can be explored, as can scaled-up or scaled-down versions of the original.31

• Computer-aided manufacturing (CAM). Computer-controlled machines in mate- rials handling, fabrication, production, and assembly greatly increase the speed at which items can be manufactured. CAM also permits a production line to shift rapidly from producing one product to any variety of other products by chang- ing software codes in the computer. CAM enables the production line to quickly honor customer requests for changes in product design and product mix.32

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Chapter 7: Manufacturing and Service technologies 269

• Robots. Automakers have been using large robots on the assembly line for years, but a new generation of smaller, simpler robots enables small and medium size manufacturers to benefit from them also. These new robots can communicate and collaborate with human employees and help with every phase of the manu- facturing process, from delivering parts to assembling products to warehousing to packing and shipping.33 Aided by new imaging and human interface software and advances in object detection and sensor technology, these robots can be used by manufacturers of all sizes because they can run “cage-free.” They can sense and react to their “co-workers,” have built-in safety mechanisms, and are capable of making commonsense decisions while performing repetitive tasks.34

• 3-D Printing. Also known as additive manufacturing, 3-D printing builds objects one successive layer of material at a time. The technology lets engineers model an object, whether it is a Barbie doll or a Ford truck axle, on a computer and print it out with plastic, metal, or composite materials rather than cutting or drilling the object from molds. This results in less wasted materials and allows manufacturers to get products to customers more quickly. 35

In a smart factory, a new product can be designed on the computer and a prototype can be produced untouched by human hands. The ideal factory can switch quickly from one product to another, working fast and with precision, without paperwork or record keeping to bog down the system.36 In addition, new software can coordinate information from multiple departments and organizations involved in a design, and virtual designs can even include an entirely new factory.

The Siemens Electronic Works facility in Amberg, Germany, is a good example of a smart factory. Its integrated smart machines coordinate the production and distribution of the company’s Simatic control devices, which involves a custom, build-to-order process involving more than 1.6 billion components from 250 suppliers to make 950 different products in 50,000 annual product variations. And they do it all with a 99 percent reliability rate and record only about 15 defects per million.37 Automakers also provide good examples of the benefits of the smart factory. Honda has achieved an amazing degree of flexibility at its plant in East Liberty, Ohio. Considered the most flexible auto manufacturer in North America, the Honda plant can switch from making Civic compacts to making the longer, taller CRV crossover in as little as five minutes. All that’s needed to switch assembly from one type of vehicle to another is to put different “hands” on the robots to handle different parts. The ability to quickly adjust inventory levels of different types of vehicles has been a key strategic advantage for Honda in an era of volatile gasoline prices and shifting vehicle popularity.38

Lean Manufacturing

The smart factory reaches its ultimate level to improve quality, customer service, and cost cutting when all parts are used interdependently and combined with flex- ible management processes in a system referred to as lean manufacturing. Lean man- ufacturing uses highly trained employees at every stage of the production process, who take a painstaking approach to squeeze out all waste to improve value to the customer. Lean manufacturing is typically combined with Six Sigma. Six Sigma is a highly ambitious quality standard that specifies a goal of no more than 3.4 defects per million parts.39 However, Six Sigma has deviated from its precise definition to become a generic term for a quality-control approach that emphasizes a disciplined

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270 Part 4: Internal Design Elements

and relentless pursuit of higher quality and lower costs. In a survey by Industry Week and the Manufacturing Performance Institute asking 745 manufacturers which improvement programs they used, lean manufacturing was by far the most common answer, with more than 40 percent reporting the use of lean manufactur- ing techniques.40

Lean Six Sigma uses a team-driven holistic approach to eliminating waste and improving quality.41 It incorporates technological elements, such as CAD/CAM, but the heart of lean Six Sigma is not machines or software, but people. Lean manufac- turing requires changes in organizational systems, such as decision-making processes and management processes, as well as an organizational culture that supports active employee participation, a quality perspective, and focus on the customer. Employees are trained to attack waste and strive for continuous improvement in all areas.42

Kaizen. One lesson of lean manufacturing is that there is always room for improvement. Continuous improvement, or kaizen, is the implementation of a large number of small, incremental improvements in all areas of the organization on an ongoing basis. All employees learn that they are expected to contribute by initiating changes in their own job activities. The basic philosophy is that improving things a little bit at a time, all the time, has the highest probability of success. Innovations can start simple, and employees can build on their success in this unending process. A commitment to kaizen has allowed La-Z-Boy in Dayton, Tennessee, to thrive even during the recent recession.

In PractIce La-Z-Boy

“If we were doing business the same way we did in 2005,” said La-Z-Boy’s Continuous Improvement Manager David Robinson, “somebody else would be here because we would already be closed. We are $50 million a year better now than we were.”

The facility’s managers and engineers were trained in Six Sigma, and cross-functional teams have completed 24 kaizen events focused on safety, quality, and productivity. A significant process improvement at the Dayton facility is the Flawless Launch Program, which assigns a production engineer to make sure quality and manufacturability are designed into all new products. That way, Robinson points out, the company knows the tooling and equipment that will be needed to produce the product repeatedly, at low cost, and relatively error-free. As an example, he points to the plant’s first attempt to manufacture an electric lift chair. It had about a 40 percent failure rate in the field. After reintroducing it with the flawless launch process, Robinson reports, “We now have a fraction of 1 percent failure in the field.”43

La-Z-Boy managers embarked on their lean manufacturing quest some years ago, as did many North American companies that started studying the practices of lean manufacturing pioneer Toyota and other Japanese companies. For example, a small improvement at Toyota’s new Miyagi factory is to position vehicles side-by- side on the assembly line rather than tip-to-tail, which cuts installation costs and increases productivity because workers don’t have to walk as far between cars.44

1Lean manufacturing is a super-efficient form of manufacturing that produces products of top quality. aNSWEr: Agree. Lean manufacturing techniques have been implemented in hundreds of organizations all over the world and have led to dramatic improvements in quality, productivity, and efficiency. Lean manufacturing continues to be an important tool for manufacturing firms, and smart managers in service firms are also learning to benefit from lean thinking.

assEss YouR answER

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Chapter 7: Manufacturing and Service technologies 271

Mass Customization. Lean manufacturing and the smart factory have paved the way for mass customization, which refers to using mass-production technology to quickly and cost-effectively assemble goods that are uniquely designed to fit the de- mands of individual customers. The goal is to provide customers with exactly what they want when they want it.45 Mass customization has been applied to products as diverse as farm machinery, water heaters, clothing, computers, and industrial deter- gents.46 A customer can order a Sony laptop with one of several hard drive capaci- ties, processing chip speeds, and software packages, or a BMW automobile with the exact combination of features and components desired. About 60 percent of the cars BMW sells in Europe are built to order.47 Oshkosh Truck Company thrived during an industry-wide slump in sales by offering customized fire, cement, garbage, and military trucks. Firefighters often travel to the plant to watch their new vehicle take shape, sometimes bringing paint chips to customize the color of their fleet.48

The awesome advantage of the smart factory is that products of different sizes, types, and customer requirements freely intermingle on the assembly line, enabling large factories to deliver a wide range of custom-made products at low mass-production costs.49 Computerized machines can make instantaneous changes—such as putting a larger screw in a different location—without slowing the production line. A manufacturer can turn out an infinite variety of products in unlimited batch sizes, as illustrated in Exhibit 7.5.

Mass production

Small batch Flexible manufacturing

TRADITIONAL

Continuous process

CHOICES

NEW CHOICES

Standardized

UnlimitedSmall

Customized

Mass customization

BATCH SIZE

PR OD

UC T

FL EX

IB IL

IT Y

Exhibit 7.5 Relationship of Smart Manufacturing Technology to Traditional Technologies

Source: Based on Jack Meredith, “The Strategic Advantages of New Manufacturing Technologies for Small Firms,” Strategic Management Journal 8 (1987), 249–258; Paul Adler, “Managing Flexible Automation,” California Management Review (Spring 1988), 34–56; and Otis Port, “Custom-made Direct from the Plant,” BusinessWeek/21st Century Capitalism, November 18, 1994, 158–159.

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272 Part 4: Internal Design Elements

In traditional manufacturing systems studied by Woodward, choices were limited to the diagonal. Small batch allowed for high product flexibility and custom orders, but because of the “craftsmanship” involved in custom-making products, batch size was necessarily small. Mass production could have large-batch size, but offered limited product flexibility. Continuous process could produce a single standard product in unlimited quantities. The smart factory allows plants to break free of this diagonal and to increase both batch size and product flexibility at the same time. When taken to its ultimate level, the smart factory allows for mass customization, with each specific product tailored to customer specification. This high-level use of smart systems has been referred to as computer-aided craftsmanship.50

Performance and Structural Implications

Studies suggest that in smart factories, machine utilization is more efficient, labor productivity increases, scrap rates decrease, and product variety and customer satis- faction increase.51 Many U.S. manufacturing companies are reinventing the factory using digital systems and lean manufacturing techniques to increase productivity.

Research into the relationship between the smart factory and organizational characteristics has discovered the organizational patterns summarized in Exhibit 7.6. Compared with traditional mass-production technologies, the smart factory has a narrow span of control, few hierarchical levels, adaptive tasks, low specialization, and decentralization, and the overall environment is characterized as organic and self-regulative. Employees need the skills to participate in teams; training is broad (so workers are not overly specialized) and frequent (so workers are up to date).

Characteristic Mass Production Smart Factory

Structure

Span of control Wide Narrow

Hierarchical levels Many Few

Tasks Routine, repetitive Adaptive, craftlike

Specialization High Low

Decision making Centralized Decentralized

Overall Bureaucratic, mechanistic Self-regulating, organic

Human resources

Interactions Standalone Teamwork

Training Narrow, one time Broad, frequent

Expertise Manual, technical Cognitive, social; solve problems

Interorganizational

Customer demand Stable Changing

Suppliers Many, arm’s length Few, close relationships

Sources: Based on Patricia L. Nemetz and Louis W. Fry, “Flexible Manufacturing Organizations: Implications for Strategy Formulation and Organization Design,” Academy of Management Review 13 (1988), 627–638; Paul S. Adler, “Managing Flexible Automation,” California Management Review, Spring 1988, 34–56; and Jeremy Main, “Manufacturing the Right Way,” Fortune, May 21, 1990, 54–64.

Exhibit 7.6 Comparison of Organi- zational Characteristics Associated with Mass Production and Smart Factories

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Chapter 7: Manufacturing and Service technologies 273

Expertise tends to be cognitive so workers can process abstract ideas and solve problems. Interorganizational relationships in smart factories are characterized by changing demand from customers—which is easily handled with the new technology—and close relationships with a few suppliers that provide top-quality raw materials.52

Technology alone cannot give organizations the benefits of flexibility, quality, increased productivity, and greater customer satisfaction. Research suggests that organizational structures and management processes also must be redesigned to take advantage of the new technology.53 When top managers make a commitment to implement new structures and processes that empower workers and support a learning and knowledge-creating environment, the smart factory can help companies be more competitive.54

Core Organization Service technology Another big change occurring in the technology of organizations is the growing service sector. More than half of all businesses in the United States are service or- ganizations, and according to one estimate nearly 90 percent of the U.S. workforce is employed in services, such as restaurants, hospitals, hotels and resorts, airlines, retail, financial services, and information services.55

Service Firms

Service technologies are different from manufacturing technologies and, in turn, require a different organization design.

Definition. Whereas manufacturing organizations achieve their primary purpose through the production of products, service organizations accomplish their primary purpose through the production and provision of services, such as education, healthcare, transportation, banking, and hospitality. Studies of service organizations have focused on the unique dimensions of service technologies. The characteristics of service technology are compared to those of manufacturing technology in Exhibit 7.7.

The most obvious difference is that service technology produces an intangible output, such as social networking provided by Facebook, rather than a tangible product, such as a refrigerator produced by General Electric. A service is abstract and often consists of knowledge and ideas rather than a physical product. Thus, whereas manufacturers’ products can be inventoried for later sale, services are characterized by simultaneous production and consumption. A client meets with a doctor or attorney, for example, and students and teachers come together in the classroom or over the Internet. A service is an intangible product that does not exist until it is requested by the customer. It cannot be stored, inventoried, or viewed as a finished good. If a service is not consumed immediately upon production, it disappears.56 This typically means that service firms are labor and knowledge intensive, with many employees needed to meet the needs of customers, whereas manufacturing firms tend to be capital intensive, relying on mass production, continuous process, and smart manufacturing technologies.57

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274 Part 4: Internal Design Elements

Direct interaction between customer and employee is generally very high with services, while there is little direct interaction between customers and employees in the technical core of a manufacturing firm. This direct interaction means that the human element (employees) becomes extremely important in service firms. Whereas most people never meet the workers who manufactured their cars, they interact directly with the salesperson who sells them a new truck or the Avis associate who rents them a car while on vacation. The treatment received from the salesperson— or from a doctor, lawyer, or hairstylist—affects the perception of the service received and the customer’s level of satisfaction. The quality of a service is perceived and cannot be directly measured and compared in the same way that the quality of a tangible product can. Another characteristic that affects customer satisfaction and perception of quality service is rapid response time. A service must be provided when the customer wants and needs it. When you take a friend to dinner, you want to be seated and served in a timely manner; you would not be very satisfied if the hostess or manager told you to come back tomorrow when there would be more tables or servers available to accommodate you.

The final defining characteristic of service technology is that site selection is often much more important here than with manufacturing. Because services are intangible, they have to be located where the customer wants to be served. Services are dispersed and located geographically close to customers. For example, fast- food franchises usually disperse their facilities into local stores. Most towns of even moderate size today have two or more McDonald’s restaurants rather than one large one, for example, in order to provide service where customers want and need it.

Exhibit 7.7 Differences Between Manufacturing and Service Technologies

Service Technology 1. Intangible output 2. Production and consumption take place

simultaneously 3. Labor- and knowledge-intensive 4. Customer interaction generally high 5. Human element very important 6. Quality is perceived and dif cult to

measure 7. Rapid response time is usually necessary 8. Site of facility is extremely important

Manufacturing Technology 1. Tangible product 2. Products can be inventoried for later

consumption 3. Capital asset-intensive 4. Little direct customer interaction 5. Human element may be less important 6. Quality is directly measured 7. Longer response time is acceptable 8. Site of facility is moderately important

Service Airlines Hotels

Consultants Health care Law  rms

Product and Service Fast-food outlets

Cosmetics Real estate

Stockbrokers Retail stores

Product Soft drink companies

Steel companies Automobile manufacturers

Mining corporations Food processing plants

Sources: Based on F. F. Reichheld and W. E. Sasser, Jr., “Zero Defections: Quality Comes to Services,” Harvard Business Review 68 (September–October 1990), 105–111; and David E. Bowen, Caren Siehl, and Benjamin Schneider, “A Framework for Analyzing Customer Service Orientations in Manufacturing,” Academy of Management Review 14 (1989), 75–95.

Briefcase as an organization manager, keep these guidelines in mind: Use the concept of service technology to evaluate the production process in nonmanufac- turing firms. Services are intangible and must be located close to the customer. hence, service organizations may have an organiza- tion design with fewer boundary roles, greater geographical dispersion, decentralization, highly skilled employees in the technical core, and generally less control than in manufacturing organizations.

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Chapter 7: Manufacturing and Service technologies 275

In reality, it is difficult to find organizations that reflect 100 percent service or 100 percent manufacturing characteristics. Some service firms take on character- istics of manufacturers, and vice versa. Many manufacturing firms are placing a greater emphasis on customer service to differentiate themselves and be more com- petitive. In addition, manufacturing organizations have departments such as pur- chasing, human resources, and marketing that are based on service technology. On the other hand, organizations such as gas stations, stockbrokers, retail stores, and restaurants belong to the service sector, but the provision of a product is a signifi- cant part of the transaction. The vast majority of organizations involve some combi- nation of products and services. The important point is that all organizations can be classified along a continuum that includes both manufacturing and service charac- teristics, as illustrated in Exhibit 7.7. This chapter’s “How Do You Fit the Design?” questionnaire will give you some insight into whether you are better suited to be a manager in a service organization or a manufacturing firm.

the trend toward Lean Services. Service firms have always tended toward pro- viding customized output—that is, providing exactly the service each customer wants and needs. When you visit a hairstylist, you don’t automatically get the same cut the stylist gave the three previous clients. The stylist cuts your hair the way you request it. Pandora.com, whose mission is “to play only music you love,” provides its 250 million or so registered users with a custom radio channel that broadcasts a set of music that fits their preferences.58

Customer expectations of what constitutes good service are rising. Zappos.com provides free shipping on both orders and returns. Amazon.com not only aims to have the lowest price and the fastest delivery, it also helps outside retailers bring their customer service up to par and covers for their service shortcomings if they don’t. Insurance and financial services giant USAA cross-trained its agents and call center representatives so that customers can get answers to their questions about any product or service rather than being switched around from one agent to an- other.59 At Montefiore Medical Center in the Bronx, New York, rather than having specialized medical, surgical, cardiothoracic, and neurosurgical intensive care units (ICUs), Dr. Vladimir Kvetan combined them into a central critical-care department to increase efficiency and improve patient care. Kvetan, director of critical-care medicine, is continually thinking of ways to provide better care more efficiently, which means Montefiore rarely encounters the critical-care bottlenecks that many other large hospitals experience.60

The expectation for better service is pushing service firms in industries from food service to package delivery to take a lesson from manufacturing.61 Japan Post, under pressure to cut a $191 million loss on operations, hired Toyota’s Toshihiro Takahashi to help apply the principles of the lean Toyota Production System to the collection, sorting, and delivery of mail. In all, Takahashi’s team came up with 370 improvements and reduced the post office’s person-hours by 20 percent. The waste reduction is expected to cut costs by around $350 million a year.62 Numerous other service firms, in the United States as well as in other countries, have also applied lean principles in recent years. Starbucks Corporation hired a vice president of lean thinking who has been traveling the world with a lean team to work with employees to find ways to cut waste and improve customer service. Panera Bread Company is looking for ways to improve sales and profits because long lines at the sandwich chain’s outlets have caused some customers to walk out and inaccurate orders have caused others not to return.63 Another good example comes from Seattle Children’s Hospital, which applied lessons from manufacturing to increase efficiency and improve patient care.

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276 Part 4: Internal Design Elements

HOW DO yOU FIt tHE DESIGN?

MaNUFaCtUrING VErSUS SErVICE The questions that follow ask you to describe your behavior. For each question, check the answer that best describes you.

1. I am usually running late for class or other appointments: a. Yes b. No

2. When taking a test I prefer: a. Subjective questions (discussion or essay) b. Objective questions (multiple choice)

3. When making decisions, I typically: a. Go with my gut—what feels right b. Carefully weigh each option

4. When solving a problem, I would more likely: a. Take a walk, mull things over, and then discuss b. Write down alternatives, prioritize them, and then

pick the best

5. I consider time spent daydreaming as: a. A viable tool for planning my future b. A waste of time

6. To remember directions, I typically: a. Visualize the information b. Make notes

7. My work style is mostly: a. Juggle several things at once b. Concentrate on one task at a time until complete

8. My desk, work area, and laundry area are typically: a. Cluttered b. Neat and organized

Scoring: Count the number of checked “a” items and “b” items. Each “a” represents right-brain processing, and each “b” represents left-brain processing. If you scored 6 or higher on either, you have a distinct processing style. If you checked fewer than 6 for either, you probably have a balanced style.

Interpretation: People have two thinking processes— one visual and intuitive in the right half of the brain, and the other verbal and analytical in the left half of the brain. The thinking process you prefer predisposes you to certain types of knowledge and information—technical reports, analytical information, and quantitative data (left brain) ver- sus talking to people, thematic impressions, and personal intuition (right brain)—as effective input to your thinking and decision making. Manufacturing organizations typically use left-brain processing to handle data based on physical, measurable technology. Service organizations typically use right-brain processing to interpret less tangible situations and serve people in a direct way. Left-brain processing has been summarized as based on logic; right-brain processing has been summarized as based on love.

Source: Adapted from Carolyn Hopper, Practicing Management Skills (Houghton Mifflin, 2003); and Jacquelyn Wonder and Priscilla Donovan, “Mind Openers,” Self (March 1984).

In PractIce Seattle

Children’s hospital

Ten years ago, Seattle Children’s Hospital set a goal to become the top hospital of its type in the country. But with healthcare costs rising nationwide, administrators needed to find ways not only to improve patient care but also cut costs. They did it by applying lean tech- niques through a program called “Continuous Performance Improvement” (CPI). The main goals of CPI are to reduce waste and increase value for customers (patients).

CPI examines every aspect of patients’ experience, from the time they arrive in the park- ing lot until they are discharged. Managers involved all hospital staff in studying the flow of medicines, patients, and information in the same way plant managers study the flow of materials in a manufacturing plant, and asked them to find ways to improve processes. Patients often had to wait for a non-emergency MRI for nearly a month. Now, that wait time has been cut to one or two days thanks to more efficient scheduling. Standardizing the

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Chapter 7: Manufacturing and Service technologies 277

With the costs of medical care soaring, other healthcare organizations are also taking a continuous improvement approach to cutting costs without sacrificing quality of care. “In healthcare, you can’t do one big thing and reduce the price,” says Dr. Devi Shetty, who runs a hospital in India that performs open-heart surgery for about 10 percent of the cost charged by hospitals in the United States (described in a Chapter 3 In Practice). “We have to do 1,000 small things.”65

Designing the Service Organization

The feature of service technologies with a distinct influence on organizational struc- ture and control systems is the need for technical core employees to be close to the customer.66 The differences between service and product organizations necessitated by customer contact are summarized in Exhibit 7.8.

The impact of customer contact on organization design is reflected in the use of boundary roles and structural disaggregation.67 Boundary roles are used exten- sively in manufacturing firms to handle customers and to reduce disruptions for the technical core. They are used less in service firms because a service is intangible and cannot be passed along by boundary spanners, so service customers must interact directly with technical employees, such as doctors or brokers.

A service firm deals in information and intangible outputs and does not need to be large. Its greatest economies are achieved through disaggregation into small units that can be located close to customers. Stockbrokers, doctors’ clinics,

instrument cart for specific types of surgeries cut inventory costs and reduced instrument preparation errors. An operating room team saw that a tonsillectomy procedure required filling out 21 separate forms and worked to cut that number down to 11. Overhauling the procedure for sterilizing surgical instruments increased the number of surgeries the hospital could perform. Overall, the CPI program helped cut costs per patient by 3.7 percent, for a savings of $23 million. The hospital has also been able to serve thousands more patients without expanding or adding beds.

A key aspect of the CPI program was shifting corporate culture by training doctors, nurses, administrators, and others in new methods and ways of thinking. Using CPI, teams can make changes any time they think they can improve a process or cut waste (defined as anything that doesn’t add value for the patient). Even small changes that increase ef- ficiency and improve patient care are celebrated by hospital administrators. “Their support fosters the idea that everyone can make positive changes in their departments,” said one physician.64

Service Product

Structural Characteristic 1. Separate boundary roles Few Many

2. Geographical dispersion Much Little

3. Decision making Decentralized Centralized

4. Formalization Lower Higher

Human resources 1. Employee skill level Higher Lower

2. Skill emphasis Interpersonal Technical

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Exhibit 7.8 Configuration and Structural Characteristics of Service Organizations Versus Product Organizations

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278 Part 4: Internal Design Elements

consulting firms, and banks disperse their facilities into regional and local offices. Manufacturing firms, on the other hand, tend to aggregate operations in a single area that has raw materials and an available workforce. A large manufacturing firm can take advantage of economies derived from expensive machinery and long production runs.

Service technology also influences internal organization characteristics used to direct and control the organization. For one thing, the skills of technical core employees typically need to be higher. These employees need enough knowledge and awareness to handle customer problems rather than just enough to perform mechanical tasks. Employees need social and interpersonal skills as well as technical skills.68 Because of higher skills and structural dispersion, decision making often tends to be decentralized in service firms, and formalization tends to be low. Although some service organizations, such as many fast-food chains, have set rules and procedures for customer service, employees in service organizations typically have more freedom and discretion on the job. Managers at Home Depot have learned that how employees are managed has a great deal to do with the success of a service organization.

In PractIce home

Depot Inc.

Home Depot grew to be the world’s largest home improvement retailer largely on the strength of its employees. Many people hired to work in the stores were former plumb- ers, carpenters, or other skilled tradesmen who understood the products and took pride in helping do-it-yourself customers find the right tools and supplies and know how to use them.

To cut costs, however, the company began hiring more part-time employees and instituted a salary cap that made jobs less appealing to experienced workers. As a further way to reduce costs, managers began measuring every aspect of the stores’ productivity, such as how long it took to unload shipments of goods or how many extended warranties each employee sold per week. Customers began complaining that they could never find anyone to assist them—and even when they did, many employees didn’t have the knowledge and experience to be of much help. Some customers took their business elsewhere, even if it meant going to small shops where they would pay higher prices but get better service.

Home Depot managers have been working hard to get things back on track. The stores are hiring more full-timers again, instituting new training programs, and looking for other ways to make sure service employees are knowledgeable and helpful.69

Managers at Home Depot can use an understanding of the nature of service technology to help them align strategy, structure, and management processes and make the retailer more effective. Service technologies require structures and systems that are quite different from those for a traditional manufacturing technology. For example, the concept of separating complex tasks into a series of small jobs and exploiting economies of scale is a cornerstone of traditional manufacturing, but researchers have found that applying it to service organizations often does not work so well.70 Some service firms have redesigned jobs to separate low- and high- customer-contact activities, with more rules and standardization in the low-contact jobs. High-touch service jobs, like those on the Home Depot sales floor, need more freedom and less control to satisfy customers.

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Chapter 7: Manufacturing and Service technologies 279

Now let’s turn to another perspective on technology, that of production activi- ties within specific organizational departments. Departments often have character- istics similar to those of service technology, providing services to other departments within the organization.

Noncore Departmental technology This section shifts to the department level of analysis for departments not within the technical core. For example, refer back to Exhibit 7.1 on page 260, which illustrates human resources, accounting, research and development, and marketing departments that are outside of the technical core. Each of these (and other noncore) departments in an organization has its own production process that consists of a distinct technology. A company such as Tenneco, a maker of auto parts, might have departments for engineering, research and development, human resources, marketing, quality control, finance, and dozens of other functions. This section analyzes the nature of departmental technology and its relationship with departmental design.

The framework that has had the greatest impact on the understanding of de- partmental technologies was developed by Charles Perrow.71 Perrow’s model has been useful for a broad range of technologies, which made it ideal for research into departmental activities.

Variety

Perrow specified two dimensions of departmental activities that were relevant to organization structure and processes. The first is the number of exceptions in the work. This refers to task variety, which is the frequency of unexpected and novel events that occur in the conversion process. Task variety concerns whether work activities are performed the same way every time or differ from time to time as employees transform the organization’s inputs into outputs.72 When individuals encounter a large number of unexpected situations, with frequent problems, variety is considered high. When there are few problems, and when day-to-day job requirements are repetitious, technology contains little variety. Variety in departments can range from repeating a single act, such as on a traditional assembly line, to working on a series of unrelated problems, such as in a hospital emergency room.

2the best way for a company to provide good service is to have abundant and clear rules and procedures and make sure everyone follows them to the letter. aNSWEr: Disagree. Service employees need good interpersonal skills and a degree of autonomy to be able to satisfy each customer’s specific needs. Although many service organizations have some standard procedures for serving customers, service firms are typically low on both centralization and formalization. Abundant rules can take away both personal autonomy and the personal touch.

assEss YouR answER

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280 Part 4: Internal Design Elements

analyzability

The second dimension of technology concerns the analyzability of work activities. When the conversion process is analyzable, the work can be reduced to mechanical steps and participants can follow an objective, computational procedure to solve problems. Problem solution may involve the use of standard procedures, such as instructions and manuals, or technical knowledge, such as that in a textbook or handbook. On the other hand, some work is not analyzable. When problems arise, it is difficult to identify the correct solution. There is no store of techniques or procedures to tell a person exactly what to do. The cause of or solution to a problem is not clear, so employees rely on accumulated experience, intuition, and judgment. The final solution to a problem is often the result of wisdom and experience and not the result of standard procedures. For example, Philippos Poulos, a tone regulator at Steinway & Sons, has an unanalyzable technology. Tone regulators carefully check each piano’s hammers to ensure that they produce the proper “Steinway sound.”73 These quality-control tasks require years of experience and practice. Standard procedures will not tell a person how to do such tasks.

Framework

The two dimensions of departmental technology and examples of departmental activities that would fit on Perrow’s framework are shown in Exhibit 7.9. The dimensions of variety and analyzability form the basis for four major categories of technology: routine, craft, engineering, and nonroutine.

Categories of Departmental technology. routine technologies are characterized by little task variety and the use of objective, computational procedures. The tasks are formalized and standardized. Examples include an automobile assembly line and a bank teller department.

Craft technologies are characterized by a fairly stable stream of activities, but the conversion process is not analyzable or well understood. Tasks require extensive training and experience because employees respond to intangible factors on the basis of wisdom, intuition, and experience. Although advances in machine technologies seem to have reduced the number of craft technologies in organizations, craft technologies are still important. For example, steel furnace engineers continue to mix steel based on intuition and experience, pattern makers at fashion houses such as Louis Vuitton, Zara, or H&M convert rough designers’ sketches into saleable garments, and teams of writers for television series such as Glee or The Mentalist convert ideas into story lines.

Engineering technologies tend to be complex because there is substantial variety in the tasks performed. However, the various activities are usually handled on the basis of established formulas, procedures, and techniques. Employees normally refer to a well-developed body of knowledge to handle problems. Engineering and accounting tasks usually fall in this category.

Nonroutine technologies have high task variety, and the conversion process is not analyzable or well understood. In nonroutine technology, a great deal of effort is devoted to analyzing problems and activities. Several equally acceptable options typically can be found. Experience and technical knowledge are used to solve problems and perform the work. Basic research, strategic planning, and other work that involves new projects and unexpected problems are nonroutine. The biotechnology industry also represents a nonroutine technology. Breakthroughs in understanding metabolism and physiology at a cellular level depend on highly trained employees who use their experience and intuition, as well as scientific knowledge.74

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Chapter 7: Manufacturing and Service technologies 281

routine Versus Nonroutine. Variety and analyzability can be combined into a single dimension of technology. This dimension is called routine versus nonroutine technology. The analyzability and variety dimensions are often correlated in depart- ments, meaning that technologies high in variety tend to be low in analyzability, and technologies low in variety tend to be analyzable. Departments can be evaluated along a single dimension of routine versus nonroutine, as illustrated in Exhibit 7.9, that combines both analyzability and variety, which is a useful shorthand measure for analyzing departmental technology.

The following questions show how departmental technology can be analyzed for determining its placement on Perrow’s technology framework in Exhibit 7.9.75 Employees normally circle a number from 1 to 7 in response to each question.

Variety:

1. To what extent would you say your work is routine? 2. Does almost everyone in this unit do about the same job in the same way most

of the time? 3. Are unit members performing repetitive activities in doing their jobs?

Nonroutine • Strategic planning • Social science research • Applied research

Craft • Performing arts • Handmade goods •Theatrical production

Routine • Clerical • Auditing • Auto assembly • Sales

Engineering

•Engineering •Tax accounting •Scienti�c research

RO UT

IN E

NO NR

OU TIN

E

—

University teaching General management

Sources: Based on R. L. Daft and N. Macintosh, “A New Approach to the Design and Use of Management Information,” California Management Review 20 (August 1978), 82–92; R. L. Daft and N. Macintosh, “The Technology of User Departments and Information Design,” Information and Management I (April 1978), 122–131; and R. L. Daft and N. Macintosh, “A Tentative Exploration into the Amount and Equivocality of Information Processing in Organizational Work Units,” Administrative Science Quarterly 26 (June 1981), 207–224.

Exhibit 7.9 Framework for Department Technologies

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282 Part 4: Internal Design Elements

Analyzability:

1. To what extent is there a clearly known way to do the major types of work you normally encounter?

2. To what extent is there an understandable sequence of steps that can be fol- lowed in doing your work?

3. To do your work, to what extent can you actually rely on established proce- dures and practices?

If answers to the preceding questions indicate high scores for analyzability and low scores for variety, the department would have a routine technology. If the oppo- site occurs, the technology would be nonroutine. Low variety and low analyzability indicate a craft technology, and high variety and high analyzability indicate an engi- neering technology. As a practical matter, most departments fit somewhere along the diagonal and can be most easily characterized as routine or nonroutine.

Department Design

Once the nature of a department’s technology has been identified, the appropriate design can be determined. Department technology tends to be associated with a cluster of departmental characteristics, such as the skill level of employees, formalization, and methods of communication. Definite patterns exist in the relationship between work unit technology and design characteristics, which are associated with departmental performance.76 Key relationships between technology and other dimensions of departments are described in this section and are summarized in Exhibit 7.10.

The overall design of departments may be characterized as either organic or mechanistic. Routine technologies are associated with a mechanistic design, with formal rules and rigid management processes. Nonroutine technologies are associated with an organic design, and department management is more flexible and free-flowing. The specific design characteristics of formalization, centralization, employee skill level, span of control, and communication and coordination vary, depending on work unit technology. For example, consider the organization of departments that provide food to hospital patients.

In PractIce Memorial

Sloan- Kettering

Cancer Center

For many years, hospital food service units reflected a routine technology. Workers fol- lowed a standard menu, prepared meals according to standard recipes, and followed stan- dard rules and procedures. In recent years, some hospitals have shifted to a nonroutine approach.

Pnina Peled, head chef at Memorial Sloan-Kettering Cancer Center, recently made her first lemon-flavored pizza. Peled is always thinking of new ways to get patients to eat. A teenage patient wanted pizza but could only taste lemon, so Peled created a pizza with a lemon Alfredo sauce. At Memorial Sloan-Kettering, patients “now order what they want to eat, when they are ready to eat,” says Veronica McLymont, director of food and nutrition services. That means less food waste, but it also means kitchen staff has to be better trained, more experienced, and more flexible, and people need more discretion in their behavior to provide personalized food service. Hospitals such as Memorial Sloan-Kettering, Rex Healthcare in Raleigh, North Carolina, MD Anderson Cancer Center in Houston, and Brigham and Women’s Hospital in Boston are retraining kitchen staff, giving them more flexibility in line with a nonroutine service technology.77

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Chapter 7: Manufacturing and Service technologies 283

1. Formalization. Routine technology is characterized by standardization and division of labor into small tasks that are governed by formal rules and procedures. For non- routine tasks, the structure is less formal and less standardized. When variety is high, as in a research department, fewer activities are covered by formal procedures.78

2. Decentralization. In routine technologies, most decision making about task activ- ities is centralized to management.79 In engineering technologies, employees with technical training tend to acquire moderate decision authority because techni- cal knowledge is important to task accomplishment. Production employees who have years of experience obtain decision authority in craft technologies because they know how to respond to problems. Decentralization to employees is greatest in nonroutine settings, where many decisions are made by employees.

3. Employee skill level. Work staff in routine technologies typically require little education or experience, which is congruent with repetitious work activities. In work units with greater variety, staff members are more skilled and often have formal training in technical schools or universities. Training for craft activities, which are less analyzable, is more likely to be through job experience. Nonroutine activities require both formal education and job experience.80

Mostly Organic Design 1. Moderate formalization 2. Moderate centralization 3. Work experience 4. Moderate to wide span 5. Horizontal, verbal communications

CRAFT

Key 1. Formalization 2. Centralization 3. Staff qualications 4. Span of control 5. Communication and coordination

Mechanistic Design 1. High formalization 2. High centralization 3. Little training or experience 4. Wide span 5. Vertical, written communications

ROUTINE

Mostly Mechanistic Design 1. Moderate formalization 2. Moderate centralization 3. Formal training 4. Moderate span 5. Written and verbal communications

ENGINEERING

Organic Design 1. Low formalization 2. Low centralization 3. Training plus experience 4. Moderate to narrow span 5. Horizontal communications, meetings

NONROUTINE

Exhibit 7.10 Relationship of Department Technology to Structural and Management Characteristics

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284 Part 4: Internal Design Elements

4. Span of control. Span of control is the number of employees who report to a single manager or supervisor. This characteristic is normally influenced by departmental technology. The more complex and nonroutine the task, the more problems arise in which the supervisor becomes involved. Although the span of control may be influenced by other factors, such as skill level of employees, it typically should be smaller for complex tasks because on such tasks the supervisor and subordinate must interact frequently.81

5. Communication and coordination. Communication activity and frequency increase as task variety increases.82 Frequent problems require more information sharing to solve problems and ensure proper completion of activities. The direction of communication is typically horizontal in nonroutine work units and vertical in routine work units.83 The form of communication varies by task analyzability.84 When tasks are highly analyzable, statistical and written forms of communication (e.g., memos, reports, rules, and procedures) are frequent. When tasks are less analyzable, information typically is conveyed face to face, over the telephone, or in group meetings.

Two important points are reflected in Exhibit 7.10. First, departments differ from one another and can be categorized according to their workflow technology.85 Second, structural and management processes differ based on departmental technology. Managers should design their departments so that requirements based on technology can be met. Design problems are most visible when the design is clearly inconsistent with technology. Studies have found that when structure and communication characteristics did not reflect technology, departments tended to be less effective.86 Employees could not communicate with the frequency needed to solve problems.

Briefcase as an organization manager, keep these guidelines in mind: Use the two dimen- sions of variety and analyzability to discover whether the work in a department is rou- tine or nonroutine. If the work in a depart- ment is routine, use a mechanistic design, with a rigid structure and processes. If the work in a department is nonroutine, use an organic design and flexible management processes.

3 the design characteristics and management processes that are effective for a television station’s sales department probably would not work so well for the news department.

aNSWEr: Agree. The news department has a nonroutine technology compared to the sales department. No one knows what newsworthy events are going to happen during the day, when or where they will happen, or how they will need to be covered. Sales tasks, particularly telephone sales to repeat customers involving standard rates for advertising, can be performed using standard procedures, but gathering and reporting news events can’t be standardized. A sales department would be characterized as routine because there is little variety and tasks are well understood.

assEss YouR answER

Workflow Interdependence among Departments The final characteristic of technology that influences organization design is called interdependence. Interdependence means the extent to which departments depend on each other for information, resources, or materials to accomplish their tasks. Low interdependence means that departments can do their work independently of each other and have little need for interaction, consultation, or exchange of materials. High interdependence means departments must constantly exchange resources.

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Chapter 7: Manufacturing and Service technologies 285

types

James Thompson defined three types of interdependence that influence organization structure.87 These interdependencies are illustrated in Exhibit 7.11 and are discussed in the following sections.

Pooled. Pooled interdependence is the lowest form of interdependence among departments. In this form, work does not flow between units. Each department is part of the organization and contributes to the common good of the organization, but works independently. Subway restaurants or Bank of America branches are examples of pooled interdependence. An outlet in Chicago need not interact with an outlet in Urbana. Pooled interdependence may be associated with the relationships within a divisional structure, defined in Chapter 3. Divisions or branches share financial resources from a common pool, and the success of each division contributes to the success of the overall organization.

Thompson proposed that pooled interdependence would exist in firms with what he called a mediating technology. A mediating technology provides products or services that mediate or link clients from the external environment and, in so doing, allows each department to work independently. Banks, brokerage firms, and real estate offices all mediate between buyers and sellers, but the offices work indepen- dently within the organization.

Exhibit 7.11 Thompson’s Classification of Interdependence and Management Implications

Low communication

Standardization, rules,

procedures

Divisional structure

Low

Pooled (bank)

Sequential (assembly line)

Reciprocal (hospital)

Clients

Client

Client

Medium

High

Plans, schedules, feedback

Task forces

Mutual adjustment, relational

coordination, teamwork

Horizontal structure

Medium communication

High communication

Form of Interdependence

Demands on Horizontal

Communication, Decision Making

Type of Coordination

Required

Priority for Locating Units Close Together

© C

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ea rn

in g®

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286 Part 4: Internal Design Elements

The management implications associated with pooled interdependence are quite simple. Thompson argued that managers should use rules and procedures to standardize activities across departments. Each department should use the same procedures and financial statements so the outcomes of all departments can be measured and pooled. Very little day-to-day coordination is required among units.

Sequential. When interdependence is of serial form, with parts produced in one department becoming inputs to another department, it is called sequential interdependence. The first department must perform correctly for the second department to perform correctly. This is a higher level of interdependence than pooled interdependence because departments exchange resources and depend on others to perform well. Sequential interdependence creates a greater need for horizontal mechanisms such as integrators or task forces.

Sequential interdependence occurs in what Thompson called long-linked technology, which “refers to the combination in one organization of successive stages of production; each stage of production uses as its inputs the production of the preceding stage and produces inputs for the following stage.”88 An example of sequential interdependence comes from the shipbuilding industry. Until recently, ship designers made patterns and molds out of paper and plywood, which were passed on to assembly. The cutting department depended on accurate measurements from the designers, and the assembly department depended on accurate parts from the cutting department. This sequential interdependence meant that mistakes in measurements or pattern mix-ups often caused errors in the cutting and assembly process, leading to delays and increased costs. Naval architect Filippo Cali created a complex software program that computerizes the process of making patterns and molds, thus eliminating many of the problems between design and assembly.89 Another example of sequential interdependence would be an automobile assembly line, which must have all the parts it needs to keep production rolling, such as engines, steering mechanisms, and tires.

The management requirements for sequential interdependence are more demanding than those for pooled interdependence. Coordination among the linked plants or departments is required. Since the interdependence implies a one-way flow of materials, extensive planning and scheduling are generally needed. Department B needs to know what to expect from Department A so both can perform effectively. Some day-to-day communication among plants or departments is also needed to handle unexpected problems and exceptions that arise.

reciprocal. The highest level of interdependence is reciprocal interdependence. This exists when the output of operation A is the input to operation B, and the output of operation B is the input back again to operation A. The outputs of departments influence those departments in reciprocal fashion.

Reciprocal interdependence tends to occur in organizations with what Thompson called intensive technologies, which provide a variety of products or services in com- bination to a client. A firm developing new products provides an example of recip- rocal interdependence. Intense coordination is needed between design, engineering, manufacturing, and marketing to combine all their resources to suit the customer’s product need. For example, Callaway Golf introduces seven to eight new products every year to keep its edge as one of the industry’s most innovative manufacturers.

Briefcase as an organization manager, keep these guidelines in mind: Evaluate the interde- pendencies among organizational de- partments. Use the general rule that, as interdependencies increase, mechanisms for coordination must also increase. Consider a divisional structure for pooled interdepen- dence. For sequential interdependence, use task forces and in- tegrators for greater horizontal coordination. at the highest level of interdependence (recip- rocal interdependence), support relational coor- dination and consider a horizontal structure.

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Chapter 7: Manufacturing and Service technologies 287

Maintaining that pace requires tight coordination between design teams, engineers, marketing staff, and even lawyers. Teams have to communicate and quickly and se- curely share information created with CAD and CAM software with manufacturing partners in China, Japan, Korea, Mexico, and Taiwan. With the use of collaborative software, everyone involved in the process is able to access files 24 hours a day to keep track of the project. On a typical business day, 200 different users will access documents and collaborate with others.90 Hospitals are also excellent examples of reciprocal interdependence because they provide coordinated services to patients.

Reciprocal interdependence requires that departments work together intimately and frequently. A study of top management teams confirms that the effective performance of teams characterized by high interdependence depends on good communication and close coordination.91 With reciprocal interdependence, the structure must allow for frequent horizontal communication and adjustment, perhaps using cross-functional teams or a horizontal structure. Extensive planning is required, but plans will not anticipate or solve all problems. Daily interaction and mutual adjustment among departments are required. People from several departments might need to be involved in face-to-face coordination, teamwork, and decision making. For these reasons, managers in organizations characterized by reciprocal interdependence often organize work in such a way to encourage and support relational coordination, as described in Chapter 3, so that people share information and coordinate across departments as a normal part of their everyday work lives. Coordination and information sharing is built into the fabric of the organization.92 Southwest Airlines provides a good example.

In PractIce Southwest airlines

For all airlines, flight departure is a highly complex process that involves numerous employ- ees from various departments, performing multiple tasks under uncertain and ever-changing conditions. Exhibit 7.12 illustrates the highly interdependent nature of the flight departure process, which involves ticket agents, pilots, flight attendants, baggage handlers, gate agents, operations agents, mechanics, cabin cleaners, ramp agents, cargo handlers, fuel attendants, and caterers. Tight coordination among these groups is essential for a success- ful on-time departure.

As described in Chapter 3, Southwest Airlines has the shortest turnaround time in the industry. How do they do it? Southwest promotes relational coordination among all these interdependent groups, some of which are illustrated in Exhibit 7.12, to achieve superior on-time performance and a high level of customer satisfaction. Southwest managers created what they call team delay, which helps people pinpoint problems in coordination between various groups rather than searching for who is to blame when something goes wrong. The emphasis on the team focuses everyone on shared goals of safety, on-time departure, accurate baggage handling, and customer satisfaction. People are motivated to work together and coordinate their activities rather than look out for themselves and try to avoid or shift blame. Supervisors work closely with employees to facilitate learning and help people accomplish their jobs.

Southwest puts a lot of emphasis on hiring people with a collaborative attitude. Rather than focusing on technical skills, Southwest focuses on hiring people who are oriented toward teamwork. Training and development activities and organizational stories reinforce teamwork and mutual respect. One story is told that a pilot came for an interview at Southwest and treated an administrative assistant with disrespect. He didn’t get the job. “We all succeed together—and all fail together,” is the philosophy at Southwest, as one field manager put it.93

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288 Part 4: Internal Design Elements

By using practices that support teamwork, shared goals, mutual respect, and shared responsibility and accountability, Southwest facilitates relational coordina- tion so that interdependent departments are tightly coordinated. Reciprocal interde- pendence is the most complex interdependence for organizations to handle and the most challenging for managers in designing the organization.

Structural Priority

As indicated in Exhibit 7.11, because decision making, communication, and coordination problems are greatest for reciprocal interdependence, reciprocal interdependence should receive first priority in organization structure. Activities that are reciprocally interdependent should be grouped close together in the organization so that managers have easy access to one another for mutual adjustment. These units should report to the same person on the organization chart and should be physically close so the time and effort for coordination can be minimized. A horizontal structure, with linked sets of teams working on core processes, can provide the close coordination needed to support reciprocal interdependence. Poor coordination will result in poor performance for the organization. If reciprocally interdependent units are not located close together, the organization should design mechanisms for coordination, such as daily meetings between departments or an intranet to facilitate communication. The next priority is given to sequential interdependencies, and finally to pooled interdependencies. This strategy of organizing keeps the communication channels short where coordination is most critical to organizational success.

Structural Implications

Most organizations experience various levels of interdependence, and structure can be designed to fit these needs, as illustrated in Exhibit 7.13.94 In a manufactur- ing firm, new product development entails reciprocal interdependence among the design, engineering, purchasing, manufacturing, and sales departments. Perhaps a horizontal structure or cross-functional teams could be used to handle the back- and-forth flow of information and resources. Once a product is designed, its actual

Pilots

Ramp Agents Flight Attendants

Baggage Handlers

Gate Agents Mechanics

Cargo Handlers

Fuel Attendants

Exhibit 7.12 Interdependence of Departments Involved in the Flight Departure Process

Source: Based on Jody Hoffer Gittell, “Organizing Work to Support Relational Coordination,” International Journal of Human Resource Management 11, no. 3 (June 2000), 517–539.

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Chapter 7: Manufacturing and Service technologies 289

manufacture would be sequential interdependence, with a flow of goods from one department to another, such as among purchasing, inventory, production control, manufacturing, and assembly. The actual ordering and delivery of products is pooled interdependence, with warehouses working independently. Customers could place an order with the nearest facility, which would not require coordination among warehouses, except in unusual cases such as a stock outage.

The three levels of interdependence are illustrated by a study of athletic teams that examined interdependency among players and how it influences other aspects of baseball, football, and basketball teams.

INTERDEPENDENCE COORDINATION

Horizontal structure, cross-functional teams, relational coordination

Face-to-face communication, unsched- uled meetings, full-time integrators

Scheduled meetings, task forces

Vertical communication

Plans

Rules

Low

High

Reciprocal (new product development)

Sequential (product manufacture)

Pooled (product delivery)

Mutual Adjustment

Planning

Standardization

Exhibit 7.13 Primary Means to Achieve Coordination for Different Levels of Task Interdependence in a Manufacturing Firm

Source: Adapted from Andrew H. Van de Ven, Andre Delbecq, and Richard Koenig, “Determinants of Communication Modes within Organizations,” American Sociological Review 41 (1976), 330.

In PractIce athletic Teams

A major difference among baseball, football, and basketball is the interdependence among players. Baseball is low in interdependence, football is medium, and basketball represents the highest player interdependence. The relationships among interdependence and other characteristics of team play are illustrated in Exhibit 7.14.

Pete Rose said, “Baseball is a team game, but nine men who reach their individual goals make a nice team.” In baseball, interdependence among team players is low and can be defined as pooled. Each member acts independently, taking a turn at bat and playing his or her own position. When interaction does occur, it is between only two or three players, as in a double play. Players are physically dispersed, and the rules of the game are the primary means of coordinating players. Players practice and develop their skills individually, such as by taking batting practice and undergoing physical conditioning. Management’s job is to select good players. If each player is successful as an individual, the team should win.

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290 Part 4: Internal Design Elements

In football, interdependence among players is higher and tends to be sequential. The line first blocks the opponents to enable the backs to run or pass. Plays are performed sequentially from first down to fourth down. Physical dispersion is medium, which allows players to operate as a coordinated unit. The primary mechanism for coordinating players is developing a game plan along with rules that govern the behavior of team members. Each player has an assignment that fits with other assignments, and management designs the game plan to achieve victory.

In basketball, interdependence tends to be reciprocal. The game is free-flowing, and the division of labor is less precise than in other sports. Each player is involved in both offense and defense, handles the ball, and attempts to score. The ball flows back and forth among players. Team members interact in a dynamic flow to achieve victory. Management skills involve the ability to influence this dynamic process, either by substituting players or by working the ball into certain areas. Players must learn to adapt to the flow of the game and to one another as events unfold.

Interdependence among players is a primary factor explaining the difference among the three sports. Baseball is organized around an autonomous individual, football around groups that are sequentially interdependent, and basketball around the free flow of reciprocal players.95

Baseball Football Basketball

Interdependence Pooled Sequential Reciprocal

Physical dispersion of players High Medium Low

Coordination Rules that govern the sport

Game plan and position roles

Mutual adjustment and shared

responsibility

Key management job Select players and develop their skills

Prepare and execute game

Influence flow of game

Source: Based on William Pasmore, Carol E. Francis, and Jeffrey Haldeman, “Sociotechnical Systems: A North American Reflection on the Empirical Studies of the 70s,” Human Relations 35 (1982), 1179–1204.

Exhibit 7.14 Relationships Among Interdependence and Other Characteristics of Team Play

Sociotechnical Systems So far, this chapter has described models for analyzing how manufacturing, ser- vice, and department technologies influence structure and management processes. The relationship between a new technology and the organization seems to follow a pattern, beginning with immediate effects on the content of jobs followed (after a longer period) by impact on the design of the organization. The ultimate impact of technology on employees can be partially understood through the concept of socio- technical systems.

The sociotechnical systems approach recognizes the interaction of technical and human needs in effective job design, combining the needs of people with the organization’s need for technical efficiency. The socio portion of the approach refers to the people and groups that work in organizations and how work is organized and coordinated. The technical portion refers to the materials, tools, machines, and processes used to transform organizational inputs into outputs.

Briefcase as an organization manager, keep these guidelines in mind: Be aware that the introduction of a new technology has sig- nificant impact on jobs. Consider using the sociotechnical systems approach to balance the needs of workers with the requirements of the new technologi- cal system.

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Chapter 7: Manufacturing and Service technologies 291

Exhibit 7.15 illustrates the three primary components of the sociotechnical systems model.96 The social system includes all human elements—such as individual and team behaviors, organizational culture, management practices, and degree of communication openness—that can influence the performance of work. The technical system refers to the type of production technology, the level of interdependence, the complexity of tasks, and so forth. The goal of the sociotechnical systems approach is to design the organization for joint optimization, which means that an organization functions best when the social and technical systems are designed to fit the needs of one another. Indeed, according to sociotechnical theory, merging people and technology effectively will create a harmonious relationship because people understand the advantages of the new technology and embrace it rather than fight against it.97 Designing the organization to meet human needs while ignoring the technical systems, or changing technology to improve efficiency while ignoring human needs, may inadvertently cause performance problems. For example, no matter how much technology advances, says evolutionary psychologist Robin Dunbar, human beings are limited in the number of “meaningful social connections” they can sustain. Based on anthropological and historical studies, that number is 150. That is why when a branch of W. L. Gore & Associates exceeds 150 employees, it breaks in two and creates a new office. When a group begins to lose its sense of meaningful connection, managers know, people don’t communicate and collaborate in a way that creates the bonds of a superior organization.98 The sociotechnical systems approach attempts to find a balance between what people want and need and the technical requirements of the organization’s production system.99

One example comes from a museum that installed a closed-circuit television system. Rather than having several guards patrolling the museum and grounds, the television could easily be monitored by a single guard. Although the technology saved money because only one guard was needed per shift, it led to unexpected performance problems. Guards had previously enjoyed the social interaction provided by patrolling; monitoring a closed-circuit television led to alienation and

Design for Joint Optimization

Work roles, tasks, work ow

Goals and values

Skills and abilities

•

•

•

•

•

•

Individual and team behaviors

Organizational/team culture

Management practices

Leadership style

Degree of communication openness

Individual needs and desires

The Social System •

•

•

•

•

•

Type of production technology (small batch, mass production, digital, service, etc.)

Level of interdependence (pooled, sequential, reciprocal)

Physical work setting

Complexity of production process (variety and analyzability)

Nature of raw materials

Time pressure

The Technical System

Sources: Based on T. Cummings, “Self-Regulating Work Groups: A Socio-Technical Synthesis,” Academy of Management Review 3 (1978), 625–634; Don Hellriegel, John W. Slocum, and Richard W. Woodman, Organizational Behavior, 8th ed. (Cincinnati, OH: South-Western, 1998), 492; and Gregory B. Northcraft and Margaret A. Neale, Organizational Behavior: A Management Challenge, 2nd ed. (Fort Worth, TX: The Dryden Press, 1994), 551.

Exhibit 7.15 Sociotechnical Systems Model

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292 Part 4: Internal Design Elements

boredom. When a Federal agency did an 18-month test of the system, only 5 percent of several thousand experimental covert intrusions were detected by the guard.100 The system was inadequate because human needs were not taken into account.

Sociotechnical principles evolved from the work of the Tavistock Institute, a research organization in England, during the 1950s and 1960s.101 Examples of organizational change using sociotechnical systems principles have occurred in numerous organizations, including General Motors, Volvo, the Tennessee Valley Authority (TVA), and Procter & Gamble.102 Although there have been failures, in many of these applications the joint optimization of changes in technology and structure to meet the needs of people as well as efficiency improved performance, safety, quality, absenteeism, and turnover. In some cases, work design was not the most efficient based on technical and scientific principles, but employee involvement and commitment more than made up for the difference. Thus, once again research shows that new technologies need not have a negative impact on people because the technology often requires higher-level mental and social skills and can be organized to encourage the involvement and commitment of employees, thereby benefiting both the employee and the organization.

The sociotechnical systems principle that states that people should be viewed as resources and provided with appropriate skills, meaningful work, and suitable rewards becomes even more important in today’s world of growing technological complexity.103 One study of paper manufacturers found that organizations that put too much faith in machines and technology and pay little attention to the appropriate management of people do not achieve advances in productivity and flexibility. Today’s most successful companies strive to find the right mix of machines, robots, and people and the most effective way to coordinate them.104

Design Essentials

■ Several important ideas in the technology literature stand out. The first is Woodward’s research into manufacturing technology. Woodward went into organizations and collected practical data on technology characteristics, organization structure, and management systems. She found clear relationships between technology and structure in high-performing organizations. Her findings are so clear that managers can analyze their own organizations along the same dimensions of technology and structure. In addition, technology and structure can be co-aligned with organizational strategy to meet changing needs and provide new competitive advantages.

■ The second important idea is that service technologies differ in a systematic way from manufacturing technologies. Service technologies are characterized by intangible outcomes and direct client involvement in the production process. Service firms do not have the fixed, machine-based technologies that appear in manufacturing organizations; hence, organization design often differs as well.

■ A third significant idea is Perrow’s framework applied to department technolo- gies. Understanding the variety and analyzability of a technology tells one about the management style, structure, and process that should characterize that de- partment. Routine technologies are characterized by a mechanistic design and nonroutine technologies by an organic design. Applying the wrong management system to a department will result in dissatisfaction and reduced efficiency.

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Chapter 7: Manufacturing and Service technologies 293

■ The fourth important idea is interdependence among departments. The extent to which departments depend on each other for materials, information, or other resources determines the amount of coordination required between them. As interdependence increases, demands on the organization for coordination in- crease. Organization design must allow for the correct amount of communica- tion and coordination to handle interdependence across departments.

■ The fifth idea is that smart factories and lean manufacturing are being adopted by organizations and having impact on organization design. For the most part, the impact is positive, with shifts toward more organic designs both on the shop floor and in the management hierarchy. These technologies replace routine jobs, give employees more autonomy, produce more challenging jobs, encourage teamwork, and let the organization be more flexible and responsive. The new technologies are enriching jobs to the point where organizations are happier places to work.

■ Several principles of sociotechnical systems theory, which attempts to design the technical and human aspects of an organization to fit one another, are increas- ingly important as advances in technology alter the nature of jobs and social interaction in today’s companies.

KEy CONCEPtS

analyzability continuous-process production core technology craft technologies engineering technologies intensive technologies interdependence joint optimization large-batch production

lean manufacturing long-linked technology mass customization mediating technology noncore technology nonroutine technologies pooled interdependence reciprocal interdependence routine technologies

sequential interdependence service technology small-batch production smart factories sociotechnical systems approach technical complexity technology variety

DISCUSSION QUEStIONS

1. Where would your university or college department be located on Perrow’s technology framework? Would a department devoted exclusively to teaching be in a dif- ferent quadrant from a department devoted exclusively to research?

2. Explain Thompson’s levels of interdependence. What is the level of interdependence among departments (finance, marketing) in a business school? What kinds of coordination mechanisms might be used to handle that interdependence?

3. What relationships did Woodward discover between supervisor span of control and technological complexity?

4. How do smart factories and lean manufacturing differ from other manufacturing technologies? Why are these new approaches needed in today’s environment?

5. What is a service technology? Are different types of ser- vice technologies likely to be associated with different organization designs? Explain.

6. Lean concepts such as continuous improvement and waste reduction have long been used by manufactur- ing companies. Discuss how service firms can apply the same concepts. Why do you think many service compa- nies are adopting these ideas?

7. Why might administrators at a hospital such as Seattle Children’s Hospital, described on page 276, want to foster relational coordination?

8. A top executive claimed that top-level management is a craft technology because the work contains intangi- bles, such as handling personnel, interpreting the envi- ronment, and coping with unusual situations that have to be learned through experience. If this is true, is it

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294 Part 4: Internal Design Elements

appropriate to teach management in a business school? Does teaching management from a textbook assume that the manager’s job is analyzable, and hence that for- mal training rather than experience is most important?

9. To what extent does the development of new tech- nologies simplify and routinize the jobs of employees?

Can you give an example? Can new technology also lead to jobs with greater variety and complexity? Discuss.

10. Describe the sociotechnical systems model. Why might some managers oppose a sociotechnical systems approach?

CHaPtEr 7 WOrKSHOP Bistro Technology105

You will be analyzing the work technology used in three different restaurants—McDonald’s, Subway, and a typical family restaurant. Your instructor will tell you whether to do this assignment as individuals or in a group.

You must visit all three restaurants and infer how the work is done, according to the following criteria. You are not allowed to interview any employees, but instead you will be an observer. Take lots of notes when you are there.

McDonald’s Subway Family Restaurant

Organization goals: Speed, service, atmosphere, and so on.

Type of technology using Woodward’s model.

Organization structure: Mechanistic or organic?

Team versus individual: Do people work together or alone?

Interdependence: How do employees depend on each other?

Tasks: Routine versus nonroutine—how varied are tasks?

Questions 1. Is the technology used the best one for each restaurant,

considering its goals and environment? 2. From the preceding data, determine if the structure and

other characteristics fit the technology.

3. If you were part of a consulting team assigned to improve the operations of each organization, what recommendations would you make?

CaSE FOr aNaLySIS | aV Corporate: Software tool Project106

Kenneth Tirona has been working for the second largest information security company in the world for the past three years. He started out as a Quality Assurance Specialist and is now a project manager in the Product

Research and Development Department who is familiar with the internal processes of the Anti Virus Operations Department. The company's organizational setup is shown in Exhibit 7.16.

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Chapter 7: Manufacturing and Service technologies 295

Organization Background Marketing The Marketing Department is involved not just in typi- cal sales and marketing but also in Product Development where they assist the Product Research and Development Department in conducting market studies for potential products and finally in Beta testing upcoming products.

Product research and Development The Product Research and Development Department is in charge of driving the entire project from start to finish. The department typically interfaces with Marketing at the start of the project to understand the requirements needed by customers and then develop these new products.

technical Support Technical Support is the customer facing side of the busi- ness and deals with issues and requests after a product is launched. They routinely escalate other issues to the Anti Virus Operations Department if required. These issues typ- ically lead to new “instructions” that are sent out to prod- ucts used by customers.

anti-Virus Operations This department typically supplies the “instructions” that are updated regularly for the company’s products. These in- structions are based on File, Web, and Email analysis con- ducted by engineers. They also provide support as needed by Technical Support.

Exhibit 7.16 Partial Organization Chart for AV Corporate

CEO Of�ce

Sales and Marketing

Anti Virus Operations

Technical Support

Product Research &

Development

Support Groups (Admin, HR, IT and

Finance)

File Analysis Services

WEB Analysis Services

Email Analysis Services

Quality Assurance

Consumer

Enterprise

Small & Medium Business

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296 Part 4: Internal Design Elements

File analysis Services. This team typically receives suspicious files from either Technical Support or from other sources. They then build a set of instructions that will clean the suspicious file. These instructions will be compiled and verified by the Quality Assurance team before it is sent out to the company’s products.

Web analysis Services. This team typically receives suspicious URLs and websites from either Technical Support or from other sources. They then tag these websites in a temporary database. The Quality Assurance team verifies the URLs before it is published in the final database. The company’s products can look up suspicious URLs from this final database.

Email analysis Services. This team typically receives suspicious Emails from either Technical Support or from other sources. They then verify the URLs or files within these emails and send it to either Web Analysis or File Analysis teams for further verification. For emails without files/URLs, the Email Analysis team simply verifies if the email is spam. They then build a set of instructions that will block the spam. These instructions will be compiled and verified by Quality Assurance team before it is sent out to the company’s products.

Quality assurance. Quality Assurance is the team in charge of verifying instructions before it is sent to the com- pany’s products. They also verify suspicious websites from the temporary database before it is published in the final database.

Office of the Chief Executive Officer (CEO) Top management – which includes the CEO and the directors of each department – sits on the company’s overall project board and is required to approve projects that have significant cost (projects over 5 million pesos) or significant impact to operations (process related projects, etc.). Projects that do not meet these criteria can be approved by the company's project board without requiring the CEO’s sign off. While the CEO office does not need to be updated on project status, the project board requires a monthly update of progress and assistance needed.

Project Background Kenneth’s latest project was to improve software that started out as a small tool that was used within his team. Upper management found the tool to be very useful by upper management. The tool is now being used by the department Kenneth belongs to. However, the tool was no longer able to handle the demands of a larger user group compared to before. As he was the primary developer of the small tool, he was very excited to handle the development of the next version.

The small tool typically automates some processes of the team such as file analysis and initial analysis. The tool also provides sonic input for Secondary Analysis and Report Generation which helps speed up those manual processes. This automation helped cut down processing from an average of 245 minutes to just 60 minutes, which resulted in four times as much analyses being done in the time allocated, as illustrated in Exhibit 7.17.

Exhibit 7.17 Processes Before and After Automation

Previous Process

File Unpacked

5 minutes

Initial Analysis

90 minutes

Secondary Analysis

90 minutes

Report Generation

60 minutes

Process after the Small Tool

File Unpacked

Initial Analysis

Secondary Analysis

30 minutes

Report Generation

15 minutes15 minutes

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Chapter 7: Manufacturing and Service technologies 297

Exhibit 7.18 Routing of Customer Support Cases

File Analysis Services

Email Analysis Services

Technical Support

Single Point of Contact Gateway

Web Analysis Services

Quality Assurance Services

Customers

Anti Virus Operations

Kenneth started by interviewing managers from the different teams under the Anti Virus Department to gather their inputs. After completing the feature requirements for the new version, Kenneth pitched the project idea to management and approval was given. He was allocated a budget of 1.5 million pesos for the six month project and kept management updated at the end of each month.

The managers from the different teams routinely met to discuss ongoing issues and improvements in the organization. As this project affected all of them, it was one of the regular items discussed in weekly management meetings. The managers are independent of each other and are free to implement changes for their own team. However, changes that impact processes across teams must be clearly communicated to all affected teams and approved by a 60 percent majority of the management through voting. This ensures that everyone is made aware of changes to be done that affect multiple teams.

In AV Corporate, customers typically submit support cases to the Technical Support Team which resolves product-related cases and further forwards Anti Virus related cases to the Anti Virus Operations Department (see

Exhibit 7.18). These cases are received by a Single Point of Contact Gateway–a team composed of four people– that routes the case depending on the analysis requested. Cases related to files are routed to the File Analysis Services team, and such cases include files that wreak havoc on customers’ computers. Cases related to websites, such as customers requesting analysis on whether a certain website is fraudulent, phishing, and so on, are routed to the Web Analysis Services team. Finally, the Email Analysis Services team receives email-related cases and typically analyzes if emails are spam.

These three teams typically perform similar tasks using tools shared throughout Anti Virus Operations; however, they also have their specialized tools within their respective teams and have varying processes. Before the three teams provide a final solution for services requested from them, a Quality Assurance Services team checks the solution provided before it is delivered to customers.

As the project was approaching completion, Kenneth optimistically presented the prototype to management. The management panel was composed of Mark Rago, manager for File Analysis Services, Joseph Rosario, manager for

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298 Part 4: Internal Design Elements

Web Analysis Services and Elvie Talavera, manager for Email Analysis Services. The following is a transcript of the meeting:

Kenneth: So that summarizes the major features of the project as we originally planned. I am now ready to answer any questions you may have.

Mark: This is all well and good and I really like the progress you and your team have made. However, it seems the requirement no longer fits the new processes that my team needs.

Kenneth: I understand that there have been developments in your team, Sir Mark, as you told me during our regular monthly meetings but as I also informed you, it might be best to add your features to the next project.

Elvie: In that case, Kenneth, there might be a problem with the synchronization of the process between Mark's team and mine since the tool will not be able to handle their needs. This will call for a lot of manual interfaces between Mark and my team, which means we might also prefer waiting for the next . . .

Joseph: Hold on, Elvie. While I agree that we have changed some of the processes in Mark’s team, I don't agree with delaying the release of this tool. We really need this new version within our team and would really like to see it released in the timeline we discussed. In fact, my team also wanted to make some changes to the requirements but we actually waited for this project to be completed before making those changes.

Mark: I find that really unfair, Joseph, since all of us have been touching base with Kenneth throughout the project. I'm sure Kenneth was very accommodating in handling the changes within all our teams but if we can manage a delayed release date then perhaps your team can proceed with those changes you have been pushing back and allow for ample time for Kenneth to incorporate them into the tool.

Joseph: I think we should stick to the current project and adjust to the new technology instead of delaying it. We have already spent over a million pesos on this project and I don't think our director would be happy about the delay and the additional cost.

Elvie: I’m sure we can defend the changes to our director. Besides, he also approved the changes that would have affected the project anyway. Kenneth, how much money and time do you need for the new changes to be incorporated to the project?

Kenneth: It would depend on the changes required.

Joseph: Elvie, Mark, I'm sure the two of you can argue that there are far more advantages than disadvantages to delaying the project but what would stop us from delaying the project even more if there are even more changes in the course of the delay?

Mark: Our company has been built around a culture of change so I'm sure we can handle any further changes into the future.

Kenneth: Sir Joseph, Sir Mark and Ma’am Elvie, thanks for the inputs so far. What if we first pool the new requirements, see how complicated the changes are, then provide a new time table and budget requirements?

Mark: Thanks Kenneth. We’ll wait for your updates.

This left Kenneth very much confused after the meeting. This project was definitely one that he hoped would change his career for the better but it had the potential of being a perpetual project, especially since minor changes in any of the three teams’ processes could affect the project at different times throughout its duration.

Kenneth took some time to go over his notes to review the detailed processes for each team that evolved during the course of the project and take note of the processes that shared resources (items shaded in blue are shared resources).

Core Process Web Analysis File Analysis Email Analysis

Download and Unpack File Downloading None File Downloading

File Unpacking File Unpacking File Unpacking

Automated Analysis File Analysis File Analysis File Analysis

URL Analysis None URL Analysis

Text Analysis None Text Analysis

URL Correlation None URL Correlation

Manual Analysis Behavior Analysis Behavior Analysis Behavior Analysis

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Chapter 7: Manufacturing and Service technologies 299

Download and Unpack– For Web and Email Analysis Services, the file is first downloaded then unpacked.

Automated Analysis– All Analysis Services require File Analysis if files are downloaded, however, only Web and Email Analysis Services require URL Analysis, Text Analysis and URL Correlation. All these services are typically handled by an automated system.

Manual Analysis– A behavior analysis is provided once all automated analysis is complete. This service requires

an engineer to manually create behavior descriptions of the threat.

author's Note Manuel C. Manuel III is an Assistant Professor at and College Secretary of the College of Business Administration, University of the Philippines, Diliman.

This case study was developed in collaboration with Peter Michael Tongco, a recent MBA graduate (Class of 2011) at the University of the Philippines. The case is not designed to illustrate effective or ineffective handling of managerial situations. Certain names have been disguised.

NOtES

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300 Part 4: Internal Design Elements

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53. Goldhar and Lei, “Variety Is Free: Manufacturing in the Twenty-First Century”; P. Robert Duimering, Frank Safayeni, and Lyn Purdy, “Integrated Manufacturing: Redesign the Organization before Implementing Flexible Technology,”

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Chapter 7: Manufacturing and Service technologies 301

Sloan Management Review (Summer 1993), 47–56; and Zammuto and O’Connor, “Gaining Advanced Manufacturing Technologies’ Benefits.”

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67. Ibid. 68. David E. Bowen and Edward E. Lawler III, “The Empowerment

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70. Richard Metters and Vincente Vargas, “Organizing Work in Service Firms,” Business Horizons, July–August 2000, 23–32.

71. Perrow, “A Framework for the Comparative Analysis of Organizations” and Organizational Analysis.

72. Brian T. Pentland, “Sequential Variety in Work Processes,” Organization Science 14, no. 5 (September–October 2003), 528–540.

73. Jim Morrison, “Grand Tour. Making Music: The Craft of the Steinway Piano,” Spirit, February 1997, 42–49, 100.

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75. Michael Withey, Richard L. Daft, and William C. Cooper, “Measures of Perrow’s Work Unit Technology: An Empirical Assessment and a New Scale,” Academy of Management Journal 25 (1983), 45–63.

76. Christopher Gresov, “Exploring Fit and Misfit with Multiple Contingencies,” Administrative Science Quarterly 34 (1989), 431–453; and Dale L. Goodhue and Ronald L. Thompson, “Task-Technology Fit and Individual Performance,” MIS Quarterly, June 1995, 213–236.

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78. Gresov, “Exploring Fit and Misfit with Multiple Contingencies”; Charles A. Glisson, “Dependence of Technological Routinization on Structural Variables in Human Service Organizations,” Administrative Science Quarterly 23 (1978), 383–395; and Jerald Hage and Michael Aiken, “Routine Technology, Social Structure and Organizational Goals,” Administrative Science Quarterly 14 (1969), 368–379.

79. Gresov, “Exploring Fit and Misfit with Multiple Contingencies”; A. J. Grimes and S. M. Kline, “The Technological Imperative: The Relative Impact of Task Unit, Modal Technology, and Hierarchy on Structure,” Academy of Management Journal 16 (1973), 583–597; Lawrence G. Hrebiniak, “Job Technologies, Supervision and Work Group Structure,” Administrative Science Quarterly 19 (1974), 395–410; and Jeffrey Pfeffer, Organizational Design (Arlington Heights, IL: AHM, 1978), Chapter 1.

80. Patrick E. Connor, Organizations: Theory and Design (Chicago: Science Research Associates, 1980); and Richard L. Daft and Norman B. Macintosh, “A Tentative Exploration into Amount and Equivocality of Information Processing in Organizational Work Units,” Administrative Science Quarterly 26 (1981), 207–224.

81. Paul D. Collins and Frank Hull, “Technology and Span of Control: Woodward Revisited,” Journal of Management Studies 23 (1986), 143–164; Gerald D. Bell, “The Influence of Technological Components of Work upon Management Control,” Academy of Management Journal 8 (1965), 127–132; and Peter M. Blau and Richard A. Schoenherr, The Structure of Organizations (New York: Basic Books, 1971).

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302 Part 4: Internal Design Elements

82. W. Alan Randolph, “Matching Technology and the Design of Organization Units,” California Management Review 22–23 (1980–81), 39–48; Daft and Macintosh, “A Tentative Exploration into Amount and Equivocality of Information Processing”; and Michael L. Tushman, “Work Characteristics and Subunit Communication Structure: A Contingency Analysis,” Administrative Science Quarterly 24 (1979), 82–98.

83. Andrew H. Van de Ven and Diane L. Ferry, Measuring and Assessing Organizations (New York: Wiley, 1980); and Randolph, “Matching Technology and the Design of Organization Units.”

84. Richard L. Daft and Robert H. Lengel, “Information Richness: A New Approach to Managerial Behavior and Organization Design,” in Barry Staw and Larry L. Cummings, eds., Research in Organizational Behavior, 6 (Greenwich, CT: JAI Press, 1984), 191–233; Richard L. Daft and Norman B. Macintosh, “A New Approach into Design and Use of Management Information,” California Management Review 21 (1978), 82–92; Daft and Macintosh, “A Tentative Exploration into Amount and Equivocality of Information Processing”; W. Alan Randolph, “Organizational Technology and the Media and Purpose Dimensions of Organizational Communication,” Journal of Business Research 6 (1978), 237–259; Linda Argote, “Input Uncertainty and Organizational Coordination in Hospital Emergency Units,” Administrative Science Quarterly 27 (1982), 420–434; and Andrew H. Van de Ven and Andre Delbecq, “A Task Contingent Model of Work Unit Structure,” Administrative Science Quarterly 19 (1974), 183–197.

85. Peggy Leatt and Rodney Schneck, “Criteria for Grouping Nursing Subunits in Hospitals,” Academy of Management Journal 27 (1984), 150–165; and Robert T. Keller, “Technology-Information Processing,” Academy of Management Journal 37, no. 1 (1994), 167–179.

86. Gresov, “Exploring Fit and Misfit with Multiple Contingencies;” Michael L. Tushman, “Technological Communication in R&D Laboratories: The Impact of Project Work Characteristics,” Academy of Management Journal 21 (1978), 624–645; and Robert T. Keller, “Technology-Information Processing Fit and the Performance of R&D Project Groups: A Test of Contingency Theory,” Academy of Management Journal 37, no. 1 (1994), 167–179.

87. James Thompson, Organizations in Action (New York: McGraw-Hill, 1967).

88. Ibid., 40. 89. Gene Bylinsky, “Shipmaking Gets Modern,” Fortune, special

section, “Industrial Management and Technology,” January 20, 2003, 170[K]–170[L].

90. Brad Kenney, “Callaway Improves Long Game with Collaborative Tech,” Industry Week, June 2008, 72.

91. Murray R. Barrick, Bret H. Bradley, Amy L. Kristof- Brown, and Amy E. Colbert, “The Moderating Role of Top Management Team Interdependence: Implications for Real Teams and Working Groups,” Academy of Management Journal 50, no. 3 (2007), 544–557.

92. Jody Hoffer Gittell, “Organizing Work to Support Rela- tional Coordination,” The International Journal of Human Resource Management 11, no. 3 (June 2000), 517–539.

93. Jody Hoffer Gittell, “Paradox of Coordination and Con- trol,” California Management Review 42, no. 3 (Spring 2000), 101–117.

94. This discussion is based on Christopher Gresov, “Effects of Dependence and Tasks on Unit Design and Efficiency,” Organization Studies 11 (1990), 503–529; Andrew H. Van de Ven, Andre Delbecq, and Richard Koenig, “Determinants of Coordination Modes within Organizations,” American Sociological Review 41 (1976), 322–338; Argote, “Input Uncertainty and Organizational Coordination in Hospital Emergency Units”; Jack K. Ito and Richard B. Peterson, “Effects of Task Difficulty and Interdependence on Information Processing Systems,” Academy of Management Journal 29 (1986), 139–149; and Joseph L. C. Cheng, “Interdependence and Coordination in Organizations: A Role-System Analysis,” Academy of Management Journal 26 (1983), 156–162.

95. Robert W. Keidel, “Team Sports Models as a Generic Or- ganizational Framework,” Human Relations 40 (1987), 591–612; Robert W. Keidel, “Baseball, Football, and Bas- ketball: Models for Business,” Organizational Dynamics (Winter 1984), 5–18; and Nancy Katz, “Sports Teams as a Model for Workplace Teams: Lessons and Liabilities,” Academy of Management Executive 15, no. 3 (2001), 56–67.