Case study

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8.1

Aligning Strategy, Culture, and Structure

MAJOR QUESTION Why is it important for managers to align a company’s vision and strategies with its organizational culture and structure?

THE BIG PICTURE

The study of organizing, the second of the four functions in the management process, begins with the study of organizational culture and structure, which managers must determine so as to implement a particular strategy. Organizational culture consists of the set of shared, taken-for-granted implicit assumptions that a group holds in the workplace. Organizational structure describes who reports to whom and who does what.

How important is culture, the “social glue” that binds together organizations?

“Culture and people are everything,” says Brett Wilson, CEO of TubeMogul, a video advertising software company. “Nothing else matters, and our ability to stay ahead is a function of having the best people and moving faster than our competitors. … Creating an exceptional culture is the only way to build a sustainable competitive advantage.” 10

How an Organization’s Culture and Structure Are Used to Implement Strategy

“A leader’s job is to help inspire every employee to help execute strategy,” says one report. “This requires consistently and constantly demonstrating, celebrating, and modeling the cultural traits that reinforce strategy.”11 Or, for better performance, perhaps the leader’s style should even be different from the organization’s culture (as we’ll discuss later).12 

Strategy, as we saw in  Chapter 6 , consists of the large-scale action plans that reflect the organization’s vision and are used to set the direction for the organization. To implement a particular strategy, managers must determine the right kind of (1) organizational culture and (2) organizational structure, which mutually influence each other. (See  Figure 8.1 .)

FIGURE 8.1  Drivers and flow of organizational culture

Realizing the Organizational Vision and Strategy: Get the Right Culture and the Right Structure 

Let’s consider these two concepts—organizational culture and organizational structure. 

Organizational Culture: The Shared Assumptions That Affect How Work Gets Done

We described the concept of culture in  Chapter 4  on global management as “the shared set of beliefs, values, knowledge, and patterns of behavior common to a group of people.” Here we are talking about a specific kind of culture called an organizational culture.

According to scholar Edgar Schein,  organizational culture,  sometimes called  corporate culture, is defined as the set of shared, taken-for-granted implicit assumptions that a group holds and that determines how it perceives, thinks about, and reacts to its various environments. 13  These are the beliefs and values shared among a group of people in the workplace that are passed on to new employees by way of socialization andPage 243 mentoring, which significantly affect work outcomes at all levels. 14  As we said, culture is the “social glue” that binds members of the organization together. Just as a human being has a personality—fun-loving, warm, uptight, competitive, or whatever—so an organization has a “personality,” too, and that is its culture. The culture helps employees understand why the organization does what it does and how it intends to accomplish its long-term goals.

The cultural tone is often set in the hiring process. “The ultimate filter we use is that we only hire nice people,” says Peter Miller, CEO of Optinose, a pharmaceutical company. 15  MuleSoft, a software company, looks for people with “high integrity, being a great team player, and they want to win as a company first, team second, individually third,” says CEO Greg Schott. 16  

TubeMogul CEO Brett Wilson, mentioned earlier, also prefers nice people. “I … really value people who are kind to one another,” he says. “That makes the workplace better, and they end up having a deeper sense of empathy with our clients.” In addition, “we want a culture where people aren’t afraid to make mistakes. … Our ability to win is a function of how innovative we are. So making mistakes is encouraged.” Finally, he says, “it’s a culture where we value the people who do what they say—they have a high ‘do-to-say’ ratio.” 17  

Freewheeling culture. Mic, a New York City news website created by and for Millennials, which has 106 mostly Millennial employees, is described as having a “playful vibe.” 18  Here CEO Chris Altchek (right) talks with an employee. At Mic, oversharing, acting entitled, and second-guessing the boss are the norm. Dogs wander between desks, some employees use a megaphone for impromptu announcements, others ride hoverboards into the kitchen for free snacks. Could the Mic culture work in, say, the labs of Pfizer Inc., the global pharmaceutical company, where drug discovery is a high-risk, costly endeavor? © Jennifer S. Altman/The New York/Redux Pictures

Culture can vary considerably, with different organizations having differing emphases on risk taking, treatment of employees, teamwork, rules and regulations, conflict and criticism, and rewards.

As such, culture can have both positive and negative effects on employees and overall corporate performance. Zenefits, a San Francisco health-insurance brokerage start-up, for example, is being sued for actions associated with a negative culture. Its director of real estate and workplace services had to send employees a note asking them to cut out using the headquarters stairwells for smoking, drinking, eating, and sex. 19  

Some other organizations, believing that the office has become “too nice,” have embraced a culture known as “radical candor” or “front-stabbing,” in which workers are encouraged “to drop the polite workplace veneer and speak frankly to each other no matter what,” according to one report. 20  Still other companies go beyond candor to fraudulent behavior: The serious blow the auto industry took to its reputation when Volkswagen admitted in 2015 that its culture had led to cheating on emissions tests was followed by another one when Mitsubishi admitted to 25 years of company engineers’ intentionally manipulating fuel-economy tests. 21  

In addition, the elements that drive an organization’s culture also vary. They may represent the values of the founder, the industry and business environment, the national culture, the organization’s vision and strategies, and the behavior of leaders. (See  Table 8.1 .)

TABLE 8.1  What Drives an Organizational Culture?

· Founder’s values

· Industry & business environment

· National culture

· Organization’s vision & strategies

· Behavior of leaders

We thoroughly discuss organizational culture in  Sections 8.2  and  8.3 .

Organizational Structure: Who Reports to Whom and Who Does What

Organizational structure  is a formal system of task and reporting relationships that coordinates and motivates an organization’s members so that they can work together to achieve the organization’s goals. As we describe in  Sections 8.4 – 8.6 , organizational structure is concerned with who reports to whom and who specializes in what work.

Whether an organization is for-profit or nonprofit, the challenge for top managers is to align the organization’s vision and strategies with its organizational culture and organizational structure, as shown in the two gold boxes in the drawing. (See  Figure 8.1 .)

Figure 8.1  shows that the consistency among these elements in turn impacts (see the three green boxes) group and social processes (discussed in  Chapters 13 – 15 ), individual work attitudes and behaviors (discussed in  Chapters 11 – 12 ), and the organization’s overall performance. As you can see from the diagram, consistency across strategy, culture, and structure leads to higher performance.

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EXAMPLE

How Strategy Affects Culture and Culture Affects Structure: EndoStim, a Medical Device Start-up, Operates Virtually

Nowadays a firm can be completely international. An example is the medical device start-up EndoStim, nominally based in St. Louis but operating everywhere.

The company, reports New York Times columnist Thomas Friedman, came together as a result of some chance encounters: 22  Cuban immigrant Raul Perez, a physician, came to St. Louis, where he met Dan Burkhardt, a local investor, with whom he began making medical investments. Perez also suffered from acid reflux (abnormal heartburn caused by stomach acid rising in the esophagus) and went to Arizona for treatment by an Indian American physician, V. K. Sharma. During the visit, Sharma proposed an idea for a pacemaker-like device to control the muscle that would choke off acid reflux.

The Strategy: Creating a New Medical Device. Perez, Burkhardt, and Sharma all agreed they wanted to build such an electrical-stimulation device. They joined forces with South Africa–born Bevil Hogg, a founder of Trek Bicycle Corporation, who became the CEO of the company they named EndoStim and who helped to raise initial development funds. (Hogg was succeeded later by Rohan Hoare, PhD, of The Netherlands, educated in Australia and at Harvard.) 23  This strategy then began to dictate whom they had to work with, which in turn influenced the company’s culture and structure.

The Culture: An International “Adhocracy.” To advance their strategy of building the device, the four principals recruited two Israelis, a medical engineer and a gastroenterologist. The Israelis collaborated with a Seattle engineering team to develop the design. A company in Uruguay specializing in pacemakers was lined up to build the EndoStim prototype. It was arranged for the clinical trials to be conducted in India and Chile. How much more international can you get?

Thus, the culture of the company could be called an adhocracy, which (as we’ll describe a little later in the chapter) is a risk-taking culture that values flexibility and creativity and that is focused on developing innovative products.

The Structure: A Virtual, Boundaryless Company. As a very lean start-up operating all over the world, with the principals rarely in the same office at the same time, EndoStim is clearly very different from, say, the usual top-down organization operating in one locality. To access the best expertise and high-quality materials and obtain low-cost manufacturing anywhere around the globe, EndoStim thus was forced to take advantage of all the technological tools—teleconferencing, e-mail, the Internet, and faxes—to maintain communications.

This EndoStim structure, then, is that of a virtual, boundaryless organization—virtual because its members are operating geographically apart, connected by electronic means, and boundaryless because the members (whether coworkers or suppliers) come together in fluid, flexible ways on an as-needed basis. We describe these structures further in another few pages.

YOUR CALL

Are you comfortable enough to work in a virtual, boundaryless organization? Many people like the social interaction that comes with working in a physical office with other people. Others, however, are turned off by the office game playing and time-wasting activities that seem to be a necessary concomitant. They welcome the opportunity to do task-oriented work in a makeshift home office, occasionally having to cope with loneliness and restlessness. Which would you favor?

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8.2

What Kind of Organizational Culture Will You Be Operating In?

MAJOR QUESTION How do I find out about an organization’s “social glue,” its normal way of doing business?

THE BIG PICTURE

Organizational culture appears as three layers: observable artifacts, espoused values, and basic assumptions. Cultures can be classified into four types: clan, adhocracy, market, and hierarchy. Culture is transmitted to employees through symbols, stories, heroes, rites and rituals, and organizational socialization.

Want to get ahead in the workplace but hate the idea of “office politics”?

Probably you can’t achieve the first without mastering the second. Although hard work and talent can take you a long way, “there is a point in everyone’s career where politics becomes more important,” says management professor Kathleen Kelley Reardon. You have to know the political climate of the company you work for, says Reardon, who is author of The Secret Handshake and It’s All Politics. 24  “Don’t be the last person to understand how people get promoted, how they get noticed, how certain projects come to attention. Don’t be quick to trust. If you don’t understand the political machinations, you’re going to fail much more often.” 25

A great part of learning to negotiate the politics—that is, the different behavioral and psychological characteristics—of a particular workplace means learning to understand the organization’s culture. The culture consists not only of the slightly quirky personalities you encounter but also all of an organization’s normal way of doing business, as we’ll explain.

The Three Levels of Organizational Culture

Organizational culture appears as three layers: (1) observable artifacts, (2) espoused values, and (3) basic assumptions. 26  Each level varies in terms of outward visibility and resistance to change, and each level influences another level.

Level 1: Observable Artifacts—Physical Manifestations of Culture

At the most visible level, organizational culture is expressed in observable artifacts—physical manifestations such as manner of dress, awards, myths and stories about the company, rituals and ceremonies, and decorations, as well as visible behavior exhibited by managers and employees.

Example: In a conference room reserved for sensitive discussions, online travel company Kayak has a 2-foot-high stuffed elephant named Annabelle—the “elephant in the room”—that is an artifact believed to bring forth more honest and constructive communications among employees. 27  (The expression “elephant in the room” is used in business and politics to mean an obvious truth that is either being ignored or going unaddressed.)

Level 2: Espoused Values—Explicitly Stated Values and Norms

Espoused values  are the explicitly stated values and norms preferred by an organization, as may be put forth by the firm’s founder or top managers.

Example: The founders of technology company Hewlett-Packard stressed the “HP Way,” a collegial, egalitarian culture that gave as much authority and job security to employees as possible. Although managers may hope the values they espouse will directly influence employee behavior, employees don’t always “walk the talk,” frequently being more influenced by  enacted values, which represent the values and norms actually exhibited in the organization. 28

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Another example: Leaders at retailer and health care company CVS Health recognized the gap between espoused values (“We sell health products”) and enacted values (“We also sell tobacco products”) and made a key strategic change to create alignment. A transformative moment came in early 2014 when CEO Larry Merlo announced that CVS would cease selling tobacco products by October 1st of that year. “The decision meant sacrificing about $2 billion in sales,” says one report. “Led by Merlo, CVS’s executive team decided that continuing to sell cigarettes had become untenable for a company that was simultaneously trying to sell itself as a health care giant.” 29  

Level 3: Basic Assumptions—Core Values of the Organization

Basic assumptions, which are not observable, represent the core values of an organization’s culture—those that are taken for granted and, as a result, are difficult to change.

Example: At insurance giant AIG, people worked so hard that the joke around the offices was “Thank heavens it’s Friday, because that means there are only two more working days until Monday.” 30

Another example: Many founders of start-ups hate rules and red tape. College Hunks Hauling Junk, for instance, was co-founded by Nick Friedman with no formal policies about dress code, vacation, sick days, and other things because he envisioned “a real-life Never Land where work is always fun, and the culture is always stress-free.” 31  However, when the enterprise grew from a single cargo van to over 50 franchises, the freewheeling spirit made employees lose focus, and client-service ratings, employee morale, and profitability all declined. The firm had to come up with rules and procedures while at the same time trying to “maintain a healthy balance of fun company culture with an accountable organization and team,” Friedman said.

Four Types of Organizational Culture: Clan, Adhocracy, Market, and Hierarchy

The competing values framework (CVF) provides a practical way for managers to understand, measure, and change organizational culture. The CVF, which has been validated by extensive research involving 1,100 companies, classifies organizational cultures into four types: (1) clan, (2) adhocracy, (3) market, and (4) hierarchy, as we’ll explain.32 (See  Figure 8.2 .)

FIGURE 8.2  Competing values framework Adapted from K.S. Cameron, R.E. Quinn, J. Degraff, and A.V. Thakor, Competing Values Leadership (Northampton, MA: Edward Elgar, 2006), p. 32. Page 247

Research leading to the development of the CVF found that organizational effectiveness varied along two dimensions:

· The horizontal dimension—inward or outward focus? This dimension expresses the extent to which an organization focuses its attention and efforts inward on internal dynamics and employees (“internal focus and integration”) versus outward toward its external environment and its customers and shareholders (“external focus and differentiation”).

· The vertical dimension—flexibility or stability? This dimension expresses the extent to which an organization prefers flexibility and discretion versus stability and control. Combining these two dimensions creates the four types of organizational culture based on different core values—namely, clan, adhocracy, market, and hierarchy.

Each culture type has different characteristics, and while one type tends to dominate in any given organization, it is the mix of types that creates competitive advantage. We begin our discussion of culture types in the upper-left-hand quadrant of the CVF. 

1. Clan Culture: An Employee-Focused Culture Valuing Flexibility, Not Stability

A  clan culture  has an internal focus and values flexibility rather than stability and control. Like a family-type organization, it encourages collaboration among employees, striving to encourage cohesion through consensus and job satisfaction and to increase commitment through employee involvement. Clan organizations devote considerable resources to hiring and developing their employees, and they view customers as partners.

Example: Property and casualty insurance company Acuity, Fortune’s No. 2 Best Company to Work For in 2016, strongly endorses a clan culture. CEO Ben Salzmann believes “that if employees are given a fun, rewarding place to work where they can express their creativity, in return the firm will get innovation, diehard loyalty, and world-class customer service.”33 Employees have generous perks and are empowered to participate in the way the company is run. The end results are profitability and an enviably low 2% turnover rate.

2. Adhocracy Culture: A Risk-Taking Culture Valuing Flexibility

An  adhocracy culture  has an external focus and values flexibility. Creation of new products and services is the strategic thrust of this culture, as we saw with EndoStim in the Example box, in previous  section 8.1 . This type of culture attempts to create innovative products by being adaptable, creative, and quick to respond to changes in the marketplace. Employees are encouraged to take risks and experiment with new ways of getting things done. Adhocracy cultures are well suited for start-up companies, those in industries undergoing constant change, and those in mature industries that are in need of innovation to enhance growth.

Example: Google, now under parent company Alphabet, is an example of a company with an adhocracy culture. “Though well past its start-up days,” says one account, “Google is not afraid of massive, embarrassing failures. This is, after all, a company that [teamed up with another company] to invest $1 billion in commercial space startup SpaceX days after it crashed a rocket.”34 As one headline about the technology sector expresses it, “A Fearless Culture Fuels Tech.”35 

3. Market Culture: A Competitive Culture Valuing Profits over Employee Satisfaction

A  market culture  has a strong external focus and values stability and control. Because market cultures are focused on the external environment and driven by competition and a strong desire to deliver results, customers, productivity, and profits take precedence over employee development and satisfaction. Employees are expected to work hard, react fast, and deliver quality work on time; those who deliver results are rewarded.

Chick-fil-A culture. Among the quick-service restaurant’s ways of engaging employees are hiring only nice people (harder than it sounds); hiring managers with people skills, not just functional skills; and closing stores on Sundays so employees can have family time. What kind of culture is that?© Zuma Press Inc/AlamyPage 248

Example: Uber, the ride-hailing company, is described by its CEO as having a “champions mind-set.” “It’s about putting everything you have on the field. … And if you get knocked down, overcoming adversity.” 36  The company uses an approach called “principled competition” to establish itself in new markets, developing a base of enthusiastic new riders and drivers and using that grass-roots support to fend off opposition. 37  “Uber doesn’t play nice,” says one writer. “It plays to win—and that strategy appears to be working.” 38  

4. Hierarchy Culture: A Structured Culture Valuing Stability and Effectiveness

A  hierarchy culture  has an internal focus and values stability and control over flexibility. Companies with this kind of culture are apt to have a formalized, structured work environment aimed at achieving effectiveness through a variety of control mechanisms that measure efficiency, timeliness, and reliability in the creation and delivery of products.

Example: Amazon relies on the benefits of a hierarchical culture to effectively manage its vast shipping processes. A Fortune reporter commented that the company has achieved success by “sticking steadfastly—even boringly—to a few key principles. … Instead of focusing on competitors or technology shifts [a market culture orientation], they continually invest in getting a little bit better. In their core retail business, they grind out incremental improvements in delivery speed and product offerings while chipping away at prices.”39 

Are you curious about the type of culture that exists in a current or past employer? Do you wonder whether this culture is best suited to help the company achieve its strategic goals? The following self-assessment allows you to consider these questions.

SELF-ASSESSMENT 8.1  

What Is the Organizational Culture at My Current Employer? 

Please be prepared to answer these questions if your instructor has assigned Self-Assessment 8.1 in Connect.

1. How would you describe the organizational culture?

2. Do you think this type of culture is best suited to help the company achieve its strategic goals? Explain.

EXAMPLE

Cultures Representing Competing Values: The Different “Personalities” of Pfizer Pharmaceuticals

“What makes culture so important is that it’s unique; it’s something that no one can copy,” says Ian C. Read, chairman and CEO of Connecticut-based Pfizer Pharmaceuticals. “Culture can become your competitive advantage. Get it wrong and you’ll pay dearly for it … for years to come.” 40

Read became head of Pfizer in December 2010, after mismanagement (“micro micro” management, or indecisiveness) by the previous CEO failed to lift the company’s fortunes. 41  Read has instituted a commitment to “our OWNIT! culture. I challenged Pfizer’s leaders to recognize that they can only own the future if they own change and can make change work for us, not against us.”

Pfizer employees, he asserts, “understand that our ownership culture can differentiate us within our industry. They also understand it requires a willingness to take prudent risks, be accountable for their decisions and results, and understand how their work contributes to the company’s performance.” The success of the culture especially depends on the efforts of first- and second-line managers, who create a climate of trust that is “essential to providing the space employees need to work, take considered risks, and own the results,” he says.

Organizational cultures are nearly as varied as human personalities, and conflicting cultures can exist within thePage 249 same organization. Sometimes they interfere with each other, but sometimes competing cultures may be strong contributors to an organization’s success. Consider the different cultures associated with Pfizer, both before Read took over and during his tenure. Do you recognize the different types?

$2.3 Billion in Fines. In 2009, Pfizer was fined $2.3 billion for improperly marketing drugs to doctors. “The whole culture of Pfizer is driven by sales,” said a former sales representative whose complaint helped the government’s case, “and if you didn’t sell drugs illegally, you were not seen as a team player.” 42  Almost every major drug company has in recent years been accused of giving kickbacks to doctors or shortchanging federal programs.

Free Prescription Drugs to Unemployed. But also in that year, as unemployment hovered around 10% in the United States, Pfizer launched a program in which it offered to supply 70 of its name-brand drugs, such as Lipitor and Viagra, free of charge for up to a year to customers who had lost their jobs and lacked prescription coverage. “We did it because it was the right thing to do,” said Pfizer’s then CEO. “But it was motivational for our employees and got a great response from customers. In the long run, it will help our business.” 43

Ongoing Experimentation. At Pfizer, drug discovery is a high-risk, costly endeavor in which hundreds of scientists screen thousands of chemicals against specific disease targets, but 96% of these compounds are ultimately found to be unworkable. The culture, then, is one of managing failure and disappointment, of helping drug researchers live for the small victories. Thus, says one account, “when a researcher publishes a paper, or when a lab gets some positive results on a new therapy, it’s trumpeted throughout the organization.” 44  Another example of experimentation, aimed at helping remaining employees to be productive after heavy job cuts, is PfizerWorks, in which 4,000 employees pass off tedious and time-consuming parts of their jobs, such as creating PowerPoint slides and riffling through spreadsheets, to outsiders in India. 45

Shedding U.S. Corporate Citizenship to Lower Taxes. In 2015, Read informed federal officials that Pfizer, which was founded in Brooklyn in 1849, proposed to merge with Dublin-based Allergan, maker of Botox, and to move the company’s headquarters to Ireland, a lower-tax country, thereby significantly cutting Pfizer’s U.S. tax bill. 46  He defended the move, which is called an “inversion,” by saying it could result in more cash that could be invested in the United States and ultimately add jobs. Critics decried it as a gift to an industry “that’s blessed with lengthy drug patents that stave off competition, keep prices high, and protect earnings for years.” 47  Calling the plan “one of the most insidious tax loopholes out there,” the Obama administration tightened tax rules, removing the planned inversion’s benefits. Pfizer and Allergan called off the merger. 48  

YOUR CALL

What cultural types are illustrated in these examples? Does it make more sense that a company would have one dominant cultural type or an equal mixture of clan, adhocracy, market, and hierarchy? Explain your rationale.

How Employees Learn Culture: Symbols, Stories, Heroes, Rites and Rituals, and Organizational Socialization

Culture is transmitted to employees in several ways, most often through such means as (1) symbols, (2) stories, (3) heroes, (4) rites and rituals, and (5) organizational socialization. 49  

1. Symbols

A  symbol  is an object, an act, a quality, or an event that conveys meaning to others. In an organization, symbols convey its most important values.

Example: One of the most iconic products of IKEA, maker of inexpensive home furnishings, whose vision is “to create a better life for the many,” is the LACK table, a 22-inch by 22-inch side table that sells for only $9.99. 50

2. Stories

A  story  is a narrative based on true events, which is repeated—and sometimes embellished upon—to emphasize a particular value. Stories are oral histories that are told and retold by members about incidents in the organization’s history.

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Example: Marc Benioff is founder of cloud computing business Salesforce.com, a San Francisco company known for its great sense of social responsibility and generosity (and rated No. 23 on Fortune’s 2016 Best Companies to Work For list). 51  Its spirit of philanthropy is embodied in a story called the 1-1-1 rule. “When we started the company,” Benioff says, “we took 1% of our equity [stock value] and 1% of our profit and 1% of all our employees’ time, and we put it into a … public charity. At the time, it was very easy because we had no profit, we had no time, we had no equity. But then, it turned out that our company is worth, you know, tens of billions of dollars.” 52  Salesforce.com also runs 10,000 nonprofits for free, doesn’t charge universities for its services, and, says Benioff, delivers “hundreds of thousands of hours of community service.” 

3. Heroes

A  hero  is a person whose accomplishments embody the values of the organization. IKEA employees are expected to work hard, inspired by an anecdote from their Swedish founder, Invar Kamprad, in his 1976 “A Furniture Dealer’s Testament.” In that essay he recounts how he was berated by his father for failing repeatedly to get out of bed to milk the cows on his family’s farm. Then one day he got an alarm clock. “‘Now by jiminy, I’m going to start a new life,’ he determined, setting the alarm for twenty to six and removing the ‘off button.’” 53

4. Rites and Rituals

Rites and rituals  are the activities and ceremonies, planned and unplanned, that celebrate important occasions and accomplishments in the organization’s life. Military units and sports teams have long known the value of ceremonies handing out decorations and awards, but many companies have rites and rituals as well.

Example: Employees of New Belgium Brewery in Fort Collins, Colorado, which makes Fat Tire Ale, are given a cruiser bicycle during their first year. After five years, they get a free brewery-hopping trip to Belgium. Ten years of employment is acknowledged with a tree planted in their name in the campus orchard. (The company boasts a 97% employment retention rate.) 54

5. Organizational Socialization

Organizational socialization  is defined as the process by which people learn the values, norms, and required behaviors that permit them to participate as members of an organization.55 Converting from outsider into organizational insider may take weeks or even years and occurs in three phases, researcher Daniel Feldman suggests—before one is hired, when one is first taken on, and when one has been employed a while and is adjusting to the job.56 

The first phase (anticipatory socialization phase) occurs before one joins the organization, when a person learns—from career advisors, from web sources, from current employees—what the organization’s job needs and values are and how one’s own needs, values, and skills might fit in. The second phase (encounter phase) takes place when a person is first hired and comes to learn what the organization is really like and how to adjust his or her expectations. The company may help to advance this socialization process through various familiarization programs (known as “onboarding” programs). The third phase (change and acquisition phase) comes about once the employee understands his or her work role and now must master the necessary skills and tasks and learn to adjust to the work group’s values and norms. The company may advance this phase of socialization through goal setting, incentives, employee feedback, continued support, and ceremonies (“graduation”) that celebrate completion of the process.

Example: Organizational socialization at Miami Children’s Hospital in Florida is helped along by assigning new employees a “buddy” trained in coaching and mentoring;Page 251 supporting new recruits with direct supervision, lunch meetings, and frequent use of online surveys and employee feedback; having monthly reviews by management; and at 90 days rewarding successful employees with a two-day culture-shaping retreat and graduation ceremony. 57  

The Importance of Culture

Many people believe culture powerfully shapes an organization’s long-term success by enhancing its competitive advantage. A team of researchers tested this hypothesis with a meta-analysis (a statistical procedure combining data from multiple studies) of more than 38,000 organizational units—either organizations as a whole or departments in different organizations—and 616,000 individuals. 58  The results are shown below. (See  Figure 8.3 .)

FIGURE 8.3  What organizational benefits are associated with what organizational cultures?  Source: A. Y. Ou, C. Hartnell, A. Kinicki, E. Karam, and D. Choi, “Culture in Context: A Meta-Analysis of the Nomological Network of Organizational Culture.” Presentation as part of symposium Connecting Culture and Context: Insights from Organizational Culture Theory and Research at the 2016 National Academy of Management meeting in Anaheim, California.

Results revealed that culture is positively associated with a variety of outcomes. Most relationships were of moderate strength, meaning they are important to today’s managers. Closer examination of  Figure 8.3  leads to the following six conclusions:

· An organization’s culture matters. The type of organizational culture can be a source of competitive advantage.

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Employees have more positive work attitudes when working in organizations with clan cultures. Employees clearly prefer to work in organizations that value flexibility over stability and control, as well as those that are more concerned with satisfying the needs of employees than those of shareholders or customers.

· Clan and market cultures are more likely to deliver higher customer satisfaction and market share. We suspect this result holds because the positive employee attitudes associated with clan cultures motivate employees to provide better customer service.  

· Operational outcomes, quality, and innovation are more strongly related to clan, adhocracy, and market cultures than to hierarchical ones. Managers should avoid the use of too many rules and procedures—hierarchical characteristics—when trying to improve these outcomes.  

· An organization’s financial performance (profit and revenue growth) is not strongly related to organizational culture. Only market and hierarchy cultures were associated with financial outcomes. Managers should not expect to immediately increase financial performance when they try to change their organization’s culture. This underscores the conclusion that culture change needs time to take hold.  

· Companies with market cultures tend to have more positive organizational outcomes. Managers are encouraged to make their cultures more market oriented. 

What Does It Mean to “Fit”? Anticipating a Job Interview

“What’s your favorite movie?” the job interviewer asks you. “Your favorite website?” “What’s the last book you read for fun?” “What makes you uncomfortable?”

These are the four most frequently asked interview questions used by hiring managers, according to a survey involving 285,000 kinds of interview questions.59 For you as a job applicant, these questions might not seem to have much to do with your performance in previous jobs. But what the interviewer is trying to find out is how well you will fit in—what is called  person–organization (PO) fit,  which reflects the extent to which your personality and values match the climate and culture in an organization. 60 

A good fit of this kind is important because it is associated with more positive work attitudes and task performance, lower stress, and fewer expressions of intention to quit (“I’m gonna tell ‘em, ‘They can take this job and …’”).61 How well an applicant will fit in with the institution’s organizational culture is considered a high priority by many interviewers. Indeed, more than 50% of the evaluators in one study considered “fit” to be the most important criterion of the interview process.62 

How can you determine how well you might fit in before you go into a job interview? You should write down your strengths, weaknesses, and values—and then do the same for the organization you’re interviewing with, by researching it online and talking with current employees. You can then prepare questions to ask the interviewer about how well you might fit. 63  

Example: If being recognized for hard work is important to you, ask the interviewer how the company rewards performance. If the answer doesn’t show a strong link between performance and rewards (“Well, we don’t really have a policy on that”), you’ll probably have a low person–organization fit and won’t be happy working there. Incidentally, a positive corporate culture that engages and motivates employees will help a company’s bottom line, according to a study of car dealerships, but the reverse is not true—a company’s success isn’t enough to ensure a positive culture. 64  

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8.3

The Process of Culture Change

MAJOR QUESTION What can be done to an organization’s culture to increase its economic performance?

THE BIG PICTURE

There are 12 ways a culture becomes established in an organization.

A particular culture can become embedded in an organization in many ways, 12 of which are described here. (See  Table 8.2 .)

TABLE 8.2  A Dozen Ways to Change Organizational Culture

1. Formal statements

2. Slogans & sayings

3. Rites & rituals

4. Stories, legends, & myths

5. Leader reactions to crises

6. Role modeling, training, & coaching

7. Physical design

8. Rewards, titles, promotions, & bonuses

9. Organizational goals & performance criteria

10. Measurable & controllable activities

11. Organizational structure

12. Organizational systems & procedures

Changing organizational culture is essentially a teaching process—that is, a process in which members instruct each other about the organization’s preferred values, beliefs, expectations, and behaviors. The process is accomplished by using one or more of the following 12 mechanisms. 65

1. Formal Statements

The first way to embed preferred culture is through the use of formal statements of organizational philosophy, mission, vision, and values, as well as materials used for recruiting, selecting, and socializing employees.

Example: At fashion website Polyvore, CEO Jess Lee wrote down three statements she thought represented the company’s distinct culture: (1) “delight the user,” (2) “do a few things well,” and (3) “make an impact.” 66  Walmart founder Sam Walton stated that three basic values represented the core of the retailer’s culture: (1) respect for the individual, (2) service to customers, and (3) striving for excellence. 67

2. Slogans and Sayings

The desirable corporate culture can be expressed in language, slogans, sayings, and acronyms.

Example: David Cote, chairman and CEO of global technology company Honeywell, has adopted the principle “Your job as a leader is to be right at the end of the meeting, not at the beginning of the meeting.” That is, a leader’s job is to flush out all the facts and opinions so at the end he or she can make a good decision. 68

3. Rites and Rituals

As we mentioned earlier, rites and rituals represent the planned and unplanned activities and ceremonies that are used to celebrate important events or achievements.

Example: After a day’s meetings with clients, employees at Boston advertising agency Arnold Worldwide like to meet at a beer-vending machine in the office (nicknamed “Arnie”), where they sip bottles of home-brewed beer, chitchat, and exchange ideas. 69  (Of course, employers need to be cautious about encouraging drinking alcohol at work, for both health and liability reasons.)

4. Stories, Legends, and Myths

A story is a narrative about an actual event that happened within the organization and that helps to symbolize its vision and values to employees.

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Example: Until a decade ago, major drug companies treated countries in the developing world as not worth the trouble of marketing to. But Andrew Witty, who in 2008 at age 43 became the youngest CEO of GlaxoSmithKline, the world’s second-largest pharmaceutical company, is making a name for himself by doing more for the poor people of the world than any other big drug company leader. While working in poor countries, Witty found “just unbelievable energy to self-improve, to lift themselves up.” He has promised to keep prices of drugs sold in poor countries to no more than 25% of what is charged in rich ones and to donate one-fifth of all profits made in such countries toward building their health systems. Now for four years running Glaxo has been ranked No. 1 on the Access to Medicine index, which rates pharmaceutical companies on their stances toward the poor. 70

5. Leader Reactions to Crises

How top managers respond to critical incidents and organizational crises sends a clear cultural message.

Example: Cory Booker (now a U.S. senator from New Jersey) was the mayor of financially struggling Newark in 2010 when a serious snowstorm hit the city. “Throughout the storm,” reports The Wall Street Journal, “those in distress hit up Mr. Booker on Twitter, one of the mayor’s preferred methods of keeping in touch with residents. After they cried out for plows, ambulances, and diapers, he responded, electronically and sometimes by driving to the location, shovel in hand. … He ordered his driver to pull over several times to help shovel out or push cars.” 71  His on-the-ground efforts were an answer to critics who accused him of being out of touch.

6. Role Modeling, Training, and Coaching

Many companies provide structured training to provide an in-depth introduction to their organizational values.

Example: Triage Consulting Group, a health care financial consulting firm in California, places a high value on superior performance at achieving measurable goals. New employees are immediately prepared for this culture with a four-day orientation in Triage’s culture and methods, followed by 15 training modules scheduled in six-week intervals. After less than a year, the best performers are ready to begin managing their own projects, furthering their career development. Performance evaluations take place four times a year, further reinforcing the drive for results. 72

7. Physical Design

There is constant experimenting going on as to the best office layout that will encourage employee productivity and send a strong message about the culture.

Example: After power producer Dynegy emerged from bankruptcy, the new CEO abandoned his private office and moved into a 64-square-foot cubicle—identical to the ones used by the 235 other employees—signaling his aim “to transform a business previously focused on day-to-day survival into an agile operator poised for growth,” according to one report. 73

Another example: Pharmaceutical company GlaxoSmithKline has embraced an open-space philosophy that abandons individual desks in favor of “hoteling,” where everyone is assigned to “neighborhoods,” or areas of workers engaged in related tasks (you store your personal belongings in a small locker), on the theory that chance encounters among employees will spark conversations and collaboration. 74

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8. Rewards, Titles, Promotions, and Bonuses

Rewards and status symbols are among the strongest ways to embed organizational culture.

Example: At Triage Consulting Group, employees at the same level of their career earn the same pay, but employees are eligible for merit bonuses, again reinforcing the culture of achievement. The awarding of merit bonuses is partly based on coworkers’ votes for who contributed most to the company’s success, and the employees who receive the most votes are recognized each year at the company’s “State of Triage” meeting. 75

9. Organizational Goals and Performance Criteria

Many organizations establish organizational goals and criteria for recruiting, selecting, developing, promoting, dismissing, and retiring people, all of which reinforce the desired organizational culture.

Example: Las Vegas–based Zappos, the online shoe retailer, spends a great deal of time analyzing applicants to see if they will fit into its clan-based culture. “We spend seven to 10 hours [with potential recruits] over four occasions at happy hours, team building events, or other things outside the office,” says the company’s human resources director. “We can see them, and they can us.” 76  Until recently, this careful selection process along with paying full employee benefits and emphasizing having fun at work (the “wow factor”) resulted in a low turnover rate of only 20% in 2009, a remarkable statistic for call centers. That figure changed when Zappos instituted a new form of organization, as we’ll describe.

The wow culture. The “wow” factor that encourages Zappos’s clan-based culture is partly created by encouraging employees to have fun at work. Is this a place you could stick with?© Jared McMillen/Aurora Photos

10. Measurable and Controllable Activities

An organization’s leaders can pay attention to, measure, and control a number of activities, processes, or outcomes that can foster a certain culture.

Example: Adam Nash, the CEO of Wealthfront, an online financial management firm, believes that how you keep score on employee progress is important. “If you don’t give people metrics [methods of measurement],” he says, “smart people will make up their own,” and “you’ll get incessant fighting and arguments.” 77

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11. Organizational Structure

The hierarchical structure found in most traditional organizations is more likely to reinforce a culture oriented toward control and authority compared with the flatter organization that eliminates management layers in favor of giving employees more power.

Example: The hierarchical structure of a railroad provides a much different culture from that of the “spaghetti organization” formerly employed by Danish hearing-aid maker Oticon, in which employees worked at mobile desks on wheels and were always subject to reorganization. Zappos has gone further by instituting a radical experiment called holocracy, which is supposed to encourage collaboration by eliminating workplace hierarchy—no titles and no bosses. Unfortunately, employees weren’t sure how to get things done anymore, which resulted in such confusion that the company’s 2015 turnover rate went from 20% to 30%. 78  

12. Organizational Systems and Procedures

Companies are increasingly using electronic networks to increase collaboration among employees, to increase innovation, quality, and efficiency.

Example: Molson Coors CEO Peter Swinburn, in knitting together employees of several former companies, made sure they had better tools to interact with each other. One technology he introduced was Yammer, a website for short messages similar to Twitter, on which some 2,000 employees now provide updates and collaborate on projects. 79

Don’t Forget about Person–Organization Fit

Now that we have described the four key types of organizational culture and the mechanisms managers can use to change culture, it’s time to reflect on your person–organization (PO) fit. Recall that PO fit reflects the extent to which your personality and values match the climate and culture in an organization. Your PO fit matters because it links to your work attitudes and performance. 80  

We have two activities for you to complete to measure your level of fit and see what you can do about it. The first is  Self-Assessment 8.2 , which measures your preference for the four types of culture in the CVF. The second is to answer the discussion questions associated with this assessment. You will be asked to conduct a gap analysis between the culture for a current or past employer and your preferred culture type. You can use this gap to make a plan of action for improving your PO fit.

SELF-ASSESSMENT 8.2  

Assessing Your Preferred Type of Organizational Culture

This survey is designed to assess your preferred type of organizational culture. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 8.2 in Connect.

1. In rank order, what are your preferred culture types? Are you surprised by the results? 

2. Compute the gap between your preferred and actual culture types by subtracting your actual culture type score ( Self-Assessment 8.1 ) from your preferred type score (Self-Assessment 8.2). Where are the largest gaps?

3. Make a plan to improve your person–organization fit. Focusing on your two largest culture types, identify what is causing the gaps. You will find it helpful to look at the survey items that measure these types.

4. Now use the 12 embedding mechanisms just discussed and suggest at least two things you can do to improve your level of fit.

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8.4

Organizational Structure

MAJOR QUESTION How are for-profit, nonprofit, and mutual-benefit organizations structured?

THE BIG PICTURE

The organizational structure of the three types of organizations—for-profit, nonprofit, and mutual-benefit—may be expressed vertically or horizontally on an organization chart.

Once an organization’s vision and strategy have been determined, as we stated at the beginning of this chapter, the challenge for top managers is, first, to create a culture that will motivate its members to work together and, second, a structure that will coordinate their actions to achieve the organization’s strategic goals. Here let us begin to consider the second part—an organization’s structure.

In  Chapter 1 , we defined an organization as a group of people who work together to achieve some specific purpose. According to Chester I. Barnard’s classic definition, an  organization  is a system of consciously coordinated activities or forces of two or more people. 81  By this wording, a crew of two coordinating their activities to operate a commercial tuna fishing boat is just as much an organization as tuna companies Bumble Bee and StarKist with their thousands of employees.

The Organization: Three Types

As we stated in  Chapter 1 , there are three types of organizations classified according to the three different purposes for which they are formed: 82

· For-profit organizations. These are formed to make money, or profits, by offering products or services.

· Nonprofit organizations. These are formed to offer services to some clients, not to make a profit (examples: hospitals, colleges).

· Mutual-benefit organizations. These are voluntary collectives whose purpose is to advance members’ interests (examples: unions, trade associations).

Who sells the electricity? About 80% of U.S. drivers drive 40 miles or less a day—and the Ford Focus Electric can drive nearly twice that far, 76 miles, on a single electric charge. The Focus is made by Ford Motor Company, a for-profit organization. What kind of organizations might sell the electricity and the charging stations—for-profit, nonprofit, or mutual-benefit?© Lucas Jackson/Reuters/AlamyPage 258

Clearly, you might have an occupation (such as auditor or police officer) that is equally employable in any one of these three sectors. As a manager, however, you would be principally required to focus on different goals—making profits, delivering public services, or satisfying member needs—depending on the type of organization.

The Organization Chart

Whatever the size or type of organization, it can be represented in an organization chart. An  organization chart  is a box-and-lines illustration showing the formal lines of authority and the organization’s official positions or work specializations. This is the family-tree-like pattern of boxes and lines posted on workplace walls and given to new hires, such as the following for a hospital. (See  Figure 8.4 .)

FIGURE 8.4  Organization chart Example for a hospital. .

Two kinds of information that organization charts reveal about organizational structure are (1) the vertical hierarchy of authority, who reports to whom, and (2) the horizontal specialization, who specializes in what work.

The Vertical Hierarchy of Authority: Who Reports to Whom

A glance up and down an organization chart shows the vertical hierarchy, the chain of command. A formal vertical hierarchy also shows the official communication network—who talks to whom. In a simple two-person organization, the owner might communicate with just a secretary or an assistant. In a complex organization, the president talks principally to the vice presidents, who in turn talk to the assistant vice presidents, and so on.

The Horizontal Specialization: Who Specializes in What Work

A glance to the left and right on the line of an organization chart shows the horizontal specialization, the different jobs or work specialization. The husband-and-wife partners in a two-personPage 259 desktop-publishing firm might agree that one is the “outside person,” handling sales, client relations, and finances and the other is the “inside person,” handling production and research. A large firm might have vice presidents for each task—marketing, finance, and so on.

PRACTICAL ACTION

Reading the Culture: Avoiding Pitfalls on Your Way Up

Although corporations and managements may make noises about training and support, newly promoted managers may not see any of this and may simply be expected to know what to do. And as managers move up the ladder, they may encounter other problems that they have not anticipated. How can you avoid some pitfalls as you make your ascent? In general, says one business professor, it begins by understanding “the culture you’re in and what your organization’s key values are.” 83  You have to learn how to read the culture, and you have to learn how to build strong relationships.

Some suggestions follow. 84

Have Realistic Expectations and Think about the Kind of Manager You Want to Be. New managers often focus on the rights and privileges of their new jobs and underestimate the duties and obligations. Make a list of all your previous bosses and their good and bad attributes. This may produce a list of dos and don’ts that can serve you well.

Don’t Forget to Manage Upward and Sideways as Well as Downward. You need to manage not only your subordinates but also the perceptions of your peers and your own managers above you. In addition, you need to have good relationships with managers in other departments—and be perceptive about their needs and priorities—since they have resources you need to get your job done. One expert on building relationship networks suggests you ask four key questions: (1) Whose cooperation do I need? (2) Whose compliance do I need? (3) Whose opposition would keep me from accomplishing my work? (4) Who needs my cooperation and compliance? 85  Work on identifying what you have in common with the other person, and invest time in nurturing and maintaining the relationship.

Get Guidance from Other Managers. You may not get advice on how to manage from your own manager, who may have promoted you to help reduce his or her workload, not add to it by expecting some coaching. If this is the case, don’t be shy about consulting other managers as well as people in professional organizations. “Keep listening to and for advice,” says one former Major League Baseball commissioner. “Never complain; never explain. No one listens. Take the blame if something goes wrong.” 86

Resist Isolation. If you’re promoted beyond supervisor of a small team and you have to manage hundreds rather than dozens, or thousands rather than hundreds, you may find the biggest surprise is isolation. The way to stay in touch is to talk daily with your senior managers, perhaps have “town meetings” with staffers several times a year, and use “management by wandering around”—bringing teams together to talk.

YOUR CALL

How would you try to manage the perceptions not only of subordinates but of your peers?

Managing. Being a manager requires a lot of interaction with others—as in “town meetings” with staffers. Do you think you’ll need to resist a tendency toward isolation?© Thomas Barwick/Getty Images

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8.5

The Major Elements of an Organization

MAJOR QUESTION When I join an organization, what seven elements should I look for?

THE BIG PICTURE

Seven basic elements or features of an organization are described in this section.

Whether for-profit, nonprofit, or mutual-benefit, organizations have a number of elements in common. We discuss four proposed by an organizational psychologist, and then describe three others that most authorities agree on.

Common Elements of Organizations: Four Proposed by Edgar Schein

Organizational psychologist Edgar Schein proposed the four common elements of (1) common purpose, (2) coordinated effort, (3) division of labor, and (4) hierarchy of authority. 87  Let’s consider these.

1. Common Purpose: The Means for Unifying Members

An organization without purpose soon begins to drift and become disorganized. The  common purpose  unifies employees or members and gives everyone an understanding of the organization’s reason for being.

2. Coordinated Effort: Working Together for Common Purpose

The common purpose is realized through  coordinated effort, the coordination of individual efforts into a group or organizationwide effort. Although it’s true that individuals can make a difference, they cannot do everything by themselves.

3. Division of Labor: Work Specialization for Greater Efficiency

Division of labor, also known as work specialization, is the arrangement of having discrete parts of a task done by different people. Even a two-person crew operating a fishing boat probably has some work specialization—one steers the boat and the other works the nets. With division of labor, an organization can parcel out the entire complex work effort to be performed by specialists, resulting in greater efficiency.

4. Hierarchy of Authority: The Chain of Command

The  hierarchy of authority, or chain of command, is a control mechanism for making sure the right people do the right things at the right time. If coordinated effort is to be achieved, some people—namely, managers—need to have more authority, or the right to direct the work of others. Even in member-owned organizations, some people have more authority than others, although their peers may have granted it to them.

In addition, authority is most effective when arranged in a hierarchy. Without tiers or ranks of authority, a lone manager would have to confer with everyone in his or her domain, making it difficult to get things done. Even in newer organizations that flatten the hierarchy, there still exists more than one level of management. 88  A  flat organization  is defined as one with an organizational structure with few or no levels of middle management between top managers and those reporting to them.

Finally, a principle stressed by early management scholars was that of  unity of command, in which an employee should report to no more than one manager in order to avoid conflicting priorities and demands. Today, however, with advances in computerPage 261 technology and networks, there are circumstances in which it makes sense for a person to communicate with more than one manager (as is true, for instance, with the organizational structure known as the matrix structure, as we’ll describe).

Common Elements of Organizations: Three More That Most Authorities Agree On

To Schein’s four common elements we may add three others that most authorities agree on: (5) span of control, (6) authority, responsibility, and delegation, and (7) centralization versus decentralization of authority.

5. Span of Control: Narrow (or Tall) versus Wide (or Flat)

The  span of control, or span of management, refers to the number of people reporting directly to a given manager. 89  There are two kinds of spans of control, narrow (or tall) and wide (or flat).

Narrow Span of Control

This means a manager has a limited number of people reporting—three vice presidents reporting to a president, for example, instead of nine vice presidents. An organization is said to be tall when there are many levels with narrow spans of control.

Wide Span of Control

This means a manager has several people reporting—a first-line supervisor may have 40 or more subordinates, if little hands-on supervision is required, as is the case in some assembly-line workplaces. An organization is said to be flat when there are only a few levels with wide spans of control.

Historically, spans of about 7 to 10 subordinates were considered best, but there is no consensus as to what is ideal. In general, when managers must be closely involved with their subordinates, as when the management duties are complex, they are advised to have a narrow span of control. This is why presidents tend to have only a handful of vice presidents reporting to them. By contrast, first-line supervisors directing subordinates with similar work tasks may have a wide span of control.

Today’s emphasis on lean management staffs and more efficiency means that spans of control need to be as wide as possible while still providing adequate supervision. Wider spans also fit in with the trend toward allowing workers greater autonomy in decision making. Research suggests that, when aided by technology to communicate and monitor, a manager can oversee 30 employees or more. 90

6. Authority, Responsibility, and Delegation: Line versus Staff Positions

Male sea lions have to battle other males to attain authority over the herd. In human organizations, however, authority is related to the management authority in the organization; it has nothing to do with the manager’s fighting ability or personal characteristics. With authority goes accountability, responsibility, and the ability to delegate one’s authority.

Accountability

Authority  refers to the rights inherent in a managerial position to make decisions, give orders, and utilize resources. (Authority is distinguished from power, which, as we discuss in  Chapter 14 , is the extent to which a person is able to influence others so they respond to orders.) In the military, of course, orders are given with the expectation that they will be obeyed, disobedience making one liable to a dishonorable discharge or imprisonment. In civilian organizations, disobeying orders may lead to less dire consequences (demotion or firing), but subordinates are still expected to accept that a higher-level manager has a legitimate right to issue orders.

Authority means  accountability—managers must report and justify work results to the managers above them. Being accountable means you have the responsibility for performing assigned tasks.

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Responsibility

With more authority comes more responsibility.  Responsibility  is the obligation you have to perform the tasks assigned to you. A car assembly-line worker has little authority but also little responsibility: just install those windshields over and over. A manager, however, has greater responsibilities.

It is a sign of faulty job design when managers are given too much authority and not enough responsibility, in which case they may become abusive to subordinates and capricious in exerting authority. 91  Conversely, managers may not be given enough authority, so the job becomes difficult.

Delegation

Delegation  is the process of assigning managerial authority and responsibility to managers and employees lower in the hierarchy. To be more efficient, most managers are expected to delegate as much of their work as possible. However, many bosses get hung up on perfection, failing to realize that delegation is a necessary part of managing.

A smart rule is the “70% Rule”: If the person you would like to perform the task is able to do it at least 70% as well as you can, you should delegate it. “Is it frustrating that the task won’t be done with the same degree of perfection or perceived perfection that [you] could achieve?” asks one writer. “Sure! But let go of perfection.”92 

PRACTICAL ACTION

When Should You Delegate and When Not? How Managers Get More Done

All managers must learn how to delegate—to assign management authority and responsibilities to people lower in the company hierarchy. When it comes to a choice between micromanaging and delegating tasks, “err on the side of delegation,” former GE head Jack Welch has recommended. “It makes your employees love being at the company and helps them flourish. And it gives managers a feel for who needs more attention.”93 

Delegation also helps you avoid exhaustion from overwork. “To do more in a day, you must do less—not do everything faster,” says Oakland, California, productivity expert Odette Pollar. 94  If as a manager you find yourself often behind, always taking work home, doing your subordinates’ work for them, and constantly having employees seeking your approval before they can act, you’re clearly not delegating well. 

How do you decide when to delegate and when not to? Here are some guidelines: 95

Delegate Routine and Technical Matters. Always try to delegate routine tasks and routine paperwork. When there are technical matters, let the experts handle them.

Delegate Tasks That Help Your Subordinates Grow. Let your employees solve their own problems whenever possible. Let them try new things so they will grow in their jobs.

Don’t Delegate Confidential and Personnel Matters. Any tasks that are confidential or that involve the evaluation, discipline, or counseling of subordinates should never be handed off to someone else.

Don’t Delegate Emergencies. By definition, an emergency is a crisis for which there is little time for solution, and you should handle this yourself.

Don’t Delegate Special Tasks That Your Boss Asked You to Do—Unless You Have His or Her Permission. If your supervisor entrusts you with a special assignment, such as attending a particular meeting, don’t delegate it unless you have permission to do so.

Match the Tasks Delegated to Your Subordinates’ Skills and Abilities. While recognizing that delegation involves some risk, make your assignments appropriate to the training, talent, skills, and motivation of your employees.

YOUR CALL

Managers fail to delegate for many reasons. 96  An excessive need for perfection. A belief that only they should handle “special,” “difficult,” or “unusual” problems or clients. A wish to keep the parts of a job that are fun. A fear that others will think them lazy. A reluctance to let employees lower down in the hierarchy take risks. A worry that subordinates won’t deliver. A concern that the subordinates will do a better job and show them up. Are any of these why you might not be very good at delegating? What are some others?

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Regarding authority and responsibility, the organization chart distinguishes between two positions, line and staff. (See  Figure 8.5 .)

FIGURE 8.5  Line and staff Line responsibilities are indicated by solid lines, staff responsibilities by dotted lines.

Line Position

Line managers  have authority to make decisions and usually have people reporting to them. Examples are the president, the vice presidents, the director of personnel, and the head of accounting. Line positions are indicated on the organization chart by a solid line (usually a vertical line).

Staff Position

Staff personnel  have authority functions; they provide advice, recommendations, and research to line managers (examples: specialists such as legal counsels and special advisers for mergers and acquisitions or strategic planning). Staff positions are indicated on the organization chart by a dotted line (usually a horizontal line).

7. Centralization versus Decentralization of Authority

Who makes the important decisions in an organization? That is what the question of centralization versus decentralization of authority is concerned with.

Centralized Authority

With  centralized authority, important decisions are made by higher-level managers. Very small companies tend to be the most centralized, although nearly all organizations have at least some authority concentrated at the top of the hierarchy. Kmart and McDonald’s are examples of companies using this kind of authority.

An advantage in using centralized authority is that there is less duplication of work, because fewer employees perform the same task; rather, the task is often performed by a department of specialists. Another advantage of centralization is that procedures are uniform and thus easier to control; all purchasing, for example, may have to be put out to competitive bids.

Decentralized Authority

With  decentralized authority, important decisions are made by middle-level and supervisory-level managers. Here, obviously, power has been delegated throughout the organization. Among the companies using decentralized authority are General Motors and Harley-Davidson.

An advantage in having decentralized authority is that managers are encouraged to solve their own problems rather than to buck the decision to a higher level. In addition, decisions are made more quickly, which increases the organization’s flexibility and efficiency.

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8.6

Basic Types of Organizational Structures

MAJOR QUESTION How would one describe the eight organizational structures?

THE BIG PICTURE

Eight types of organizational structures are simple, functional, divisional, matrix, team-based, network, modular, and virtual.

Culture and structure, we’ve said, are quite often intertwined. When Google co-founder (with Sergey Brin) and CEO Larry Page was asked in 2011 about the biggest threat to his company, Page answered in a single word: “Google.”

Small firm. What type of organizational structure is best suited to a local bicycle shop? Should the number of employees influence the decision?© Matthew Simmons/WireImage/Getty Images

Now 19 years old, Google started out as a freewheeling company in which, as we mentioned, engineers were given time to experiment on their own projects, producing the famed Google’s culture of innovation. The problem, however, was that the company grew so quickly (it’s now over 61,000 people) that decision making had become molasses-like. For instance, the two co-founders, who had been trained as engineers, had hired a professional manager, Eric Schmidt, to be CEO, but the three of them “had to agree before anything could be done,” says one report. “The unwieldy management and glacial pace of decision making were particularly noticeable in [Silicon Valley], where start-ups overtake behemoths in months.” 97  

In 2015 Google revamped its corporate structure into a conglomerate called Alphabet Inc., with individual operations headed by separate chief executives. The word conglomerate (defined as a large company that is doing business in different, quite unrelated areas—General Electric and Berkshire Hathaway are two examples) is unpopular with most companies today because critics think it spreads top management focus too widely.98 However, for the Google founders, the purpose of Alphabet was not only to streamline the company’s structure and decision-making processes but also to bring more transparency into the company’s operations to satisfy investors who, as one editorial explained it, “admired its cash-rich search businesses but complained that its other sidelines are hard to measure.”99 The reorganization separated the collection of traditional businesses most associated with Google—such as Search, Android, YouTube, and Google Maps—from more speculative “moonshot” ventures such as Calico (life extension), Google X (self-driving cars), Nest (smart-home devices), and Sidewalk (city infrastructure).100

Organizational design  is concerned with designing the optimal structures of accountability and responsibility that an organization uses to execute its strategies. We can categorize organizational designs as three types: (1) traditional designs, (2) horizontal designs, and (3) designs that open boundaries between organizations. 101

1. Traditional Designs: Simple, Functional, Divisional, and Matrix Structures

Traditional organizational designs tend to favor structures that rely on a vertical management hierarchy, with clear departmental boundaries and reporting arrangements, as follows.

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The Simple Structure: For the Small Firm

The first organizational form is the simple structure. This is the form often found in a firm’s very early, entrepreneurial stages, when the organization is apt to reflect the desires and personality of the owner or founder. An organization with a  simple structure  has authority centralized in a single person, a flat hierarchy, few rules, and low work specialization. (See  Figure 8.6 , right.)

FIGURE 8.6  Simple structure: An example There is only one hierarchical level of management beneath the owner.

Hundreds of thousands of organizations are arranged according to a simple structure—for instance, small mom-and-pop firms running landscaping, construction, insurance sales, and similar businesses. Examples: Both Hewlett-Packard and Apple Computer began as two-man garage start-ups that later became large.

The Functional Structure: Grouping by Similar Work Specialties

The second organizational form is the functional structure. In a  functional structure, people with similar occupational specialties are put together in formal groups. This is a quite commonplace structure, seen in all kinds of organizations, for-profit and nonprofit. (See  Figure 8.7 .)

FIGURE 8.7  Functional structure: Two examples This shows the functional structure for a business and for a hospital.

Examples: A manufacturing firm will often group people with similar work skills in a Marketing Department, others in a Production Department, others in Finance, and so on. A nonprofit educational institution might group employees according to work specialty under Faculty, Admissions, Maintenance, and so forth.

The Divisional Structure: Grouping by Similarity of Purpose

The third organizational form is the divisional structure. In a  divisional structure, people with diverse occupational specialties are put together in formal groups by similar products or services, customers or clients, or geographic regions. (See  Figure 8.8 , next page.)

Page 266FIGURE 8.8  Divisional structure: Three examples This shows product, customer, and geographic divisions.

Product Divisions: Grouping by Similar Products or Services

Product divisions group activities around similar products or services. Examples: The media giant Time Warner has different divisions for magazines, movies, recordings, cable television, and so on. The Warner Bros. part of the empire alone has divisions spanning movies and television, a broadcast network, retail stores, theaters, amusement parks, and music.

Customer Divisions: Grouping by Common Customers or Clients

Customer divisions tend to group activities around common customers or clients. Examples: Ford Motor Co. has separate divisions for passenger-car dealers, for large trucking customers, and for farm products customers. A savings and loan might be structured with divisions for making consumer loans, mortgage loans, business loans, and agricultural loans.

Geographic Divisions: Grouping by Regional Location

Geographic divisions group activities around defined regional locations. Example: This arrangement is frequently used by government agencies. The Federal Reserve Bank, for instance, has 12 separate districts around the United States. The Internal Revenue Service also has several districts.

The Matrix Structure: A Grid of Functional and Divisional for Two Chains of Command

The fourth organizational form is the matrix structure. In a  matrix structure, an organization combines functional and divisional chains of command in a grid so that there are two command structures—vertical and horizontal. The functional structure usually doesn’t change—it is the organization’s normal departments orPage 267 divisions, such as Finance, Marketing, Production, and Research & Development. The divisional structure may vary—as by product, brand, customer, or geographic region. (See  Figure 8.9 ).

FIGURE 8.9  Matrix structure An example of an arrangement that Ford might use.

A hypothetical example, using Ford Motor Co.: The functional structure might be the departments of Engineering, Finance, Production, and Marketing, each headed by a vice president. Thus, the reporting arrangement is vertical. The divisional structure might be by product (the new models of Taurus, Mustang, Explorer, and Expedition, for example), each headed by a project manager. This reporting arrangement is horizontal. Thus, a marketing person, say, would report to both the Vice President of Marketing and the project manager for the Ford Mustang. Indeed, Ford Motor Co. used the matrix approach to create the Taurus and a newer version of the Mustang.

2. The Horizontal Design: Eliminating Functional Barriers to Solve Problems

The second organizational design is the horizontal design. In a  horizontal design, also called a team-based design, teams or workgroups, either temporary or permanent, are used to improve collaboration and work on shared tasks by breaking down internal boundaries. For instance, when managers from different functional divisions are brought together in teams—known as cross-functional teams—to solve particular problems, the barriers between the divisions break down. The focus on narrow divisional interests yields to a common interest in solving the problems that brought them together. Yet team members still have their full-time functional work responsibilities and often still formally report to their own managers above them in the functional-division hierarchy. (See  Figure 8.10 )

Page 268FIGURE 8.10  Horizontal design This shows a mix of functional (vertical) and project-team (horizontal) arrangements.

EXAMPLE

Use of a Horizontal Design: Whole Foods Market

Upscale natural and organic-food grocery Whole Foods Market started out in 1980 as one store in Austin, Texas, and today has revenues of $15.3 billion and 447 stores in North America and the United Kingdom. 102  It was rated No. 24 in 2016 on Fortune magazine’s annual “World’s Most Admired Companies” list. 103  It has also been chosen as one of Fortune’s “100 Best Companies to Work For” every year for 17 years (No. 75 in 2016). 104  But as one writer observed, if its values are “soft-hearted,” emphasizing Whole Food, Whole People, Whole Planet, “its competitive logic is hard-headed.” 105  That’s because its management strategy is based not on hierarchy but on autonomous profit centers of self-managed teams.

“Radical Decentralizing”: Empowering Small Teams. One of Whole Foods’s core operating principles is that all work is teamwork. Thus, each store is organized into roughly eight self-managed teams, each with a designated team leader. The leaders in each store also operate as a team, as do the store leaders in each region. Additionally, the directors of the company’s 11 regions operate as a team.

At most retail companies, employees are hired by supervisors (not fellow employees), decisions about what products to order are made by someone high up at central headquarters, and the amounts of people’s paychecks are kept secret. Whole Foods, however, believes in “radical decentralizing,” in the words of influential management professor Gary Hamel. 106

At the individual-store level, compensation is tied to team rather than individual performance, and performance measurements and individual pay schedules are open to all. Each team has the mission of improving the food for which it is responsible; is given wide flexibility in how it manages its responsibilities, hires and fires its members, and stocks its shelves; and is given a lot of power in how it responds to the changing tastes of local consumers.

A Steady Diet of Growth. Whole Foods employees are given both the freedom to do the right thing for customers and the incentive to do the right thing for profits. The financial results of this business model are that Whole Foods is the most profitable food retailer in the United Sates, when measured by profit perPage 269 square foot. Although its stock price was down somewhat in 2014, it still was up 12-fold since its 2008 recession-era low. 107

YOUR CALL

In designing new products, such as cell phones, the horizontal design team approach, known as concurrent engineering or integrated product development, has been found to speed up design because all the specialists meet at once, instead of separately doing their own thing, then handing off the result to the next group of specialists. Why do you think a horizontal design would be better in a retail business such as groceries?

3. Designs That Open Boundaries between Organizations: Hollow, Modular, and Virtual Structures

The opposite of a bureaucracy, with its numerous barriers and divisions, a  boundaryless organization  is a fluid, highly adaptive organization whose members, linked by information technology, come together to collaborate on common tasks. The collaborators may include not only coworkers but also suppliers, customers, and even competitors. This means that the form of the business is ever-changing, and business relationships are informal. 108

Three types of structures in this class of organizational design are hollow, modular, and virtual structures.

The Hollow Structure: Operating with a Central Core and Outsourcing Functions to Outside Vendors

In the  hollow structure, often called the network structure, the organization has a central core of key functions and outsources other functions to vendors who can do them cheaper or faster. (See  Figure 8.11 .) A company with a hollow structure might retain such important core processes as design or marketing and outsource most other processes, such as human resources, warehousing, or distribution, thereby seeming to “hollow out” the organization. 109

FIGURE 8.11  Hollow structure This is an example of a personal computer company that outsources noncore processes to vendors.

A firm with a hollow structure might operate with extensive, even worldwide operations, yet its basic core could remain small, thus keeping payrolls and overhead down. The glue that holds everything together is information technology, along with strategic alliances and contractual arrangements with supplier companies. An example of a hollow structure is EndoStim, the medical device start-up we described earlier.

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The Modular Structure: Outsourcing Pieces of a Product to Outside Firms

The modular structure differs from the hollow structure in that it is oriented around outsourcing certain pieces of a product rather than outsourcing certain processes (such as human resources or warehousing) of an organization. In a  modular structure, a firm assembles product chunks, or modules, provided by outside contractors. One article compares this form of organization to “a collection of Lego bricks that can snap together.” 

Modular structure. The center section of Bombardier’s eight-passenger Continental business jet is built in Ireland and is shipped to Wichita, Kansas, where it is assembled with 12 other major components in just four days.© epa european pressphoto agency b.v./Alamy

An example of the modular structure is the massive 787 Dreamliner project, in which Boeing contracted with many suppliers, each responsible for one component or assembly, which were then integrated to make the aircraft. Another example is an eight-passenger business jet, the Continental, made by Bombardier (pronounced “bom-bar-dee-ay”) of Wichita, Kansas. The Continental is designed in a dozen large modules, which are built in various places around the world. The cockpit and forward fuselage are built by Bombardier Montreal. The center section is built in Belfast, the wing by Mitsubishi in Japan, the stabilizers and rear fuselage by Aerospace Industrial Development in Taiwan, the landing gear by Messier-Dowty in Canada, and the tailcone by Hawker de Havilland in Australia. The engines are provided by General Electric and the avionics gear by Rockwell Collins, both companies in the United States. The 12 modules are shipped to Wichita, where the parts are snapped together in just four days. 110

The Virtual Structure: An Internet-Connected Partner for a Temporary Project

“Strip away the highfalutin’ talk,” says one industry observer, “and at bottom the Internet is a tool that dramatically lowers the cost of communication. That means it can radically alter any industry or activity that depends heavily on the flow of information.” 111  One consequence of this is the  virtual structure, an organization whose members are geographically apart, usually working with e-mail, and other forms of information technology yet which generally appears to customers as a single, unified organization with a real physical location. 112

An example is web-services company Automattic Inc., which has a San Francisco office, but it’s only for occasional use. Its real offices are the homes of its 123 employees working in 26 countries, 94 cities, and 28 U.S. states. Although occasionally employees hop on a plane and meet face to face, they mainly transmit messages via text-based internal blogs or, when misunderstandings occur, talk on the phone. With a virtual structure, companies can “tap into a wider talent pool not limited by geography,” says one report. “Firms can also save money on real estate, though sizable travel budgets may partly offset that.”113 

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8.7

Contingency Design: Factors in Creating the Best Structure

MAJOR QUESTION What factors affect the design of an organization’s structure?

THE BIG PICTURE

Three factors that should be considered when determining the best organizational culture involve whether an organization’s environment is mechanistic or organic, whether its environment stresses differentiation or integration, and how its strategy can affect its structure.

What is the optimal size for an organization? How big is too big?

Medical records company gloStream, which sells software to doctors’ offices, was founded in 2005 as a virtual structure, and for four years the approach worked well, with costs kept low and salespeople having no choice but to be out in the field. But in 2009, CEO Mike Sappington decided it was time to “take the company physical.” “We’ve gotten too big to be a virtual company,” he told Inc. magazine. By the following year, gloStream planned to have 100 employees in the United States and another 100 in India. “Setting up a conference call or arranging everyone’s schedules for a meeting,” he said, “started to take an enormous amount of time.” 114

Three Factors to Be Considered in Designing an Organization’s Structure

When managers are considering what organizational arrangements to choose from, such factors as stage of development are among the factors, or contingencies, they must consider. Recall from  Chapter 2  that the contingency approach to management emphasizes that a manager’s approach should vary according to—that is, be contingent on—the individual and environmental situation. Thus, the manager following the contingency approach simply asks, “What method is the best to use under these particular circumstances?” The process of fitting the organization to its environment is called  contingency design.

Managers taking a contingency approach must consider the following factors in designing the best kind of structure for their particular organization at that particular time:

1. Environment—mechanistic versus organic

2. Environment—differentiation versus integration

3. Link between strategy, culture, and structure

1. The Environment: Mechanistic versus Organic Organizations—the Burns and Stalker Model

Making beds—how hard could it be?

Could anyone do this? Hotel housekeepers, following the model of a mechanistic organization, are supposed to be able to make beds in no more than 3 minutes and ready an entire room within 24 minutes. The tasks are physically demanding, and the staff must be taught how to bend properly to make the work easier on the body. If you had this job, what would you do to vary the routine to avoid monotony—or would that sacrifice speed?© Simon Dawson/Bloomberg/Getty Images

Actually, a hotel housecleaner may be expected to whip not just beds but entire rooms, 16–30 of them, into spick-and-span shape during an eight-hour shift. Here every job is broken down into the smallest of steps, with vacuuming, dusting, mopping, making beds, and so on expected to take about 20–24 minutes per room, according to time-motion studies. Making a neatly tucked bed should take no more than 3 minutes.115 Marriott allows 30 minutes for tidying up a room and has developed a 66-step manual with very specific directions (“Wipe the nightstand’s glass top with a blue rag, using the blue bottle. Wipe the phone and clock”).116 

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Much of this kind of mundane hotel work exemplifies what British behavioral scientists Tom Burns and G. M. Stalker call a mechanistic organization, as opposed to an organic organization. 117  (See  Table 8.3 .)

TABLE 8.3 Mechanistic versus Organic Organizations

MECHANISTIC ORGANIZATIONS	ORGANIC ORGANIZATIONS
Centralized hierarchy of authority	Decentralized hierarchy of authority
Many rules and procedures	Few rules and procedures
Specialized tasks	Shared tasks
Formalized communication	Informal communication
Few teams or task forces	Many teams or task forces
Narrow span of control, taller structures	Wider span of control, flatter structures

Mechanistic Organizations: When Rigidity and Uniformity Work Best

In a  mechanistic organization, authority is centralized, tasks and rules are clearly specified, and employees are closely supervised. Mechanistic organizations, then, are bureaucratic, with rigid rules and top-down communication. This kind of structure is effective in certain aspects of hotel work because the market demands uniform product quality and cleanliness.

In general, mechanistic design works best when an organization is operating in a stable environment. Yet new companies that have gone through a rough-and-tumble start-up period may decide to change their structures so that they are more mechanistic, with clear lines of authority.

Organic Organizations: When Looseness and Flexibility Work Best

In an  organic organization, authority is decentralized, there are fewer rules and procedures, and networks of employees are encouraged to cooperate and respond quickly to unexpected tasks. Tom Peters and Robert Waterman called this kind of organization a “loose” structure. 118

Organic organizations are sometimes termed “adhocracies” because they operate on an ad hoc basis, improvising as they go along. As you might expect, information-technology companies favor the organic arrangement because they constantly have to adjust to technological change. New York–based Dark Arts Consulting, a technology consulting firm, has used the practice of co-working—sharing office space with other businesses—to expand into territories in New Jersey and Pennsylvania, enabling it to hire salespeople and engineers without having the added expense of an underutilized office. 119  Companies that need to respond to fast-changing consumer tastes also favor organic arrangements.

No doubt you would be more comfortable in some organizational structures than others. If you value autonomy and the chance to make decisions, you probably prefer a hollow or virtual structure as opposed to one that is more structured. What type of structure do you think would bring out the best in you? 

SELF-ASSESSMENT 8.3  

Assessing Your Organizational Structure Preference

This survey is designed to assess your preferred type of organizational structure. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 8.3 in Connect.

1. Do you prefer a more mechanistic or organic structure? What do you think is the cause for this preference?

2. If you were interviewing for a job, what questions might you ask to determine if the company is more mechanistic or organic?

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2. The Environment: Differentiation versus Integration—the Lawrence and Lorsch Model

Burns and Stalker’s ideas were extended in the United States by Harvard University researchers Paul R. Lawrence and Jay W. Lorsch. 120  Instead of a mechanistic–organic dimension, however, they proposed a differentiation–integration dimension—forces that impelled the parts of an organization to move apart or to come together. The stability of the environment confronting the parts of the organization, according to Lawrence and Lorsch, determines the degree of differentiation or integration that is appropriate.

Differentiation: When Forces Push the Organization Apart

Differentiation  is the tendency of the parts of an organization to disperse and fragment. The more subunits into which an organization breaks down, the more highly differentiated it is.

This impulse toward dispersal arises because of technical specialization and division of labor. As a result, specialists behave in specific, delimited ways, without coordinating with other parts of the organization. For example, a company producing dental floss, deodorants, and other personal-care products might have different product divisions, each with its own production facility and sales staff—a quite differentiated organization.

Integration: When Forces Pull the Organization Together

Integration  is the tendency of the parts of an organization to draw together to achieve a common purpose. In a highly integrated organization, the specialists work together to achieve a common goal. The means for achieving this are a formal chain of command, standardization of rules and procedures, and use of cross-functional teams and computer networks so that there is frequent communication and coordination of the parts.

3. Linking Strategy, Culture, and Structure

We began this chapter by discussing why it makes sense that a company’s organizational culture and organizational structure should be aligned with its vision and strategies. Thus, if the managers of an organization change its strategy, as gloStream did when it decided to add lots more people and put them under one roof instead of in a virtual network, they need to change the organization’s culture and structure to support that strategy. Indeed, companies often begin by offering a single product or product line that requires only a simple structure, but as they grow and their strategies become more ambitious and elaborate, the culture and structure need to change to support those strategies. 121

All the organizational cultures and structures described in this chapter are used today because all of them have advantages that make them appropriate for some cases and disadvantages that make them not useful for others. For example, the clear roles and strict hierarchy of an extremely mechanistic organization are clearly suitable in a system valuing careful routines and checks and balances, such as a nuclear power plant. A fast-moving start-up drawing on sources of expertise throughout the world may benefit from a more flexible culture and organic structure that lowers boundaries between functions and organizations.

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10.1

The Nature of Change in Organizations

MAJOR QUESTION Since change is always with us, what should I understand about it?

THE BIG PICTURE

Two types of change are reactive and proactive. Forces for change may consist of forces outside the organization—demographic characteristics; technological advancements; shareholder, customer, and market changes; and social and political pressures. Or they may be forces inside the organization—human resources concerns and managers’ behavior.

“Every journey starts with fear. … Do you know what fear stands for? False Evidence Appearing Real.” 10  

Of course, not every fear rests on false evidence—often the evidence is very real indeed. But in an age of discontinuous change, we are all having to make our own new journeys. “There is a need to retool yourself,” says the CEO of AT&T, “and you should not expect to stop.” 11  

Fundamental Change: What Will You Be Called On to Deal With?

“It is hard to predict, especially the future,” physicist Niels Bohr is supposed to have quipped.

But it is possible to identify and prepare for the future that has already happened, in the words of management theorist Peter Drucker. 12  Among the trends: Today’s digitally savvy kids will grow up and continue to be early adopters of new technology. Women will be a dominant force in the global marketplace. More people will move from rural to urban areas. Social networks will replace traditional institutions in driving change. Consumers will grow more informed, changing the power balance in the marketplace. A rising developing-world middle class will fuel global consumer spending. Spending on health and wellness will soar. Starting a new business will become easier. Niche markets will flourish. Cloud computing will do away with the brick-and-mortar office. Data will be critical for competitive advantage. Smart machines will get smarter. 13  

There are also some supertrends specifically shaping the future of business: (1) The marketplace is becoming more segmented; (2) competitors offering specialized solutions require we get our products to market faster; (3) some companies are unable to survive disruptive innovation; (4) offshore suppliers are changing the way we work; and (5) knowledge, not information, is becoming the new competitive advantage. 14   

1. The Marketplace Is Becoming More Segmented and Moving toward More Niche Products

In the recent past, managers could think in terms of mass markets—mass communication, mass behavior, and mass values. Now we have “demassification,” with customer groups becoming segmented into smaller and more specialized groups responding to more narrowly targeted commercial messages.

“Our culture and economy are increasingly shifting away from a focus on a relatively small number of hits (mainstream products and markets) … and moving toward a huge number of niches,” says Chris Anderson of Wired magazine. “In an era without the constraints of physical shelf space and other bottlenecks of distribution, narrowly targeted goods and services can be as economically attractive as mainstream fare.” 15  Thus, he says, “the future of business is selling less of more.”

Example: In the Internet Age, retailers like Amazon and Apple are not constrained by physical shelf space and can offer consumers a much wider variety of products, yet small sales, one or two rather than millions of items at a time, can produce big profits.

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2. More Competitors Are Offering Targeted Products, Requiring Faster Speed-to-Market

“Companies that take too long to commercialize their products may fail to capitalize on a narrow window of opportunity before competitors swoop in and pass them by,” points out a Forbes writer. 16  Some of these competitors may be in and out of a market in a matter of days or months—like pop-up stores, “here today, gone tomorrow” retailers, such as those selling Halloween products.

Example: Virgin Group Ltd., headed by Sir Richard Branson, is known mainly for its music and airline businesses, but it has entered around 400 new businesses, one after the other—mobile phones, credit cards, hotels, games, trains, and most recently foot races and cruise ships—and very quickly. Virgin Comics, started in 2006, aimed at India’s multibillion-dollar comics market, went from idea to public announcement in less than 11 months. In mid-2008, it restructured and changed its name to Liquid Comics.

Virgin train. A brainchild of British multiple entrepreneur Richard Branson, Virgin Trains was launched in 1997 to provide long-distance passenger services in the United Kingdom. Among Branson’s many companies, perhaps 400 derivatives in all: Virgin Records, Virgin Mobile, Virgin Cola, Virgin Vodka, Virgin Car, and Virgin Galactic (for space tourism). Branson is quick to enter a new industry but also quick to get out if it isn’t profitable. Branson’s entrepreneurial approach: “Think, what’s the most amazing way to do it?”© Alvey & Towers Picture Library/Alamy

3. Some Traditional Companies May Not Survive Radical Change

In The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Clayton M. Christensen, a Harvard Business School professor, argues that when successful companies are confronted with a giant technological leap that transforms their markets, all choices are bad ones.

Indeed, he thinks, it’s very difficult for an existing successful company to take full advantage of a technological breakthrough such as digitalization—what he calls  disruptive innovation, a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. 17  Some companies that have the resources to survive disruption—to build “the next big thing”—often fail to do so. 18  

Lower-level managers are rarely rewarded for telling powerful senior executives that a competitive advantage is fading away, adds Columbia Business School professor Rita Gunther McGrath. “Better to shore up an existing advantage for as long as possible, until the pain becomes so obvious there is no choice. That’s what happened at … Nokia, Kodak, and a host of other firms that got themselves into terrible trouble.” 19

EXAMPLE

Radical Change: The Decline of Radioshack

Electronics retailer RadioShack, which once sold electronic parts, including the first mass-produced personal computer (the TRS-80), in the 1980s failed to spot up-and-coming competition from Amazon, as well as undertook confused marketing strategies and a poor mix of inventory. 20  The chain’s demise also coincided with the decline of free time that once had allowed electronic hobbyists to flourish (a loss of 181 hours a year between 1979 and 2007).

From Computers to Cell Phones and E-Commerce. Told that computers weren’t a money maker, RadioShack stopped making them in 1993 and turned to cell phones. Unfortunately, signing up phone customers took about 45 minutes each, tying up store employees. In the late 1990s, the chain’s website didn’t allow consumers to shop, at the same time Best Buy and Walmart were running e-commerce sites.

Weird Marketing, Small Inventory, Missing the Maker Movement. For a time the company tried a marketing campaign, widely ridiculed, in which it tried to seem cool by referring to itself as “The Shack.” In addition, its stores, never the size of big box competitors, were limited by store space, which restricted their inventory. Finally, while it was trying to sell mobile phones and remote-controlled cars, the chain missed stocking the kind of inventory that would appeal to the burgeoning Maker movement—the do-it-yourselfers wanting to build homemade robots and other tech projects.

YOUR CALL

In March 2015, RadioShack filed for bankruptcy. “I wouldn’t even call this failure. I’d call it an assisted suicide,” said one marketing professor. 21  It’s always easy in retrospect to find the faults of a failed enterprise, although RadioShack’s demise is “like tracing the steps and doings of a drunk person,” says one former employee. 22  As you consider the disruptive effects of technology on a host of other industries, what kind of strategy do you think they should embrace? How, for instance, would you advise the owner of an automobile body shop whose business in the next few years might be imperiled by the accident-free driving of self-driving cars? 23  

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4. China, India, and Other Offshore Suppliers Are Changing the Way We Work

As we said in  Chapter 2 , globalization and outsourcing are transforming whole industries and changing the way we work. China, India, Mexico, the Philippines, and other countries possess workers and even professionals willing to work twice as hard for half the pay, giving American businesses substantial labor savings. While unquestionably some American jobs are lost, others become more productive, with some engineers and salespeople, for example, being liberated from routine tasks so that they can spend more time innovating and dealing with customers.

Example: Querétaro is not a place students would probably go for spring break, but it has become known for something not normally associated with Mexico: aircraft construction. American aircraft makers from Bombardier to Cessna Aircraft to Hawker Beechcraft have various kinds of subassembly work there, where wages are lower but skill levels are not. 24

But if some manufacturing jobs have moved cross-border, dozens of foreign manufacturers in aerospace, chemicals, and other industries are bringing jobs to the United States. British-based Rolls-Royce, for instance, makes engine parts in Virginia. Siemens, a German company, makes power-plant turbines in North Carolina. 25  In addition, in 2015, the United States added roughly as many jobs due to foreign investment and American companies returning from offshore as it lost to offshoring. 26

Overseas firms also now look to the United States for talented workers in technology, finance, and research. 27

5. Knowledge, Not Information, Is Becoming the New Competitive Advantage

“Information is rapidly becoming a profitless commodity, and knowledge is becoming the new competitive advantage,” says San Diego management consultant Karl Albrecht. 28

That is, as information technology does more of the work formerly done by humans, even in high-tech areas (such as sorting data for relevance), many low-level employees previously thought of as knowledge workers are now being recognized as “data workers,” who contribute very little added value to the processing of information. Unlike routine information handling, knowledge work is analytic and involves problem solving and abstract reasoning—exactly the kind of thing required of skillful managers, professionals, salespeople, and financial analysts. The rise of knowledge workers is accelerating despite the threat of automation, and indeed the number of people in knowledge-work jobs—nonroutine cognitive occupations—has more than doubled in the last 30 years, and shows no sign of slowing down. 29  

Example: Middle-skill jobs like bookkeeping, clerical work, and repetitive assembly-line work are being rapidly taken over by automation, according to MIT economist David Autor. But higher-paying knowledge-work jobs, which require creativity and problem solving—often aided by computers—have grown rapidly, as have lower-skilled jobs that are resistant to automation. 30  

Two Types of Change: Reactive versus Proactive

Most CEOs, general managers, and senior public-sector leaders agree that incremental changes are no longer sufficient in a world that is operating in fundamentally different ways. Life in general, they say, is becoming more complex, and the firms that are able to manage that complexity are the ones that will survive in the long term. 31  Clearly, we are all in for an interesting ride.

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As a manager, you will typically have to deal with two types of change: reactive and proactive.

1. Reactive Change: Responding to Unanticipated Problems and Opportunities

When managers talk about “putting out fires,” they are talking about  reactive change, making changes in response to problems or opportunities as they arise. 

U.S. public health authorities went to reactive-change high alert when measles, declared eliminated in 2000 because of widespread vaccination, came back with a vengeance in 2015 after being initiated by an infected international visitor to Disneyland in southern California. 32  The virus rapidly spread among American adults and children who had refused to be vaccinated (“anti-vaxxers”), a growing population concerned about a famous British medical study that claimed to link the measles vaccine with autism (complex disorders of brain development). 33  “The study was not only spectacularly wrong,” writes pediatrics professor and vaccine expert Paul Offit, “but also fraudulent.” 34  Nevertheless, misinformed U.S. parents opted out of vaccinations at a rate of 6% a year between 1991 and 2006, some swayed by passionate celebrities such as former Playboy model Jenny McCarthy. 35  

EXAMPLE

Reactive Change: The BP Gulf of Mexico Blowout

Crises can happen quickly and without warning, and many companies have shown they don’t deal with them well, as happened with Toyota’s and GM’s slow reactions in recalling defective vehicles. But for oil giant BP (formerly British Petroleum), the crisis was catastrophic—both for itself and most certainly for the United States. 36

Crisis in the Gulf of Mexico. In April 2010, an explosion on the BP drilling platform Deepwater Horizon in the Gulf of Mexico led to sinking of the rig, the loss of 11 lives, and the largest oil spill ever to happen in U.S. waters. Oil wells have emergency shutoff valves called blowout preventers, which can be triggered from the rig. The Deepwater Horizon, which floated 5,000 feet above the ocean floor, was equipped with this device, which nearly always works when wells surge out of control. However, it failed to operate on the day of the Gulf accident.

And what the rig did not have was a backup shutoff switch, a remote-control device that carries an acoustic signal through the water that can be activated as a last resort. Such acoustic backup triggers, which cost about $500,000, are not mandated by U.S. regulators, but they also haven’t been tested under real-world conditions, because major offshore oil-well blowouts are so rare. (Even so, Norway and Brazil require them, and some major oil companies, such as Royal Dutch Shell, carry them even when not mandated.)

BP Reacts. As 2.5 million gallons of oil a day leaked from the open wellhead, the question was asked: Why wasn’t BP prepared for such an accident? Eventually they capped the leak, but in the aftermath BP pled guilty to federal felony charges and environmental-law violations and was forced to sell almost $40 billion in assets to meet its liabilities, a move that cut its number of wells and platforms in half. 37  In the six years following, BP tried to settle with thousands of Gulf victims, from shrimpers to hotel owners—and deal with many dubious claims of businesses hundreds of miles from the Gulf, including a Florida escort service. 38  In 2016, a federal judge approved a $20 billion settlement to end the years of litigation. BP has reportedly set aside nearly $54 billion to cover the costs associated with the disaster. 39  

YOUR CALL

The BP blowout happened 21 years after the tanker Exxon Valdez’s catastrophic 1989 oil spill in the Gulf of Alaska, the effects of which are still being felt. Wasn’t that enough time for oil companies to plan for major accidents? What should BP have done?

2. Proactive Change: Managing Anticipated Problems and Opportunities

In contrast to reactive change,  proactive change, or planned change, involves making carefully thought-out changes in anticipation of possible or expected problems or opportunities. 40

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EXAMPLE

Proactive Change: Disney World Gets Out Front with Its MagicBand

Even big companies in the constantly changing landscape of California’s Silicon Valley are nervous. “Everyone is trying to position themselves for the new style of information technology,” says Hewlett-Packard CEO Meg Whitman. “The fittest will survive.” 41

The Game Changer. Across the country in Orlando, Florida, however, the Walt Disney Company has been taking a giant proactive stride: investing $1 billion into a wearable technology designed to revolutionize the way visitors spend money at Walt Disney World. It begins with the MyMagic+ vacation-planning system, which features a website (“My Disney Experience”) and data-collecting wristbands (“MagicBands”) that interact with scanners throughout the 40-square-mile theme park. The electronic band can digitally carry everything a guest might need—“park tickets, photos, coupons, even money,” says one description. 42   

“Because it is a reservation system, it is a game changer,” says a professor who teaches theme-park management. “Now you can plan your vacation and your ride sequence well ahead of your trip.” 43  For instance, you can “prebook front-of-the-line access to three rides, parades, or [Disney cartoon] character meet-and-greets,” says writer Brooks Barnes. To buy food and merchandise, you just stand at the register and swipe your wristband. The MagicBand also functions as a hotel room key, parking claim, and VIP access (so that Disney employees will greet you by name). Says Barnes, “Disney thinks people will spend more money and time at the [park] if they find it easier to navigate.” 44

Onward to Phones. During testing of the system, Disney found it could accommodate 3,000 additional daily guests and that use of the FastPass reservation system had increased 40%, freeing people from standing in line and increasing their number of experiences. Today, however, much of what the bracelets do can be done with cell phones, and indeed it was decided when the Shanghai Disney Resort opened in June 2016 it would not use the bands. 45  

YOUR CALL

Disney plans for the technology will give people the flexibility to visit multiple Disney parks in a single day and keep them from going to competing central Florida parks, such as Universal Orlando Resort.

Do you think Disney is onto something? Could the technology be applied to zoos, Las Vegas resorts, and other venues, as the company hopes? How? What about Disney cruise ships?

As we’ve stated, change can be hard, and the tools for survival are flexibility and adaptability. We also know that organizations like to hire people who are flexible and willing to accept change. How well do you think you fare in this regard? You can find out by taking  Self-Assessment 10.1 .

SELF-ASSESSMENT 10.1  

Assessing Your Attitudes toward Change at Work

The following survey was designed to assess your attitudes toward change at work. Please be prepared to answer these questions if your instructor has assigned  Self-Assessment 10.1  in Connect.

1. Where do you stand when it comes to your attitude toward change? Are you surprised by the results?

2. Based on your three lowest scoring survey items, how might you foster a more positive attitude toward change? Be specific.

3. What types of questions might a recruiter ask you during an interview to assess your attitude toward change? What would be your response to these questions?

The Forces for Change outside and inside the Organization

How do managers know when their organizations need to change? The answers aren’t clear-cut, but you can get clues by monitoring the forces for change—both outside and inside the organization. (See  Figure 10.1 )

Page 331FIGURE 10.1  Forces for change outside and inside the organization

Forces Originating outside the Organization

External forces consist of four types, as follows.

1. Demographic Characteristics

Earlier we discussed the demographic changes occurring among U.S. workers, with the labor force becoming more diverse. Example: For the first time since 1880, Americans ages 18 to 34 (Millennials) are more likely to be living with their parent(s) than in a household shared with a spouse or partner. 46  How might this affect their spending habits?

2. Technological Advancements

Technology  is not just computer technology; it is any machine or process that enables an organization to gain a competitive advantage in changing materials used to produce a finished product.

“We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another,” writes Klaus Schwab, executive chairman of the World Economic Forum. “In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before.” 47  This is the Fourth Industrial Revolution, characterized by “a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.”

Example: The First Industrial Revolution (1784) used water and steam to mechanize production, the Second (1870) used electric power to create mass production, and the Third (1969) used electronics and information technology to automate production. The Fourth, which is now ongoing and is disrupting nearly every industry in every country, is characterized by billions of people connected by mobile devices with unprecedented processing power, storage capacity, and access to knowledge—Page 332joined by emerging technology breakthroughs in such fields as artificial intelligence, robotics, autonomous vehicles, 3-D printing, nanotechnology, quantum computing, and biotechnology.

EXAMPLE

From Ride Sharing to Self-driving Cars: Uber, Lyft, and the Upending of Transportation

“We think there’s going to be more change in the world of mobility in the next five years than there has been in the last 50,” said General Motors president Dan Ammann in January 2016. The occasion was the announcement of GM’s $500-million investment in Lyft, the ride-sharing service that is a competitor to Uber. 48

TNCs. Just as technology has allowed the lodging-sharing service Airbnb (discussed in  Chapter 1 ) to take business from hotels, so smartphones and apps have enabled on-demand “transportation network companies” (TNCs) such as Uber and Lyft to challenge the traditional taxi cab industry—and to threaten other existing transportation arrangements. In cities from San Francisco to Shanghai, Uber, for instance, lets riders hail drivers in their personal cars by using a smartphone app to rent a car and driver on demand and by the minute.

Self-driving Cars. Lyft president John Zimmer has said that he believes that individual car ownership will fade in favor of autonomous vehicles—self-driving cars or robot cars—that are run through a network, and clearly GM agrees. GM and Lyft will begin co-developing an on-demand network of self-driving cars as well as other car-sharing services. These are areas in which there has also been recent enormous interest—and investment—from competitors ranging from Tesla to Toyota, Ford to Fiat, and Google to Apple. 49  Initial efforts will probably be in self-driving taxis, buses, and big-rig trucks. 50  The U.S. government has proposed investing $4 billion for self-driving cars, with the aim of ending human error in driving, which can be fatal. 51  

A world changer? A self-driving car traverses a parking lot at Google’s headquarters in Mountain View, California, in early 2016. What do you think are the chances for self-driving cars realizing the high hopes predicted for them?© Noah Berger/AFP/Getty Images

Your Call 

Clearly transportation is coming in for severe technological disruption in the coming years. But how safe do you think self-driving cars have to be before they can be deployed on the highway? How will self-driving cars affect the insurance industry? Will your costs for car insurance go up or down?

3. Shareholder, Customer, and Market Changes

Shareholders have begun to be more active in pressing for organizational change. Example: Some shareholders may form a  B corporation, or benefit corporation, in which the company is legally required to adhere to socially beneficial practices, such as helping consumers, employees, or the environment. The largest B corp is Brazilian cosmetics manufacturer Natura, with $3 billion U.S. in annual revenues. 52  

Customers are also becoming more demanding, being more inclined to take their business elsewhere if they do not get what they want from a given company. 

Example: Millennials have been found to be more focused on app-based shopping options, like those offered by Starbucks, where many customers can preorder their beverages through their phones before picking them up. Millennials also prefer specialty stores to department stores, so stores like Macy’s have been trying out “stores within a store.” 53  

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The global economy continues to influence the way U.S. companies have to do business. 54  Perhaps the most momentous recent example occurred in June 2016, when voters in the United Kingdom voted for a British exit (“Brexit”) from the European Union, setting off shockwaves around the world and causing stock markets to fall off a cliff. Among the possible long-term results were trade restrictions harmful to Britain, a deep recession, the separation of Scotland and Northern Ireland from the U.K., and other countries trying to leave the EU. 55  

Another example: Recently, Apple Inc. received 25% of its revenue from China. Imagine the shock to the company, then, when the major city of Beijing banned sales of Apple’s iPhones 6 and 6 Plus, on the grounds that their design might have been lifted from that of a local Chinese-made phone. Earlier, Apple’s online book and movie sales were shut down by Chinese censors. 56  

4. Social and Political Pressures

Social events can create great pressures.

Example: Poor diet choices, such as reliance on sugary sodas, have led to nearly 70% of U.S. adults being overweight or obese, which in turn has produced an epidemic of type 2 diabetes. Soda tax proposals have failed in more than 30 cities and states in recent years, mainly because they are promoted for health reasons, and “Americans generally reject other people telling them what’s healthy for them,” as one report notes. 57  In 2016, the Philadelphia city council passed such an ordinance—despite a multimillion-dollar campaign against it by the beverage industry—because backers argued that the tax money would be used not to discourage sugar consumption but to pay for popular programs such as universal pre-kindergarten and improvements to parks and libraries.

Forces Originating inside the Organization

Internal forces affecting organizations may be subtle, such as low job satisfaction, or more dramatic, such as constant labor-management conflict. Internal forces may be of the two following types: human resources concerns and managers’ behavior.

1. Human Resources Concerns

Is there a gap between the employees’ needs and desires and the organization’s needs and desires? Job dissatisfaction—as expressed through high absenteeism and turnover—can be a major signal of the need for change. Organizations may respond by addressing job design, reducing employees’ role conflicts, and dealing with work overload, to mention a few matters.

Example: After Foxconn’s Chinese facilities had problems with employee suicides, other Chinese companies like Pegatron implemented HR policies and practices to reduce employee work hours and overtime. Pegatron, which operates an iPhone assembly facility outside Shanghai, requires employees to scan ID cards, use face scanners, and walk through turnstiles in order to monitor compliance with new overtime regulations. 58  

2. Managers’ Behavior

Excessive conflict between managers and employees or between a company and its customers is another indicator that change is needed. Perhaps there is a personality conflict, so that an employee transfer may be needed. Or perhaps some interpersonal training is required.

Example: Facebook’s leadership decided to respond to tech blog Gizmodo’s conclusion that “curators of Facebook’s ‘trending topics’ feature suppressed news about conservative events and from conservative sources,” according to The Wall Street Journal. The company is now training employees “to identify and check their political leanings.” 59  

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10.2

Types and Models of Change

MAJOR QUESTION What are three types of change, and how is Lewin’s approach designed to handle change?

THE BIG PICTURE

This section discusses the three types of change, from least threatening to most threatening: adaptive, innovative, and radically innovative. It also describes Lewin’s three-stage change model: unfreezing, changing, and refreezing. Finally, it describes the systems approach to change: inputs, target elements of change, and outputs.

As we mentioned in  Section 10.1 , change may be forced upon an organization—reactive change, requiring you to make adjustments in response to problems or opportunities as they arise. Or an organization may try to get out in front of changes—proactive change, or planned change, which involves making carefully thought-out changes in anticipation of possible problems or opportunities.

As a manager, particularly one working for an American organization, you may be pressured to provide short-term, quick-fix solutions. But when applied to organizational problems, this approach usually doesn’t work: Quick-fix solutions have little staying power.

What, then, do we need to understand in order to effectively manage organizational change? In this section, we discuss the following:

· Three kinds of change.

· Lewin’s change model.

· The systems approach to change.

Three Kinds of Change: From Least Threatening to Most Threatening

Whether organizational change is administrative or technological, it can be adaptive, innovative, or radically innovative, depending on (1) the degree of complexity, cost, and uncertainty and (2) its potential for generating employee resistance. 60

Least Threatening: Adaptive Change—“We’ve Seen Stuff Like This Before”

Adaptive change  is reintroduction of a familiar practice—the implementation of a kind of change that has already been experienced within the same organization. This form of change is lowest in complexity, cost, and uncertainty. Because it is familiar, it is the least threatening to employees and thus will create the least resistance.

For example, during the annual Labor Day sale, a department store may ask its sales employees to work 12 hours a day instead of the usual 8. During tax-preparation time, the store’s accounting department may imitate this same change in work hours. Although accounting employees are in a different department from sales employees, it’s expected they wouldn’t be terribly upset by the temporary change in hours, since they’ve seen it in effect elsewhere in the store.

Somewhat Threatening: Innovative Change—“This Is Something New for This Company”

Innovative change  is the introduction of a practice that is new to the organization. This form of change involves moderate complexity, cost, and uncertainty. It is therefore apt to trigger some fear and resistance among employees.

For example, should a department store decide to adopt a new practice of competitors by staying open 24 hours a day, requiring employees to work flexible schedules, it may be felt as moderately threatening.

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Very Threatening: Radically Innovative Change—“This Is a Brand-New Thing in Our Industry”

Radically innovative change  involves introducing a practice that is new to the industry. Because it is the most complex, costly, and uncertain, it will be felt as extremely threatening to managers’ confidence and employees’ job security and may well tear at the fabric of the organization. 61

For example, Amazon is currently testing a new delivery system called Prime Air in Canada, the United Kingdom, and the Netherlands. The program uses drones to carry packages up to 5 pounds in 30 minutes or less. The goal is to safely operate the drones for a distance of 10 miles or more beyond the line of sight. 62  

Imagine the implications of companies using drones to distribute products.

Lewin’s Change Model: Unfreezing, Changing, and Refreezing

Most theories of organizational change originated with the landmark work of social psychologist Kurt Lewin. Lewin developed a model with three stages—unfreezing, changing, and refreezing—to explain how to initiate, manage, and stabilize planned change. 63  (See  Figure 10.2 .)

FIGURE 10.2  Lewin’s model of change

1. “Unfreezing”: Creating the Motivation to Change

In the unfreezing stage, managers try to instill in employees the motivation to change, encouraging them to let go of attitudes and behaviors that are resistant to innovation. For this “unfreezing” to take place, employees need to become dissatisfied with the old way of doing things. Managers also need to reduce the barriers to change during this stage.

Example: Wireless handheld computers—personal digital assistants (PDAs)—are becoming established tools for health professionals, who use them to access patient records in hospital information systems. How well have they been accepted? Studies exploring nurses’ perceptions about using PDAs in their daily patient practice found initial resistance, with some nurses concerned about the cost and short technological life cycle of these devices—the unfreezing stage. 64

2. “Changing”: Learning New Ways of Doing Things

In the changing stage, employees need to be given the tools for change: new information, new perspectives, new models of behavior. Managers can help here by providing benchmarking results, role models, mentors, experts, and training. It’s advisable, experts say, to convey the idea that change is a continuous learning process, not just a one-time event. 65

Example: In the changing stage, nurses learning PDAs were allowed to continue their manual patient-charting systems while learning the PDA-accessible versions, but only for a limited time to avoid adding to their already heavy workloads. They were assisted with educational programs to help them learn and implement the new technology, programs that also stressed the need to protect confidential patient records.

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3. “Refreezing”: Making the New Ways Normal

In the refreezing stage, employees need to be helped to integrate the changed attitudes and behavior into their normal ways of doing things. Managers can assist by encouraging employees to exhibit the new change and then, through additional coaching and modeling, by reinforcing the employees in the desired change, as we’ll discuss in  Section 10.5 .

Example: In the refreezing stage, as hospitals eliminated barriers that precluded the use of wireless networks, nurses learned to appreciate the usefulness of having a widely pervasive and portable technology, with its easier access to drug and diagnostic/laboratory reference applications and improved communications.

A Systems Approach to Change

Change creates additional change—that’s the lesson of systems theory. Promoting someone from one group to another, for instance, may change the employee interactions in both (as from cordial to argumentative, or the reverse). Adopting a team-based structure may require changing the compensation system to pay bonuses based on team rather individual performance. A systems approach to change presupposes that any change, no matter how small, has a rippling effect throughout an organization.

A system, you’ll recall from  Chapter 2 , is a set of interrelated parts that operate together to achieve a common purpose. The systems approach can be used to diagnose what to change and determine the success of the change effort.

The systems model of change consists of three parts: (1) inputs, (2) target elements of change, and (3) outputs. (See  Figure 10.3 .)

FIGURE 10.3  Systems model of change Source: Based on A. Kinicki and M. Fugate, Organizational Behavior: A Practical, Problem-Solving Approach (New York: McGraw-Hill Education, 2016), Figure 16.4, p. 567, which was adapted from D. R. Fuqua and D. J. Kurpius, “Conceptual Models in Organizational Consultation,” Journal of Counseling and Development, July-August 1993, pp. 602–618; and D. A. Nadler and M. L. Tushman, “Organizational Frame Bending: Principles for Managing Reorientation,” Academy of Management Executive, August 1989, pp. 194–203. Page 337

Inputs: “Why Should We Change, and How Willing and Able Are We to Change?”

“Why change?” A systems approach always begins with the question of why change is needed at all—what the problem is that needs to be solved. (Example: “Why change? Because our designers are giving us terrible products that we can’t sell.”)          

Whatever the answer, the systems approach must make sure the desired changes align with the organization’s mission statement, vision statement, and strategic plan—subjects we discussed in  Chapter 5 : 66  

· Mission statement: This expresses the organization’s reason for being (Southwest Airlines: “To give people the freedom to fly”).

· Vision statement: This expresses what the organization wishes to become (Amazon: “To be earth’s most customer-centric company, to build a place where people can come to find and discover anything they might want to buy online”).

· Strategic plan: This sets the long-term goals and direction for an organization, based on the mission and vision statements (Example: “To increase revenue from existing and new customers rather than from acquiring other companies; thus, we intend to increase product quality and customer satisfaction so customers are more attracted to our merchandise”). A good plan, you’ll recall from  Chapter 6 , reflects an analysis of the company’s strengths, weakness, opportunities, and threats (SWOT).

A second question is “How willing and able are management and employees to make the necessary change?”  Readiness for change  is defined as the beliefs, attitudes, and intentions of the organization’s staff regarding the extent of the changes needed and how willing and able they are to implement them. 67  Readiness has four components: (1) how strongly the company needs the proposed change, (2) how much the top managers support the change, (3) how capable employees are of handling it, and (4) how pessimistic or optimistic employees are about the consequences of the result.

Self-Assessment 10.2  will help you gauge your readiness for change. You can also use it to measure the readiness of an organization to which you belong.

SELF-ASSESSMENT 10.2  

What Is Your Readiness for Change?

If your instructor has assigned  Self-Assessment 10.2  in Connect, think of a change at school, work, or another area of your life. Take  Self-Assessment 10.2  to learn the extent of your readiness for change, or that of the organization in which the change needs to occur.

1. Of the four components, which is the lowest?

2. How do you think this result will affect the success of the particular change? Be specific.

3. Who seems to be most ready, you (components 1 and 2) or the organization (components 3 and 4)?

4. Given what the readiness measure tells you, what do you recommend to improve your and your organization’s readiness?

Target Elements of Change: “Which Levers Can We Pull That Will Produce the Change We Want?”

The target elements of change represent four levers that managers may use to diagnose problems (such as “Our designers are too inbred and don’t look outside the company for ideas”) and identify solutions (such as “We need new managers and new blood in the Design Group”).

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As  Figure 10.3  shows, the four target elements of change (the four levers) are

1. People—their knowledge, ability, attitudes, motivation, and behavior.

2. Organizational arrangements—such as policies and procedures, roles, structure, rewards, and physical setting.

3. Methods—processes, work flow, job design, and technology.

4. Social factors—culture, group processes, interpersonal interactions, communication, and leadership.

Two things are important to realize: 

· Any change made in each and every target element will ripple across the entire organization. For example, if a manager changes a system of rewards (part of the organizational arrangements) to reinforce team rather than individual performance, that change is apt to affect organizational culture (one of the social factors).

· All organizational change ultimately affects the people in it and vice versa. Thus, organizational change is more likely to succeed when managers carefully consider the prospective impact of a proposed change on the employees.

Outputs: “What Results Do We Want from the Change?”

Outputs represent the desired goals of a change, which should be consistent with the organization’s strategic plan. Results may occur at the organizational, group, or individual level (or all three) but will be most difficult to effect at the organizational level, since changes will mostly likely affect a wide variety of target elements.

Feedback: “How Is the Change Working and What Alterations Need to Be Made?”

Not all changes work out well, of course, and organizations need to monitor their success. This is done by comparing the status of an output such as employee or customer satisfaction before the change to the same measurable output sometime after the change has been implemented.

Force-Field Analysis: “Which Forces Facilitate Change and Which Resist It?”

In most change situations being considered, there are forces acting for and against the change.  Force-field analysis is a technique to determine which forces could facilitate a proposed change and which forces could act against it. The first step is to identify the positive forces (called thrusters) and the negative forces (called counterthrusters). The second step is to remove the negative forces and then, if necessary, increase the positive forces. Although this may sound simple, it can be tricky to identify the forces at work.

Example: In late 2015, Procter & Gamble (P&G), maker of such household staples as Tide, Crest, and Gillette, reported that sales abroad were shrinking. Among the negative forces were the following: In countries overseas, the company had too many unprofitable products; smaller, nimbler rivals were taking away business; and currency fluctuations had made pricing difficult. Among the positive forces were these: P&G had extensive market data about customer needs, a strong enough financial position that it could forgo revenue in the short term, and an experienced management team that was ready to change. By exiting nearly 100 brands, narrowing its focus to 65 core brands, and forgoing sales in the short run, P&G could improve its profitability later. Thus, for example, in Mexico, the company shifted from selling cheap tissues to higher-priced variations, a move that cut sales but made the business more profitable. 68  

10.3

Organizational Development: What It Is, What It Can Do

MAJOR QUESTION What are the uses of OD, and how effective is it?

THE BIG PICTURE

Organizational development (OD) is a set of techniques for implementing change, such as managing conflict, revitalizing organizations, and adapting to mergers. OD has three steps: diagnosis, intervention, and evaluation. Four factors have been found to make OD programs effective.

Organizational development (OD)  is a set of techniques for implementing planned change to make people and organizations more effective. Note the inclusion of people in this definition. OD focuses specifically on people in the change process. (Some scholars apply the term “organizational development” to techniques designed to improve organizational effectiveness and the term “change management” to techniques designed to improve people effectiveness—techniques that will help them, in one definition, to adopt “new mindsets, policies, practices, and behaviors to deliver organizational results.”) 69

Often OD is put into practice by a person known as a  change agent, a consultant with a background in behavioral sciences who can be a catalyst in helping organizations deal with old problems in new ways.

What Can OD Be Used For?

OD can be used to address the following three matters.

1. Managing Conflict

Conflict is inherent in most organizations. Sometimes an OD expert, perhaps in the guise of an executive coach, can help advise on how to improve relationships within the organization.

Example: Difficult coworkers—“jerks at work”—can damage others’ job performance and hurt a company’s bottom line. Such “de-energizers” spread a dark cloud over everyone and leave you feeling deflated and depleted, says business professor Gretchen Spreitzer, who has done research in this area. 70  An organizational behavior specialist might be brought in to help buffer workers from the de-energizers by showing them how to limit interactions, make sure their own work is meaningful, and increase the time they spend with people who make them feel good, among other activities.

2. Revitalizing Organizations

Information technology is wreaking such change that nearly all organizations these days are placed in the position of having to adopt new behaviors in order to resist decline. OD can help by opening communication, fostering innovation, and dealing with stress.

Example: For IBM, confronting the relentless advance of digital technology means confronting the question “Can you grow in the new businesses faster than your older, lucrative businesses decline?” The company is responding by hiring thousands of designers to challenge IBM’s conventional thinking (such as coming up with a product idea and trying to sell to the customers) with new thinking (such as identifying users’ needs as a starting point). 71  

3. Adapting to Mergers

Mergers and acquisitions are associated with increased anxiety, stress, absenteeism, turnover, and decreased productivity. 72  What is the organizational fit between two disparate organizations, such as American Airlines and U.S. Airways, which merged in 2014? OD experts are often called upon in such situations to help integrate two firms with varying cultures, products, and procedures.

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How OD Works

Like physicians, OD managers and consultants follow a medical-like model. (Or to use our more current formulation, they follow the rules of evidence-based management.) They approach the organization as if it were a sick patient, using diagnosis, intervention, and evaluation—“diagnosing” its ills, “prescribing” treatment or intervention, and “monitoring” or evaluating progress. If the evaluation shows that the procedure is not working effectively, the conclusions drawn are then applied (via a feedback loop) to refining the diagnosis, and the process starts again. (See  Figure 10.4 .)

FIGURE 10.4  The OD process Sources: Adapted from W.L. French and C.H. Bell Jr., Organization Development: Behavioral Interventions for Organizational Improvement (Englewood Cliffs, NJ: Prentice Hall. 1978); and E. G Huse and T. G. Cummings, Organizational Development and Change, 3rd ed. (St. Paul: West, 1985).

1. Diagnosis: What Is the Problem?

To carry out the diagnosis, OD consultants or managers use some combination of questionnaires, surveys, interviews, meetings, records, and direct observation to ascertain people’s attitudes and to identify problem areas.

2. Intervention: What Shall We Do about It?

“Treatment,” or  intervention,  is the attempt to correct the diagnosed problems. Often this is done using the services of an OD consultant who works in conjunction with management teams. Some OD activities for implementing planned change are communicating survey results to employees to engage them in constructive problem solving, observing employee communication patterns and teaching them skills to improve them, helping group members learn to function as a team, stimulating better cohesiveness among several work groups, and improving work technology or organizational design.

3. Evaluation: How Well Has the Intervention Worked?

An OD program needs objective evaluation to see if it has done any good. Answers may lie in hard data about absenteeism, turnover, grievances, and profitability, which should be compared with earlier statistics. The change agent can use questionnaires, surveys, interviews, and the like to assess changes in employee attitudes.

4. Feedback: How Can the Diagnosis and Intervention Be Further Refined?

If evaluation shows that the diagnosis was wrong or the intervention was not effective, the OD consultant or managers need to return to the beginning to rethink these two steps.

EXAMPLE

Organizational Development: Using OD to Make Money in the Restaurant Business

“Restaurants are so focused on the day-to-day business,” says Eli Chait, “that they don’t have time to grow the business.” 73

If you own or manage a restaurant, how can you improve your chances? You could hire a change agent such as Chait,Page 341 now 28, who co-founded San Francisco–based Copilot Labs, a restaurant marketing analytics company, not long after graduating from the University of California, Berkeley.

Diagnosis: “What Is the Problem?” Organizational development is often focused on “big wins” (such as merging two companies), but it can also be used in a small business like a restaurant where small or incremental wins are important. Thus, an owner might want to know “Which is more effective—promoting our happy hours or promoting our daily deals?” (A “happy hour” is a period, such as 5 to 7 p.m., when drinks are served at reduced prices or with free snacks. “Daily deals” are meals served at discounted prices, such as two meals for the price of one for a particular menu item; such deals are frequently promoted by Groupon and similar marketing services.)

Intervention: “What Shall We Do about It?” Analyzing sales data over 19 months for one restaurant, Copilot found that, in Chait’s words, “happy hour contributes specifically to the hours of the day that are otherwise the slowest, driving critical off-peak [customer] traffic that is so important to restaurants. The deal traffic, however, is distributed across several periods of time, many of which are already busy,” making it less effective. 74

Evaluation: “How Well Has the Intervention Worked?” The outcome would seem to be foreshadowed by Copilot’s research, but it would be up to the change agent to evaluate an activity’s success when put into practice. There are all kinds of factors, after all, that can affect restaurant traffic. For instance, more data don’t always translate into better customer service. 75  Some days are busier than others (Valentine’s Day—busy; Super Bowl Sunday—not busy; Mother’s Day—depends on the restaurant), when a promotion wouldn’t be effective. 76

Feedback: “How Can the Diagnosis and Intervention Be Further Refined?” Depending on the results of evaluation—namely, the profitability of the process according to the kind of promotions—the change agent might feel the diagnosis and intervention deserve a revisit. And the process would start over.

YOUR CALL

One of the latest trends in business is “hyperlocal marketing”—building a large, dedicated, loyal base of local customers. 77  Do you think an organizational development approach can be helpful to this effort?

The Effectiveness of OD

Among organizations that have practiced organizational development are American Airlines, B.F. Goodrich, General Electric, Honeywell, ITT, Procter & Gamble, Prudential, Texas Instruments, and Westinghouse Canada—companies covering a variety of industries.

Research has found that OD is most apt to be successful under the following circumstances.

1. Multiple Interventions

OD success stories tend to use multiple interventions. Goal setting, feedback, recognition and rewards, training, participation, and challenging job design have had good results in improving performance and satisfaction. 78  Combined interventions have been found to work better than single interventions. 79

2. Management Support

OD is more likely to succeed when top managers give the OD program their support and are truly committed to the change process and the desired goals of the change program. 80  Using employee feedback during the change process is one way to demonstrate this support. 81

3. Goals Geared to Both Short- and Long-Term Results

Change programs are more successful when they are oriented toward achieving both short-term and long-term results. Managers should not engage in organizational change for the sake of change. Change efforts should produce positive results. 82

4. OD Is Affected by Culture

OD effectiveness is affected by cross-cultural considerations. Thus, an OD intervention that worked in one country should not be blindly applied to a similar situation in another country. 83  ●

Team building. One technique for implementing change is team building. Teams are often diverse in gender, age, ethnicity, and educational background and experience. Would you prefer to work with a highly diverse team of people?© Jacobs Stock Photography/Photodisc/Getty Images

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10.4

Promoting Innovation within the Organization

MAJOR QUESTION What do I need to know to encourage innovation?

THE BIG PICTURE

Innovation may be a product innovation or a process innovation, a core (incremental) innovation or a transformational (radical) innovation. Two myths about innovation are that it happens in a “Eureka!” moment and that it can be systematized. Ways to encourage innovation are by providing the organizational culture, the people, the resources, and the reward system. To make innovation happen, you need to recognize problems and opportunities, gain allies, overcome employee resistance, and execute well.

If  invention  is creating or making up something new and  creativity  is the act of developing new and imaginative ideas into reality, innovation is something else. Innovation, as we’ve said earlier in the book, is the activity of creating new ideas and converting them into useful applications—specifically, new goods and services.

“You need creativity and invention,” says Procter & Gamble’s former CEO A. G. Lafley, “but until you can connect the creativity to the customer in the form of a product or service that meaningfully changes their lives, I would argue you don’t have innovation.” 84  The spirit of innovation is essential to keeping an organization vital and maintaining a competitive advantage. Otherwise, the innovation will come from your competitors, forcing you to scramble to catch up—if you can.

Innovation is more likely to occur when organizations have the proper culture, resources, and reward systems to support it. We now take a closer look into innovation and how it can be encouraged within organizations.

How Does Failure Impede Innovation?

“You learn more from failure than you do from success,” says Lafley, “but the key is to fail early, fail cheaply, and don’t make the same mistake twice.” 85  Lafley, who doubled sales and quadrupled profits for P&G, admits to having had “my fair share of failure. But you have to get past the disappointment and blame and really understand what happened and why it happened.” 86

Lafley is comfortable with the idea of learning from failure, but many people are not. They’re reluctant to experiment, they blame others, and they refuse to recognize that not all failures are of equal seriousness. All of these can detract from an organization’s ability to learn from its mistakes, as the table below indicates. (See  Table 10.1 .)

TABLE 10.1   Factors That Reduce an Organization’s Ability to Learn from Failure

EMPLOYEES …
1.	Play the “blame game,” blaming an individual when failures are due to internal or external matters
2.	Suffer “self-serving bias”
3.	Don’t recognize failures are not created equal; some may be preventable, some uncontrollable
4.	Are afraid to discuss failures and take risks; the company isn’t a learning organization
5.	Are reluctant to experiment

Source: Adapted from A. C. Edmondson, “Strategies for Learning from Failure,” Harvard Business Review, April 2011, pp. 151–176.Page 343

Two Myths about Innovation

Two myths about innovation that need to be dispelled are the following.

Myth No. 1: Innovation Happens in a “Eureka!” Moment

Many people think that innovation often happens like a bolt from the blue. In this view, innovation happens as a “Eureka!” or “Aha!” moment of discovery, like the instant revelation about the law of gravity supposedly experienced by Sir Isaac Newton under a tree when an apple fell on his head. Most of the time, however, innovation is the product of hard work and dedication, “forged by a mixed bag of coworkers from up, down, and across an organization, sitting and wrangling it out in the trenches,” in the words of Jack and Suzy Welch. 87

Myth No. 2: Innovation Can Be Systematized

Lots of people also believe that innovation can be systematized—made a codified and standardized process that can be designed to always yield fruitful results. Obviously, if this could be done, many companies would be doing it. The problem with innovation, however, is that there are too many challenges associated with it, which makes success unpredictable, although it’s possible to establish cultural and other conditions (as discussed next) that increase the likelihood of a payoff.

The Seeds of Innovation: Starting Point for Experimentation and Inventiveness

Former Microsoft employee Scott Berkun, author of The Myths of Innovation, has identified six  seeds of innovation, the starting point for organizational innovation. They are as follows: 88

1. Hard work in a specific direction. Most innovations come from dedicated people diligently working to solve a well-defined problem, hard work that can span many years.

Example: This was certainly the case with Boeing’s long endeavor to build and fly the Dreamliner.

2. Hard work with direction change. Innovations frequently occur when people change their approach to solving a problem. In other words, hard work closes some doors and opens others. 

Example: Supergerms have developed that resist traditional antibacterial treatments. But researchers exploring whether garments might be developed that clean themselves are also testing whether minute flecks of silver and copper embedded in cotton fabric might not only repel dirt but also degrade superbugs. 89  

3. Curiosity. Innovations can begin when people are curious about something of interest to them, which leads to experimentation and inventiveness.

Example: The GoPro camera was invented by a surfer, Nick Woodman, who wondered if there was a way to capture video of his amazing rides. His wearable camera captured new angles never before recorded on film. 90  

4. Wealth and money. Innovations frequently occur because an organization or an individual simply wants to make money. Being near bankruptcy, for instance, drove Fiat, the Italian auto company, to look for innovative ways to cut costs and grow its market share in the United States. This is why Fiat took a stake in Chrysler in return for imparting its knowledge of small-car technology. 91

Example: Because its old Windows software licensing business model is fading, Microsoft has been trying to move into other businesses, such as cloudPage 344 and mobile computing. As a result, in 2016 it acquired the professional social network LinkedIn Corp. in a deal that, as one writer says, “attempts to put itself at the center of people’s business lives.” Microsoft “largely missed out on the consumer Web boom dominated by the likes of Google and Facebook,” and with this new deal it hopes to pull ahead in the social tools race—in this case, with social tools for professionals. 92  

5. Necessity. Many innovations grow from the desire to achieve something or to complete a task that is needed to accomplish a broader goal.

Example: Microsoft took an employee-driven grassroots idea called the “Microsoft Garage,” which draws on engineers, marketers, testers, or employees in other disciplines, and “we all can come together with ideas, make things and fail, learn and try again,” says senior quality manager Todd Rawlings. 93  The ideas “come from people’s passions or start from problems.” The purpose of The Garage is to make sure Microsoft stays on the cutting edge in innovation, certainly a necessity for a technology company.

6. Combination of seeds. Many innovations occur as a result of multiple factors. Example: “Innovation these days is in dire need of some innovations,” says business reporter Thomas Lee. Companies seeking breakthroughs “use the same mind-numbing mush of clichés to encourage creativity: hackathons, innovation centers, white boards, prizes, etc.” 94  San Jose software maker Adobe Systems (maker of PhotoShop) is trying something else: Called Kickbox, the approach “is something of a game that allows any of its employees to develop an idea—whether or not the idea is related to the employee’s expertise or regular work responsibility,” Lee says. Employees who enter Kickbox get a prepaid $1,000 debit card to spend to validate the idea, and they do not need to get managers to okay the project before proceeding. In addition, they can try the idea out with actual customers.

Types of Innovation: Product or Process, Core or Transformational

Innovations may be of the following two types.

Product versus Process Innovations

As a manager, you may need to improve your organization’s product or service itself; this is generally a technological innovation. Or you may need to improve the process by which the product or service is created, manufactured, or distributed; this is generally a managerial innovation.

More formally, a  product innovation  is a change in the appearance or the performance of a product or a service or the creation of a new one. A process innovation  is a change in the way a product or service is conceived, manufactured, or disseminated.

Today, innovation is about much more than new products. It is about reinventing business processes and building entirely new markets that meet untapped customer needs.

Core versus Transformational Innovations

An innovation may be small or large, incremental or radical. The difference is in modifying versus replacing existing products or services. That is, you might have  core innovations—the optimizing of products or services for existing customers, as when Procter & Gamble modified a liquid detergent to make it available as a concentrated powder in a pouch. Or you might have  transformational innovations—the invention of breakthrough products or services that don’t exist yet and that are aimed at creating brand new markets and customers. Example: Alphabet, Google’s parent, is experimenting with sending off high-altitude balloons, such as one launched into Sri Lankan airspace, in an ambitious plan to beam high-speed Internet to remote areas. 95  

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PRACTICAL ACTION

What Makes a Successful Start-up?

According to the Ewing Marion Kauffman Foundation, which works to further understanding of entrepreneurship, the vast majority of entrepreneurs (called replicative entrepreneurs) are those with small businesses that replicate, or duplicate, products and services already in existence, such as restaurants and dry cleaners. Less common are those entrepreneurs (innovative entrepreneurs) who pioneer never-seen-before products and services or production methods, such as eBay. 96

Entrepreneurship: Exploiting Niche Opportunities. Some replicative entrepreneurs, however, simply do things better and faster. One economist, Amar V. Bhidé (pronounced “Beh-dee”), suggests that many successful entrepreneurs start out not by having radical ideas but by making a small modification in what somebody else is doing. 97  Indian drugmakers, for instance, are now targeting niche markets by developing new treatments for ailments that were ignored by big American and European pharmaceutical companies. 98  

That is, replicative entrepreneurs see a niche opportunity—one in which the company they are working for is already involved, or a supplier or customer is involved. “And the person jumps [into a new business] with very little preparation and analysis,” says Bhidé, “but with direct firsthand knowledge of the profitability of that opportunity—and pretty much does what somebody else is already doing, but does it better and faster.”

And “better and faster” seems to be the main difference. Usually, such entrepreneurs don’t have anything in the way of technology or concept that differentiates them from other businesses. “They just work harder, hustle for customers, and know that the opportunity may not last for more than six or eight months,” says Bhidé. “But they expect to make a reasonable return on those six to eight months. And along the way they’ll figure out something else that will keep the business going.”

Tolerance for Ambiguity. Another quality of entrepreneurs is “a tolerance for ambiguity,” Bhidé says. They are willing to jump into things when it’s hard to even imagine what the possible outcomes will be, going ahead in the absence of information, very much capital, or even a very novel idea.

An example of a start-up that fits these criteria is Build-a-Bear Workshop, which offers mall customers a make-your-own stuffed animal experience, choosing from models of teddy bears, bunnies, dogs, and the like, then adding “a unique personality” from hundreds of teddy bear–sized outfits and accessories.

The idea came to Maxine Clark, a former department store executive, in 1997, when she was shopping with a friend who collected Ty Beanie Babies. When they couldn’t find anything new, the friend said, “We could make one.” Says Clark, “Her words gave me the idea to create a company that would allow people to create their own customized stuffed animals. … Build-a-Bear Workshop would be like a theme park factory in a mall.”

There were no formal focus groups, but from the beginning she relied on children for advice. “Kids have insights and offer inspiration by looking at the world differently,” says Clark. 99

The Illusions of Entrepreneurship. Think you’d like to create a start-up yourself and make yourself rich? “One-third of new ventures close within two years, half within five years,” says a Bloomberg Businessweek writer. “Only one in four is still around 15 years after opening day.” 100  The biggest myth, says Case Western professor Scott Shane, is that entrepreneurs believe “the growth and performance of their start-ups depends more on their entrepreneurial talent than on the businesses they choose.” 101

Over a 20-year period, he found, about 4% of all the start-ups in the computer and office equipment industry made Inc. magazine’s Inc. 500 list of America’s fastest-growing companies. But only about 0.005% of start-ups in the hotel and motel industries made that list, and 0.007% of start-ups in eating and drinking establishments. “So that means the odds that you make the Inc. 500,” Shane says, “are 840 times higher if you start a computer company than if you start a hotel or motel.” 102

YOUR CALL

Suppose you want to be your own boss. What “better and faster” niche opportunity do you see? Assuming it’s not a computer company that you’re starting, what do you think your chances are of being successful?

How Companies Can Foster Innovation: Seven Components

If you’re going to not just survive but prevail as a manager, you need to know how to make innovation happen within an organization. Here we offer an  innovation system, which is defined as “a coherent set of interdependent processes and structures that dictates how the company searches for novel problems and solutions, synthesizes ideas into a business concept and product designs, and selects which projects get funded.” 103  The components of the innovation system are shown on next page. 104  (See  Table 10.2 .)

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TABLE 10.2  Creating an Innovation System: Seven Parts

1. Create an innovation strategy.

2. Get commitment from top managers.

3. Foster an innovation culture and climate.

4. Establish the required structure and processes.

5. Obtain the necessary human capital.

6. Institute the necessary human resource policies, practices, and procedures.

7. Obtain the appropriate resources.

1. Create an Innovation Strategy

A successful innovation effort requires an innovation strategy by which a company integrates its innovation activities into its business strategies. This effort will encourage top managers to invest resources in innovation and employees to commit to it. 105

Example: Corning makes everything from glassware to specialized components for electronic displays, life sciences instruments, and telecommunications systems. The company’s business strategy is to sell key components that will improve the performance of its customers’ complex system products. To execute this strategy, Corning has launched innovation efforts by investing heavily in long-term research to put itself at the leading edge of glass and materials science. 106  

2. Get Commitment from Top Managers

Strategic goals are unlikely to be achieved without the commitment of top managers.

Example: PepsiCo CEO Indra Nooyi is driving innovation by prioritizing design, as expressed in her hiring of the company’s first-ever chief design officer, Mauro Pircini, formerly of 3M. Nooyi gave Pircini what he asked for—“resources, a design studio, and a seat at the [top decision makers’] table.” Now, she says, “our teams are pushing design through the entire system, from product creation, to packaging and labeling, to how a product looks on the shelf, to how consumers interact with it.” 107  

3. Foster an Innovative Culture and Climate

Innovation requires a corporate culture and climate that permit experimentation, risk taking, and tolerance for failure. 108  An organizational culture, as we said in  Chapter 8 , is defined as the set of shared, taken-for-granted, implicit assumptions that a group holds and that determines how it perceives, thinks about, and reacts to its various environments. An organizational culture that doesn’t just allow but celebrates failure is vital in fostering innovation. Most new ideas will fail. Only a few will be successful. But as Pixar president Ed Catmull says, “Mistakes aren’t a necessary evil. They aren’t evil at all. They are an inevitable consequence of doing something new … and should be seen as valuable.” 109  

Example: After Extended Stay America went through bankruptcy, employees suffered from job insecurity and were loath to make decisions that might cost the company money. New CEO Jim Donald told them they needed to take calculated risks and generate daring ideas to improve customer service and profitability. To encourage them to let go of fear of failure, Donald distributed Monopoly-style “Get Out of Jail Free” cards to the 9,000 employees, which they could turn in “when they took a big risk on behalf of the company—no questions asked.” A few results: A California hotel manager used her “Get Out of Jail” card to justify grabbing 20 guest business cards from a fishbowl in the lobby of a rival hotel as a way of finding prospective customers. A New Jersey manager used it to try cold-calling a movie-production company filming in the area, leading to the crew’s booking $250,000 in accommodations at her hotel. 110  

 If an organization doesn’t encourage this kind of risk taking, that organization won’t become a superstar in innovation. The top 15 superstars for 2016 designated by Fast Company magazine are shown in the table. (See  Table 10.3 .)

TABLE 10.3 Top Organizations in 2016 Whose Cultures Strongly Encouraged Innovation 

Buzzfeed (news)

Facebook

CVS Health

Uber

Netflix

Amazon

Apple

Alphabet

Black Lives Matter (race)

Taco Bell

Robinhood (stock trading)

Universal Studios

Huawei (smartphones)

Cyanogen (free Android)

inMobi (mobile ads)

Source: Data from “The World’s Most Innovative Companies 2016,” Fast Company, February 16, 2016.

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4. Establish the Required Structure and Processes

Organizational structure and internal processes can promote innovation if they foster collaboration, cross-functional communication, and agility. In particular, organic structures (described in  Chapter 8 ) are often better suited than mechanistic ones for innovation.

Example: Juniper Networks, a leader in computer network integration, concluded that its formal organizational structure didn’t lead to the kinds of rich interactions and conversations that made innovation thrive. “We were not integrating diverse expertise and experience across engineering, infrastructure, and sales teams the way we could when we were a small company,” says Vince Molinaro, executive vice president of worldwide sales. Accordingly, Juniper changed its structure. 111

5. Obtain the Necessary Human Capital 

Human capital, we said (see  Chapter 9 ), is the economic or productive potential of employee knowledge, experience, and actions. Some employee characteristics that help organizations innovate are creativity, creative-thinking skills, intrinsic motivation, and international work experience, as well as the quality of the relationship between managers and employees. 112  Research also shows that work teams are more creative when team members have different sets of knowledge and experience. 113  

Example: General Electric has hired hundreds of software engineers to develop its analytic and Big Data capabilities, with the strategic goal of becoming a top-10 software company by 2020. 114

6. Institute Necessary Human Resource Policies, Practices, and Procedures 

Companies that are able to make human resource policies, practices, and procedures consistent with, and reinforcing of, the other five components we just described are more likely to be innovative and to have higher financial performance. 115  

Example: Bringing people together from different disciplines to train and to brainstorm ideas can foster the collaboration needed for innovation. For instance, the University of Michigan’s Biointerfaces Institute tries to locate materials scientists, chemical engineers, biomechanical engineers, and medical researchers near each other. The resulting collaborations produced a blood test that is able to both capture and culture cancer cells for faster cancer diagnoses. 116  

7. Obtain the Appropriate Resources

If top managers want innovation, they must dedicate resources to its development, whether people, dollars, time, energy, knowledge, focus, or all of these.

Example: To help employees be innovative, Heineken spent $2 million on training employees in beer basics. 117  

EXAMPLE

Achieving Success through Innovation and Collaboration: Tesla’s Culture of Openness

Who are the greatest innovators? For three years, it was Apple, Google, and Amazon atop Booz & Co.’s annual 1,000 global “Most Innovative Companies” list. Then in 2015, Amazon dropped from third to fifth place, and electric carmaker Tesla Motors of Palo Alto, California, rose to claim the new third spot. 118  

Most of the top five companies on the “Most Innovative” list are information technology and electronics companies (Apple, Google, Samsung, and Amazon). And they are the biggest spenders on research and development. (Google, for instance, spent $9.8 billion in 2015; Samsung spent $14.1 billion.) Tesla spent a mere half a billion dollars on R&D, yet it not only became No. 3 on the Booz & Co. list, it was also named to No. 1 on Forbes magazine’s 2015 “World’s Most Innovative Companies” list and No. 4 on MIT Technology Review’s “50 Smartest Companies 2016” list, and the Tesla Model S luxury electric car was named No. 1 on Consumer Reports’s list of best cars for 2015. 119  

Disrupting Mobility. Tesla was founded in 2003 by South Africa–born Elon Musk, currently “the most well-known innovative business leader in America,” according to one technology observer. 120  Earlier, in 1998, Musk disrupted e-commerce by creating PayPal, the widely deployed and secure payment system. In 2002, he developed SpaceX for launching rockets and spacecraft, with the idea of enabling people to live on other planets. (Musk himselfPage 348 wants to “die on Mars.”) He has also outlined a high-speed transit system called Hyperloop, designed to go the 400 miles from Los Angeles to San Francisco in 35 minutes. With Tesla, says one report, “Musk is focused on disrupting mobility.” 121

A Tech Company That Makes Cars. Tesla is closer to being a technology company than a traditional automobile company, or “a tech company that happens to make cars.” 122  By being born into the San Francisco–to–San Jose corridor of tech innovation known as Silicon Valley, it learned to design and build its vision of mobility by drawing on ideas and employees from leading technology companies of the area. For instance, at a time when traditional car builders took four years to complete a model change, Tesla was able to have an immediate competitive advantage by deploying over-the-air software updates to upgrade features or address recall problems in short order. And because Tesla sells cars directly to customers, rather than through third-party dealers, the changes could be made immediately. 123  (Some of the automatic updates may enable Teslas to become self-driving at some point.) 124

By avoiding the path of the traditional automotive industry, Tesla also avoided being constrained by its traditional thought processes—as shown by the fact that a Tesla automobile has a “frunk”—a trunk in the front—with the battery located underneath the seats, whereas other electric cars reflected the design of combustion-engine vehicles. 125  In addition, Tesla avoided the customary path of new carmakers of going after the low-end, price-sensitive customers with cheaper technology; instead, it targeted the high-end buyers capable of spending thousands of dollars on a car that was a sexy status symbol and fun to drive. “While Toyota was busy making something affordable that competed with other vehicles in its class,” pointed out one report, “Tesla Motors claimed the elite niche of luxury sports cars and catapulted ahead with an entirely new game.” 126  And all this with no marketing department.

Innovation and Collaboration. The culture of Tesla has been described by writer Jacqueline Zhou as being “innovative and collaborative.” 127  Four tips she offers for “going Tesla” and creating an open culture to support innovation are the following.

1. Share information. In many companies, employees often withhold information, even between teams in the same department. Tesla has removed all such “knowledge silos.” “The more you share,” says Zhou, “the more others will share with you. This increases efficiency by reducing redundancies in work between teams.”

2. Don’t immediately dismiss new ideas. “By avoiding immediately dismissing ideas, you are showing those in your community that ideas are valued and considered even if they cannot be immediately implemented,” says Zhou. “Others will be more willing to share ideas if they know that their ideas matter.”

3. Help others without expecting anything back. “When someone comes to you for help, you should always say yes, if you can. In the end people will be more willing to help you.”

4. Credit others. “We rarely accomplish things on our own, and if we can show appreciation for the help that we’ve been given, it shows that we value the collaboration.”

Your Call

Tesla’s innovative, collaborative culture even extends to making its patents available to the rest of the industry, in hopes that other companies will join the expansion of electric vehicles. What other components of an innovation system have been used by Tesla?

Executing Well

What finally will make or break an organization’s attempts at bringing new products and services to market is execution—the process, as we stated back in  Chapter 6 , of discussing hows and whats and of using questioning, analysis, and follow-through to achieve the results promised and ensure accountability. 128  Execution requires organizations to effectively manage people, groups, and organizational processes and systems in the pursuit of innovation.

In the end, then, the innovation process must be managed. This is what is precisely what is done at Apple, Google, and other top innovative companies.

Research tells us that companies are unlikely to innovate unless the culture and climate support it. How would you know if a potential employer had an innovative climate? You can find out by completing  Self-Assessment 10.3 .

SELF-ASSESSMENT 10.3  

How Innovative Is the Organizational Climate?

The following survey was designed to assess the innovation climate of your organization. Please be prepared to answer these questions if your instructor has assigned  Self-Assessment 10.3  in Connect.

1. To what extent does the company have an innovative climate?

2. Based on your survey scores, what advice would you give to management if they wanted to increase innovation? Be specific.

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10.5

The Threat of Change: Managing Employee Fear and Resistance

MAJOR QUESTION How are employees threatened by change, and how can I help them adjust?

THE BIG PICTURE

This section discusses the causes of resistance to change and the reasons employees fear change.

As we mentioned in  Section 10.1 , change may be forced upon an organization—reactive change, requiring you to make changes in response to problems or opportunities as they arise. Or an organization may try to get out in front of changes—proactive change, or planned change, which involves making carefully thought-out changes in anticipation of possible problems or opportunities.

What, then, are effective ways to manage organizational change and employees’ fear and resistance to it? In this section, we discuss the following:

· The causes of resistance to change.

· Why employees resist change.

The Causes of Resistance to Change

Resistance to change  is an emotional/behavioral response to real or imagined threats to an established work routine. Resistance can be as subtle as passive resignation and as overt as deliberate sabotage. As you will learn, change experts believe that resistance does not primarily reside within the individual but instead is a result of the context in which change occurs. 129  

Resistance can be considered to be the interaction of three causes. (See  Figure 10.5 .) They are

1. Employee characteristics

2. Change agent characteristics

3. The change agent–employee relationship.

For example, an employee’s resistance is partly based on his or her perception of change, which is influenced by the attitudes and behaviors exhibited by the change agent and the level of trust between the change agent and the employee.

FIGURE 10.5  A model of resistance to change Source: Adapted from R. Kreitner and A. Kinicki. Organizational Behavior, 9th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2010), p. 549. Page 350

Let us consider these three sources.

1. Employee Characteristics

The characteristics of a given employee consist of his or her individual differences (discussed in  Chapter 11 ), actions and inactions, and perceptions of change. The next section discusses a variety of employee characteristics related to resistance to change. One of them involves a person’s level of adaptability or flexibility. 130  How adaptable are you? You can find out by taking  Self-Assessment 10.4 .

SELF-ASSESSMENT 10.4 

How Adaptable Are You?

The following survey was designed to assess your level of adaptability. Please be prepared to answer these questions if your instructor has assigned  Self-Assessment 10.4  in Connect.

1. What is your level of adaptability? Are you surprised by the results?

2. Based on your scores, identify three things you can do to increase your level of adaptability. Explain.

3. Why would recruiters prefer to hire adaptable people?

2. Change Agent Characteristics

The characteristics of the change agent—the individual who is a catalyst in helping organizations change—also consist of his or her individual differences, experiences, actions and inactions, and perceptions of change. Such characteristics that might contribute to employee resistance to change include leadership style, personality, tactfulness, sense of timing, awareness of cultural traditions or group relationships, and ability to empathize with the employee’s perspective. 131

3. Change Agent–Employee Relationship

As you might expect, resistance to change is reduced when change agents and employees have a trusting relationship—faith in each other’s intentions. Mistrust, on the other hand, encourages secrecy, which begets deeper mistrust, and can doom an otherwise well-conceived change. 132

Ten Reasons Employees Resist Change

Whether changes are adaptive, innovative, or radically innovative, employees may resist change for all kinds of reasons. Ten of the leading reasons for not accepting change are as follows. 133

1. Individuals’ Predisposition toward Change

How people react to change depends a lot on how they learned to handle change and ambiguity as children. One person’s parents may have been patient, flexible, and understanding, and from the time the child was weaned she may have learned there were positive compensations for the loss of immediate gratification. Thus, she will associate making changes with love and approval. Another person’s parents may have been unreasonable and unyielding, forcing him to do things (piano lessons, for example) that he didn’t want to do. Thus, he will be distrustful of making changes because he will associate them with demands for compliance. 134

2. Surprise and Fear of the Unknown

When radically different changes are introduced without warning—for example, without any official announcements—the office rumor mill will go into high gear, and affected employees will become fearful of the implications of the changes. It is essential for change leaders to explain the rationale for change, to educate people about the personal implications of change, and to garner commitment to change. 135  

3. Climate of Mistrust

Trust involves reciprocal faith in others’ intentions and behavior. Mistrust encourages secrecy, which causes deeper mistrust, putting even well-conceived changes at risk of failure. Managers who trust their employees make thePage 351 change process an open, honest, and participative affair. All told, employees who feel fairly treated by managers during change are less likely to resist. 136  

4. Fear of Failure

Intimidating changes on the job can cause employees to doubt their capabilities. Self-doubt erodes self-confidence and cripples personal growth and development.

5. Loss of Status or Job Security

Administrative and technological changes that threaten to alter power bases or eliminate jobs—as often happens during corporate restructurings that threaten middle-management jobs—generally trigger strong resistance.

6. Peer Pressure

Even people who are not themselves directly affected by impending changes may actively resist in order to protect the interests of their friends and coworkers.

7. Disruption of Cultural Traditions or Group Relationships

Whenever individuals are transferred, promoted, or reassigned, it can disrupt existing cultural and group relationships.

Example: Traditionally, Sony Corp. promoted insiders to new positions. When an outsider, Howard Stringer, was named as the next chairman and CEO and six corporate officers were asked to resign, creating a majority board of foreigners, the former CEO, Nobuyuki Idei, worried the moves might engender strong employee resistance. 137  

8. Personality Conflicts

Just as a friend can get away with telling us something we would resent hearing from an adversary, the personalities of change agents can breed resistance.

9. Lack of Tact or Poor Timing

Introducing changes in an insensitive manner or at an awkward time can create employee resistance. Employees are more apt to accept changes when managers effectively explain their value, as, for example, in demonstrating their strategic purpose to the organization.

10. Nonreinforcing Reward Systems

Employees are likely to resist when they can’t see any positive rewards from proposed changes, as, for example, when one is asked to work longer hours without additional compensation.

Where do you stand on change? Do you tend to accept and embrace change, or do you have tendencies to resist it? The following self-assessment will provide feedback on your attitudes toward change. If your scores indicate resistance, you should consider what can be done to move your attitudes in a more positive direction. ●

SELF-ASSESSMENT 10.5 

Assessing Your Resistance to Change

The following survey was designed to assess your resistance to change. Please be prepared to answer these questions if your instructor has assigned  Self-Assessment 10.5  in Connect.

1. Are you more or less willing to accept change? Discuss.

2. Based on your scores, identify three things you can do to lower your resistance to change. These changes may involve new thoughts or beliefs or the display of new behaviors.

3. What questions might a recruiter ask during an interview to determine whether or not you tend to resist change? What would be your answers?

Change is hard. Lots of people don’t like change. Among the reasons are one’s individual predisposition toward change, surprise and fear of the unknown, mistrust, loss of status or job security, and poor timing. Do some of these reasons seem particularly to apply to you? When was the last time you had to wrestle with momentous changes?© Lev Dolgachov/Alamy RF