Week 6 Discussion - Division of Labor

Chapter 9: Executing Strategy through Organizational

Design

Chapter 9: Executing Strategy through Organizational Design

9.1 Executing Strategy through Organizational Design

9.2 The Basic Building Blocks of Organizational Structure

9.3 Creating an Organizational Structure

9.4 Creating Organizational Control Systems

9.5 Legal Forms of Business

9.6 Conclusion

9.1 Executing Strategy through Organizational Design

Learning Objectives

After reading this chapter, you should be able to understand and articulate answers to the following questions:

1. What are the basic building blocks of organizational structure?

2. What types of structures exist, and what are advantages and disadvantages of each?

3. What is control and why is it important?

4. What are the different forms of control and when should they be used?

5. What are the key legal forms of business, and what implications does the choice of a business form have for organizational structure?

Can Oil Well Services Fuel Success for GE?

General Electric’s logo has changed little since its creation in the 1890s, but the company has grown to become the sixth largest in the United

States.

Wikimedia Commons – public domain.

In February 2011, General Electric (GE) reached an agreement to acquire the well-support division of John Wood Group PLC for $2.8 billion. This was GE’s third acquisition of a company that provides services to oil wells in only five months. In October 2010, GE added the deepwater exploration capabilities of Wellstream Holdings PLC for $1.3 billion. In December 2010, part and equipment maker Dresser was acquired for $3 billion. By spending more than $7 billion on these acquisitions, GE executives made it clear that they had big plans within the oil well services business.

While many executives would struggle to integrate three new companies into their firms, experts expected GE’s leaders to smoothly execute the transitions. In describing the acquisition of John Wood Group PLC, for example, one Wall Street analyst noted, “This is a nice bolt-on deal for GE (Layne, 2011).” In other words, this analyst believed that John Wood Group PLC could be seamlessly added to GE’s corporate empire. The way that GE was organized fueled this belief.

GE’s organizational structure includes six divisions, each devoted to specific product categories: (1) Energy (the most profitable division), (2) Capital (the largest division), (3) Home & Business Solutions, (4) Healthcare, (5) Aviation, and (6) Transportation. Within the Energy division, there are three subdivisions: (1) Oil & Gas, (2) Power & Water, and (3) Energy Services. Rather than having the entire organization involved with integrating John Wood Group PLC, Wellstream Holdings PLC, and Dresser into GE, these three newly acquired companies would simply be added to the Oil & Gas subdivisions within the Energy division.

In addition to the six product divisions, GE also had a division devoted to Global Growth & Operations. This division was responsible for all sales of GE products and services outside the United States. The Global Growth & Operations division was very important to GE’s future. Indeed, GE’s CEO Jeffrey Immelt expected that countries other than the

9.1 Executing Strategy through Organizational Design 276

United States will account for 60 percent of GE’s sales in the future, up from 53 percent in 2010. To maximize GE’s ability to respond to local needs, the Global Growth & Operations was further divided into twelve geographic regions: China, India, Southeast Asia, Latin/South America, Russia, Canada, Australia, the Middle East, Africa, Germany, Europe, and Japan (GE News Center, 2010).

Finally, like many large companies, GE also provided some centralized services to support all its units. These support areas included public relations, business development, legal, global research, human resources, and finance. By having entire units of the organization devoted to these functional areas, GE hoped not only to minimize expenses but also to create consistency across divisions.

Growing concerns about the environmental effects of drilling, for example, made it likely that GE’s oil well services operations would need the help of GE’s public relations and legal departments in the future. Other important questions about GE’s acquisitions remained open as well. In particular, would the organizational cultures of John Wood Group PLC, Wellstream Holdings PLC, and Dresser mesh with the culture of GE? Most acquisitions in the business world fail to deliver the results that executives expect, and the incompatibility of organizational cultures is one reason why.

GE fits a dizzying array of businesses into a relatively simple organizational chart.

Adapted from company document posted at http://www.ge.com/pdf/company/ge_organization_chart.pdf

The word executing used in this chapter’s title has two distinct meanings. These meanings were cleverly intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless professional football team. In one game, McKay’s offensive unit played particularly poorly. When McKay was asked after the game what he thought of his offensive unit’s execution, he wryly responded, “I am in favor of it.”

In the context of business, execution refers to how well a firm such as GE implements the strategies that executives create for it. This involves the creation and operation of both an appropriate organizational structure and an appropriate organizational control processes. Executives who skillfully orchestrate structure and control are likely to lead their firms to greater levels of success. In contrast, those executives who fail to do so are likely to be viewed by stakeholders such as employees and owners in much the same way Coach McKay viewed his offense: as worthy of execution.

References

GE News Center, GE names vice chairman John Rice to lead GE Global Growth & Operations [Press release].

2010, November 8. GE website. Retrieved from http://www.genewscenter.com/ Press-Releases/GE-Names-Vice-

Chairman-John-Rice-to-Lead-GE-Global-Growth-Operations-2c8a.aspx.

Layne, R. 2011, February 14. GE agrees to buy $2.8 billion oil-service unit; shares surge. Bloomsberg

277 Mastering Strategic Management

Businessweek. Retrieved from http://www.businessweek.com/news/2011-02-14/ge-agrees-to-buy-2-8-billion-oil-

service-unit-shares-surge.html.

9.1 Executing Strategy through Organizational Design 278

9.2 The Basic Building Blocks of Organizational Structure

Table 9.1 The Building Blocks of Organizational Structure

Legendary football coach Vince Lombardi once noted, “The achievements of an organization are the results of

the combined effort of each individual.” Understanding how people can be most efficiently organized is the basis

for modern management thought, and we illustrate the building blocks of organizational structure below.

Division of labor is a process of splitting up a task into a series of smaller tasks, each of which is performed by a specialist. In ancient Greece, historian Xenophon wrote about the division of labor in shoe making: one person cut out the shoes, another sewed the uppers together, and a third person assembled the parts.

An organizational chart is a diagram that depicts a firm’s structure.

Do you know what happens each year on the Wednesday of the last full week of April? It’s Administrative Professionals’ Day. Savvy workers mark this day with generosity. The reason involves informal linkages, which are unofficial relationships such as friendships that do not appear in organizational charts. Administrative professionals such as secretaries tend to be well informed about both policies and office politics. So keep them on your side!

Vertical linkages tie supervisors and subordinates together. These linkages show the lines of responsibility through which a supervisor delegates authority to subordinates, oversees their activities, evaluates their performance, and guides them toward improvement.

Horizontal linkages are formal relationships between equals in an organization. They often take the form of committees and task forces.

Employees may receive conflicting guidance about how to do their jobs if they work in a situation where multiple bosses are present. This problem can be avoided by following the unity of command principle, which states that each person should only report directly to one supervisor.

Learning Objectives

1. Understand what division of labor is and why it is beneficial.

2. Distinguish between vertical and horizontal linkages and know what functions each fulfills in an organizational structure.

Division of Labor

General Electric (GE) offers a dizzying array of products and services, including lightbulbs, jet engines, and loans.

One way that GE could produce its lightbulbs would be to have individual employees work on one lightbulb at a

time from start to finish. This would be very inefficient, however, so GE and most other organizations avoid this

approach. Instead, organizations rely on division of labor when creating their products (Table 9.1 “The Building

Blocks of Organizational Structure”). Division of labor is a process of splitting up a task (such as the creation of

lightbulbs) into a series of smaller tasks, each of which is performed by a specialist.

Table 9.2 Hierarchy of Authority

We illustrate one of the oldest recorded stories that is relevant to the design of modern organizations below.

After fleeing Egypt, Moses found himself as the sole judge of the entire Hebrew population. This was a daunting task because estimates suggest the population may’ve exceeded on million people.

Moses’s father-in-law Jethro warned Moses that he would wear himself out if he tried to handle such a heavy load alone.

Jethro offered Moses some practical advice. He told Moses that he should teach the people decrees and laws in an effort to minimize trouble and act as an example to demonstrate how the people live and the duties they were to perform.

Rather than handling all judging himself, Moses should appoint capable and trustworthy officials over groups of thousands, hundreds, fifties, and tens. These men would serve as judges for the people at all times, and only the most difficult cases would be brought to Moses.

Key Takeaway

This is perhaps the first recorded example of a clear hierarchy of authority—an arrangement of individuals based

on rank. A similar idea is used today in the U.S. justice system where there are lower courts for easy-to-resolve

cases and the Supreme Court only handles the most difficult cases.

The leaders at the top of organizations have long known that division of labor can improve efficiency. Thousands

of years ago, for example, Moses’s creation of a hierarchy of authority by delegating responsibility to other judges

offered perhaps the earliest known example (Table 9.2 “Hierarchy of Authority”). In the eighteenth century, Adam

Smith’s book The Wealth of Nations quantified the tremendous advantages that division of labor offered for a pin

factory. If a worker performed all the various steps involved in making pins himself, he could make about twenty

pins per day. By breaking the process into multiple steps, however, ten workers could make forty-eight thousand

pins a day. In other words, the pin factory was a staggering 240 times more productive than it would have been

without relying on division of labor. In the early twentieth century, Smith’s ideas strongly influenced Henry Ford

and other industrial pioneers who sought to create efficient organizations.

Division of labor allowed eighteenth-century pin factories to dramatically increase their efficiency.

While division of labor fuels efficiency, it also creates a challenge—figuring out how to coordinate different

tasks and the people who perform them. The solution is organizational structure, which is defined as how

tasks are assigned and grouped together with formal reporting relationships. Creating a structure that effectively

9.2 The Basic Building Blocks of Organizational Structure 280

coordinates a firm’s activities increases the firm’s likelihood of success. Meanwhile, a structure that does not

match well with a firm’s needs undermines the firm’s chances of prosperity.

Division of labor was central to Henry Ford’s development of assembly lines in his automobile factory. Ford noted, “Nothing is

particularly hard if you divide it into small jobs.”

Wikimedia Commons – public domain.

Vertical and Horizontal Linkages

Most organizations use a diagram called an organizational chart to depict their structure. These organizational

charts show how firms’ structures are built using two basic building blocks: vertical linkages and horizontal

linkages. Vertical linkages tie supervisors and subordinates together. These linkages show the lines of

responsibility through which a supervisor delegates authority to subordinates, oversees their activities, evaluates

their performance, and guides them toward improvement when necessary. Every supervisor except for the

person at the very top of the organization chart also serves as a subordinate to someone else. In the typical

business school, for example, a department chair supervises a set of professors. The department chair in turn is a

subordinate of the dean.

Most executives rely on the unity of command principle when mapping out the vertical linkages in an

organizational structure. This principle states that each person should only report directly to one supervisor. If

employees have multiple bosses, they may receive conflicting guidance about how to do their jobs. The unity of

command principle helps organizations to avoid such confusion. In the case of General Electric, for example, the

head of the Energy division reports only to the chief executive officer. If problems were to arise with executing

the strategic move discussed in this chapter’s opening vignette—joining the John Wood Group PLC with GE’s

Energy division—the head of the Energy division reports would look to the chief executive officer for guidance.

Horizontal linkages are relationships between equals in an organization. Often these linkages are called

281 Mastering Strategic Management

committees, task forces, or teams. Horizontal linkages are important when close coordination is needed across

different segments of an organization. For example, most business schools revise their undergraduate curriculum

every five or so years to ensure that students are receiving an education that matches the needs of current

business conditions. Typically, a committee consisting of at least one professor from every academic area (such

as management, marketing, accounting, and finance) will be appointed to perform this task. This approach helps

ensure that all aspects of business are represented appropriately in the new curriculum.

Committee meetings can be boring, but they are often vital for coordinating efforts across departments.

Yohann Legrand – Meeting – CC BY-SA 2.0.

Organic grocery store chain Whole Foods Market is a company that relies heavily on horizontal linkages. As

noted on their website, “At Whole Foods Market we recognize the importance of smaller tribal groupings to

maximize familiarity and trust. We organize our stores and company into a variety of interlocking teams. Most

teams have between 6 and 100 Team Members and the larger teams are divided further into a variety of sub-

teams. The leaders of each team are also members of the Store Leadership Team and the Store Team Leaders are

members of the Regional Leadership Team. This interlocking team structure continues all the way upwards to

the Executive Team at the highest level of the company (Mackey, 2010).” This emphasis on teams is intended to

develop trust throughout the organization, as well as to make full use of the talents and creativity possessed by

every employee.

Informal Linkages

Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics. In the long-

running comedy series The Simpsons, Homer Simpson is a low-level—and very low-performing—employee at

a nuclear power plant. In one episode, Homer gains power and influence with the plant’s owner, Montgomery

Burns, which far exceeds Homer’s meager position in the organization chart, because Mr. Burns desperately wants

to be a member of the bowling team that Homer captains. Homer tries to use his newfound influence for his own

9.2 The Basic Building Blocks of Organizational Structure 282

personal gain and naturally the organization as a whole suffers. Informal linkages such as this one do not appear

in organizational charts, but they nevertheless can have (and often do have) a significant influence on how firms

operate.

Key Takeaway

• The concept of division of labor (dividing organizational activities into smaller tasks) lies at the heart of the study of organizational structure. Understanding vertical, horizontal, and informal linkages helps managers to organize better the different individuals and job functions within a firm.

Exercises

1. How is division of labor used when training college or university football teams? Do you think you could use a different division of labor and achieve more efficiency?

2. What are some formal and informal linkages that you have encountered at your college or university? What informal linkages have you observed in the workplace?

References

Mackey, John’s blog. 2010, March 9. Creating the high trust organization [Web blog post]. Retrieved from

http://www2.wholefoodsmarket.com/blogs/jmackey/2010/03/09/creating-the-high-trust-organization/.

283 Mastering Strategic Management

9.3 Creating an Organizational Structure

Learning Objectives

1. Know and be able to differentiate among the four types of organizational structure.

2. Understand why a change in structure may be needed.

Within most firms, executives rely on vertical and horizontal linkages to create a structure that they hope will

match the needs of their firm’s strategy. Four types of structures are available to executives: (1) simple, (2)

functional, (3) multidivisional, and (4) matrix (Table 9.3 “Common Organizational Structures”). Like snowflakes,

however, no two organizational structures are exactly alike. When creating a structure for their firm, executives

will take one of these types and adapt it to fit the firm’s unique circumstances. As they do this, executives must

realize that the choice of structure will influences their firm’s strategy in the future. Once a structure is created, it

constrains future strategic moves. If a firm’s structure is designed to maximize efficiency, for example, the firm

may lack the flexibility needed to react quickly to exploit new opportunities.

Table 9.3 Common Organizational Structures

Executives rely on vertical and horizontal linkages to create a structure that they hope will match the firm’s

needs. While no two organizational structures are exactly alike, four general types of structures are available to

executives: simple functional, multidivisional, and matrix.

Simple Strucutre

Simple structures do not rely on formal systems of division of labor, and organizational charts are not generally needed. If the firm is a sole proprietorship, one person performs all of the tasks that the organization needs to accomplish. Consequently, this structure is common for many small businesses.

Functional Structure

Within a functional structure, employees are divided into departments that each handles activities related to a functional area of the business, such as marketing, production, human resources, information technology, and customer service.

Multidivisional Structure

In this type of structure, employees are divided into departments based on product areas and/or geographic regions. General Electric, for example, has six product divisions: Energy, Capital, Home & Business Solutions, Healthcare, Aviation, and Transportation.

Matrix Structure

Firms that engage in projects of limited duration often use a matrix structure where employees can be put on different teams to maximize creativity and idea flow. As parodied in the move Office Space, this structure is common in high tech and engineering firms.

Simple Structure

Many organizations start out with a simple structure. In this type of structure, an organizational chart is usually

not needed. Simple structures do not rely on formal systems of division of labor (Table 9.4 “Simple Structure”).

If the firm is a sole proprietorship, one person performs all the tasks the organization needs to accomplish. For

example, on the TV series The Simpsons, both bar owner Moe Szyslak and the Comic Book Guy are shown

handling all aspects of their respective businesses.

Table 9.4 Simple Structure

Most small businesses begin with a simple structure where one person or a small set of people share the tasks

needed to accomplish the firm’s goals with relatively little formalized division of labor. We illustrate a number of

businesses that commonly rely upon a simple structure below.

Need a few dollars to tide you over? You may want to pawn your rare coin collection. The pawn shop’s simple structure will mean that the same person values your coins, decides how much money you can borrow, and writes up your paperwork.

The reality show Miami Ink illustrates how a tattoo parlor’s simple structure governs a colorful set of tattoo artists who create body art for their patrons.

Architects often also act as marketers and accountants when drafting their small business plans.

Bait shop owners generally do not dive deep into their pockets to pay for additional personnel as many are owner operated.

When a dry cleaner is family owned as many are, all members of the family pitch in as needed to clean clothing and wait on customers.

There is flexibility in the management of many yoga studios given the laid back management style often embraced.

Instrument dealers may create beautiful music, but they rarely create complex organizational structures.

“Bridezillas” are an occupational hazard for bridal shops, but these shops are generally able to avoid the complexity associated with other organizational structures.

There is a good reason most sole proprietors do not bother creating formal organizational charts.

If the firm consists of more than one person, tasks tend to be distributed among them in an informal manner

rather than each person developing a narrow area of specialization. In a family-run restaurant or bed and breakfast,

for example, each person must contribute as needed to tasks, such as cleaning restrooms, food preparation, and

serving guests (hopefully not in that order). Meanwhile, strategic decision making in a simple structure tends to

be highly centralized. Indeed, often the owner of the firm makes all the important decisions. Because there is little

emphasis on hierarchy within a simple structure, organizations that use this type of structure tend to have very few

rules and regulations. The process of evaluating and rewarding employees’ performance also tends to be informal.

285 Mastering Strategic Management

The informality of simple structures creates both advantages and disadvantages. On the plus side, the flexibility

offered by simple structures encourages employees’ creativity and individualism. Informality has potential

negative aspects, too. Important tasks may be ignored if no one person is specifically assigned accountability for

them. A lack of clear guidance from the top of the organization can create confusion for employees, undermine

their motivation, and make them dissatisfied with their jobs. Thus when relying on a simple structure, the owner

of a firm must be sure to communicate often and openly with employees.

Functional Structure

As a small organization grows, the person in charge of it often finds that a simple structure is no longer adequate

to meet the organization’s needs. Organizations become more complex as they grow, and this can require more

formal division of labor and a strong emphasis on hierarchy and vertical links. In many cases, these firms evolve

from using a simple structure to relying on a functional structure.

Table 9.5 Functional Structure

Functional structures rely on a division of labor whereby groups of people handle activities related to a specific

function of the overall business. We illustrate functional structures in action within two types of organizations that

commonly use them.

Grocery Store Functions Spa Functions

Grocery stockers often work at night to make sure shelves stay full during the day.

Some spa employees manicure fingernails, a practice that is over four thousand years old. Many also provide pedicures, a service whose popularity has nearly doubled in the past decade.

Pharmacists’ specialized training allows them to command pay that can exceed $50 an hour.

Compared to other spa functions, little training is required of a tanning bed operator–although the ability to tell time may help.

Bakers wake up early to give shoppers their daily bread.

Almost anyone can buy a shotgun or parent a child without any training, but every state requires a license in order to cut hair.

Bagging groceries requires a friendly personality as well as knowing that eggs should not go on the bottom.

Cucumber masks are usually applied by a skin care specialist who has taken a professional training program.

Folks that work checkout aisles should be trusted to handle cash.

The license required of massage therapists in many states ensures that spa visits end happily.

The creation of produce, deli, and butcher departments provides an efficient way to divide a grocery store physically as well as functionally.

Within a functional structure, employees are divided into departments that each handle activities related to a

functional area of the business, such as marketing, production, human resources, information technology, and

customer service (Table 9.5 “Functional Structure”). Each of these five areas would be headed up by a manager

who coordinates all activities related to her functional area. Everyone in a company that works on marketing

the company’s products, for example, would report to the manager of the marketing department. The marketing

managers and the managers in charge of the other four areas in turn would report to the chief executive officer.

9.3 Creating an Organizational Structure 286

An example of a functional structure

Using a functional structure creates advantages and disadvantages. An important benefit of adopting a

functional structure is that each person tends to learn a great deal about his or her particular function. By being

placed in a department that consists entirely of marketing professionals, an individual has a great opportunity

to become an expert in marketing. Thus a functional structure tends to create highly skilled specialists. Second,

grouping everyone that serves a particular function into one department tends to keep costs low and to create

efficiency. Also, because all the people in a particular department share the same background training, they tend

to get along with one another. In other words, conflicts within departments are relatively rare.

Using a functional structure also has a significant downside: executing strategic changes can be very slow when

compared with other structures. Suppose, for example, that a textbook publisher decides to introduce a new form

of textbook that includes “scratch and sniff” photos that let students smell various products in addition to reading

about them. If the publisher relies on a simple structure, the leader of the firm can simply assign someone to

shepherd this unique new product through all aspects of the publication process.

If the publisher is organized using a functional structure, however, every department in the organization will

have to be intimately involved in the creation of the new textbooks. Because the new product lies outside each

department’s routines, it may become lost in the proverbial shuffle. And unfortunately for the books’ authors, the

publication process will be halted whenever a functional area does not live up to its responsibilities in a timely

manner. More generally, because functional structures are slow to execute change, they tend to work best for

organizations that offer narrow and stable product lines.

The specific functional departments that appear in an organizational chart vary across organizations that use

functional structures. In the example offered earlier in this section, a firm was divided into five functional areas:

(1) marketing, (2) production, (3) human resources, (4) information technology, and (5) customer service. In the

TV show The Office, a different approach to a functional structure is used at the Scranton, Pennsylvania, branch of

Dunder Mifflin. As of 2009, the branch was divided into six functional areas: (1) sales, (2) warehouse, (3) quality

control, (4) customer service, (5) human resources, and (6) accounting. A functional structure was a good fit for

the branch at the time because its product line was limited to just selling office paper.

287 Mastering Strategic Management

The Scranton branch of Dunder Mifflin may be a dysfunctional organization, but it relies on a functional structure.

Multidivisional Structure

Many organizations offer a wide variety of products and services. Some of these organizations sell their offerings

across an array of geographic regions. These approaches require firms to be very responsive to customers’ needs.

Yet, as noted, functional structures tend to be fairly slow to change. As a result, many firms abandon the use of a

functional structure as their offerings expand. Often the new choice is a multidivisional structure. In this type of

structure, employees are divided into departments based on product areas and/or geographic regions.

General Electric (GE) is an example of a company organized this way. As shown in the organization chart

that accompanies this chapter’s opening vignette, most of the company’s employees belong to one of six product

divisions (Energy, Capital, Home & Business Solutions, Health Care, Aviation, and Transportation) or to a

division that is devoted to all GE’s operations outside the United States (Global Growth & Operations).

A big advantage of a multidivisional structure is that it allows a firm to act quickly. When GE makes a

9.3 Creating an Organizational Structure 288

strategic move such as acquiring the well-support division of John Wood Group PLC, only the relevant division

(in this case, Energy) needs to be involved in integrating the new unit into GE’s hierarchy. In contrast, if GE

was organized using a functional structure, the transition would be much slower because all the divisions in

the company would need to be involved. A multidivisional structure also helps an organization to better serve

customers’ needs. In the summer of 2011, for example, GE’s Capital division started to make real-estate loans

after exiting that market during the financial crisis of the late 2000s (Jacobius, 2011). Because one division of GE

handles all the firm’s loans, the wisdom and skill needed to decide when to reenter real-estate lending was easily

accessible.

Of course, empowering divisions to act quickly can backfire if people in those divisions take actions that do

not fit with the company’s overall strategy. McDonald’s experienced this kind of situation in 2002. In particular,

the French division of McDonald’s ran a surprising advertisement in a magazine called Femme Actuelle. The ad

included a quote from a nutritionist that asserted children should not eat at a McDonald’s more than once per

week. Executives at McDonald’s headquarters in suburban Chicago were concerned about the message sent to

their customers, of course, and they made it clear that they strongly disagreed with the nutritionist.

Problems can be created when delegating lots of authority to local divisions. McDonald’s top executives were angered when an ad by

their French division suggested that children should only eat at their restaurants once a week.

Alfonsina Blyde – Everything to see you smile – CC BY-NC-ND 2.0.

Another downside of multidivisional structures is that they tend to be more costly to operate than functional

structures. While a functional structure offers the opportunity to gain efficiency by having just one department

handle all activities in an area, such as marketing, a firm using a multidivisional structure needs to have marketing

units within each of its divisions. In GE’s case, for example, each of its seven divisions must develop marketing

skills. Absorbing the extra expenses that are created reduces a firm’s profit margin.

289 Mastering Strategic Management

GE’s organizational chart highlights a way that firms can reduce some of these expenses: the centralization

of some functional services. As shown in the organizational chart, departments devoted to important aspects

of public relations, business development, legal, global research, human resources, and finance are maintained

centrally to provide services to the six product divisions and the geographic division. By consolidating some

human resource activities in one location, for example, GE creates efficiency and saves money.

An additional benefit of such moves is that consistency is created across divisions. In 2011, for example,

the Coca-Cola Company created an Office of Sustainability to coordinate sustainability initiatives across the

entire company. Bea Perez was named Coca-Cola’s chief sustainability officer and was put in charge of the

Office of Sustainability. At the time, Coca-Cola’s chief executive officer Muhtar Kent noted that Coca-Cola had

“made significant progress with our sustainability initiatives, but our current approach needs focus and better

integration (McWilliams, 2011).” In other words, a department devoted to creating consistency across Coca-

Cola’s sustainability efforts was needed for Coca-Cola to meet its sustainability goals.

Matrix Structure

Within functional and multidivisional structures, vertical linkages between bosses and subordinates are the most

elements. Matrix structures, in contrast, rely heavily on horizontal relationships (Ketchen & Short, 2011). In

particular, these structures create cross-functional teams that each work on a different project. This offers several

benefits: maximizing the organization’s flexibility, enhancing communication across functional lines, and creating

a spirit of teamwork and collaboration. A matrix structure can also help develop new managers. In particular, a

person without managerial experience can be put in charge of a relatively small project as a test to see whether the

person has a talent for leading others.

Using a matrix structure can create difficulties too. One concern is that using a matrix structure violates

the unity of command principle because each employee is assigned multiple bosses. Specifically, any given

individual reports to a functional area supervisor as well as one or more project supervisors. This creates confusion

for employees because they are left unsure about who should be giving them direction. Violating the unity of

command principle also creates opportunities for unsavory employees to avoid responsibility by claiming to each

supervisor that a different supervisor is currently depending on their efforts.

The potential for conflicts arising between project managers within a matrix structure is another concern.

Chances are that you have had some classes with professors who are excellent speakers while you have been

forced to suffer through a semester of incomprehensible lectures in other classes. This mix of experiences reflects

a fundamental reality of management: in any organization, some workers are more talented and motivated than

others. Within a matrix structure, each project manager naturally will want the best people in the company

assigned to her project because their boss evaluates these managers based on how well their projects perform.

Because the best people are a scarce resource, infighting and politics can easily flare up around which people are

assigned to each project.

Given these problems, not every organization is a good candidate to use a matrix structure. Organizations

such as engineering and consulting firms that need to maximize their flexibility to service projects of limited

duration can benefit from the use of a matrix. Matrix structures are also used to organize research and development

departments within many large corporations. In each of these settings, the benefits of organizing around teams are

so great that they often outweigh the risks of doing so.

9.3 Creating an Organizational Structure 290

You won’t need to choose between a red pill and a blue pill within a matrix structure, but you will have multiple bosses.

Strategy at the Movies

Office Space

How much work can a man accomplish with eight bosses breathing down his neck? For Peter Gibbons, an employee at information technology firm Initech in the 1999 movie Office Space, the answer was zero. Initech’s use of a matrix structure meant that each employee had multiple bosses, each representing a different aspect of Initech’s business. High- tech firms often use matrix to gain the flexibility needed to manage multiple projects simultaneously. Successfully using a matrix structure requires excellent communication among various managers—however, excellence that Initech could not reach. When Gibbons forgot to put the appropriate cover sheet on his TPS report, each of his eight bosses—and a parade of his coworkers—admonished him. This fiasco and others led to Gibbons to become cynical about his job.

Simpler organizational structures can be equally frustrating. Joanna, a waitress at nearby restaurant Chotchkie’s, had only one manager—a stark contrast to Gibbons’s eight bosses. Unfortunately, Joanna’s manager had an unhealthy obsession with the “flair” (colorful buttons and pins) used by employees to enliven their uniforms. A series of mixed messages about the restaurant’s policy on flair led Joanna to emphatically proclaim—both verbally and nonverbally—her disdain for the manager. She then quit her job and stormed out of the restaurant.

Office Space illustrates the importance of organizational design decisions to an organization’s culture and to employees’ motivation levels. A matrix structure can facilitate resource sharing and collaboration but may also create complicated working relationships and impose excessive stress on employees. Chotchkie’s organizational structure involved simpler working relationships, but these relationships were strained beyond the breaking point by a manager’s eccentricities. In a more general sense, Office Space shows that all organizational structures involve a series of trade-offs that must be carefully managed.

291 Mastering Strategic Management

Within a poorly organized firm like Initech, simply keeping possession of a treasured stapler is a challenge.

Wikimedia Commons – public domain.

Boundaryless Organizations

Most organizational charts show clear divisions and boundaries between different units. The value of a much

different approach was highlighted by former GE CEO Jack Welch when he created the term boundaryless

organization. A boundaryless organization is one that removes the usual barriers between parts of the

organization as well as barriers between the organization and others (Askenas, et. al., 1995). Eliminating all

internal and external barriers is not possible, of course, but making progress toward being boundaryless can

help an organization become more flexible and responsive. One example is W.L. Gore, a maker of fabrics,

medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids organizational

charts, management layers, and supervisors despite having approximately nine thousand employees across thirty

countries. Rather than granting formal titles to certain people, leaders with W.L. Gore emerge based on

performance and they attract followers to their ideas over time. As one employee noted, “We vote with our feet.

If you call a meeting, and people show up, you’re a leader (Hamel, 2007).”

9.3 Creating an Organizational Structure 292

The boundaryless approach to structure embraced by W.L. Gore drives the kind of creative thinking that led to their most famous

product, GORE-TEX.

Adifansnet – adidas_Men’s_WINTER STORY – CC BY-SA 2.0.

An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During

2005’s Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders from the

National Guard (who are controlled by state governments) and from active-duty military units (who are controlled

by federal authorities). According to one National Guard officer, “It was just like a solid wall was between the

two entities (Elliott, 2011).” Efforts were needlessly duplicated in some geographic areas while attention to other

areas was delayed or inadequate. For example, poor coordination caused the evacuation of thousands of people

from the New Orleans Superdome to be delayed by a full day. The results were immense human suffering and

numerous fatalities.

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In 2005, boundaries between organizations hampered rescue efforts following Hurricane Katrina.

Wikimedia Commons – public domain.

To avoid similar problems from arising in the future, barriers between the National Guard and active-duty

military units are being bridged by special military officers called dual-status commanders. These individuals will

be empowered to lead both types of units during a disaster recovery effort, helping to ensure that all areas receive

the attention they need in a timely manner.

9.3 Creating an Organizational Structure 294

Reasons for Changing an Organization’s Structure

Creating an organizational structure is not a onetime activity. Executives must revisit an organization’s structure

over time and make changes to it if certain danger signs arise. For example, a structure might need to be adjusted

if decisions with the organization are being made too slowly or if the organization is performing poorly. Both

these problems plagued Sears Holdings in 2008, leading executives to reorganize the company.

Although it was created to emphasize the need for unity among the American colonies, this famous 1754 graphic by Ben Franklin

also illustrates a fundamental truth about structure: If the parts that make up a firm do not work together, the firm is likely to fail.

Wikimedia Commons – public domain.

Sears’s new structure organized the firm around five types of divisions: (1) operating businesses (such as

clothing, appliances, and electronics), (2) support units (certain functional areas such as marketing and finance),

(3) brands (which focus on nurturing the firm’s various brands such as Lands’ End, Joe Boxer, Craftsman, and

Kenmore), (4) online, and (5) real estate. At the time, Sears’s chairman Edward S. Lampert noted that “by creating

smaller focused teams that are clearly responsible for their units, we [will] increase autonomy and accountability,

create greater ownership and enable faster, better decisions (Retail Net).” Unfortunately, structural changes cannot

cure all a company’s ills. As of July 2011, Sears’s stock was worth just over half what it had been worth five years

earlier.

Sometimes structures become too complex and need to be simplified. Many observers believe that this

description fits Cisco. The company’s CEO, John Chambers, has moved Cisco away from a hierarchical emphasis

toward a focus on horizontal linkages. As of late 2009, Cisco had four types of such linkages. For any given

project, a small team of people reported to one of forty-seven boards. The boards averaged fourteen members

each. Forty-three of these boards each reported to one of twelve councils. Each council also averaged fourteen

members. The councils reported to an operating committee consisting of Chambers and fifteen other top

295 Mastering Strategic Management

executives. Four of the forty-seven boards bypassed the councils and reported directly to the operating committee.

These arrangements are so complex and time consuming that some top executives spend 30 percent of their work

hours serving on more than ten of the boards, councils, and the operating committee.

Because it competes in fast-changing high-tech markets, Cisco needs to be able to make competitive moves

quickly. The firm’s complex structural arrangements are preventing this. In late 2007, Hewlett-Packard (HP)

started promoting a warranty service that provides free support and upgrades within the computer network

switches market. Because Cisco’s response to this initiative had to work its way through multiple committees,

the firm did not take action until April 2009. During the delay, Cisco’s share of the market dropped as customers

embraced HP’s warranty. This problem and others created by Cisco’s overly complex structure were so severe

that one columnist wondered aloud “has Cisco’s John Chambers lost his mind (Blodget, 2009)?” In the summer

of 2011, Chambers reversed course and decided to return Cisco to a more traditional structure while reducing

the firm’s workforce by 9 percent. Time will tell whether these structural changes will boost Cisco’s stock price,

which remained flat between 2006 and mid-2011.

Key Takeaway

• Executives must select among the four types of structure (simple, functional, multidivisional, and matrix) available to organize operations. Each structure has unique advantages, and the selection of structures involves a series of trade-offs.

Exercises

1. What type of structure best describes the organization of your college or university? What led you to reach your conclusion?

2. The movie Office Space illustrates two types of structures. What are some other scenes or themes from movies that provide examples or insights relevant to understanding organizational structure?

References

Askenas, R., Ulrich, D., Jick, T., & Kerr, S. 1995. The boundaryless organization: Breaking down the chains of

organizational structure. San Francisco, CA: Jossey-Bass.

Blodget, H. 2009, August 6. Has Cisco’s John Chambers lost his mind? Business Insider. Retrieved from

http://www.businessinsider.com/henry-blodget-has-ciscos-john- chambers-lost-his-mind-2009-8.

Elliott, D. 2011, July 3. New type of commander may avoid Katrina-like chaos. Yahoo! News. Retrieved from

http://news.yahoo.com/type-commander-may-avoid-katrina-chaos-153 143508.html.

Hamel, G. 2007, September 27. What Google, Whole Foods do best. CNNMoney. Retrieved from

http://money.cnn.com/2007/09/26/news/companies/management_hamel. fortune/index.htm.

Jacobius, A. 2011, July 25. GE Capital slowly moving back into lending waters. Pensions & Investments.

Retrieved from http://www.pionline.com/article/20110725/PRINTSUB/110729949.

9.3 Creating an Organizational Structure 296

Ketchen, D. J., & Short, J. C. 2011. Separating fads from facts: Lessons from “the good, the fad, and the ugly.”

Business Horizons, 54, 17–22.

McWilliams, J. 2011, May 19. Coca-Cola names Bea Perez chief sustainability officer. Atlantic-Journal

Constitution. Retrieved from http://www.ajc.com/business/coca-cola-names-bea-951741.html.

Retail Net, Sears restructures business units. Retail Net. Retrieved from http://www.retailnet.com

/story.cfm?ID=41613.

297 Mastering Strategic Management

9.4 Creating Organizational Control Systems

Learning Objectives

1. Understand the three types of control systems.

2. Know the strengths and weaknesses of common management fads.

In addition to creating an appropriate organizational structure, effectively executing strategy depends on the

skillful use of organizational control systems. Executives create strategies to try to achieve their organization’s

vision, mission, and goals. Organizational control systems allow executives to track how well the organization

is performing, identify areas of concern, and then take action to address the concerns. Three basic types of control

systems are available to executives: (1) output control, (2) behavioral control, and (3) clan control. Different

organizations emphasize different types of control, but most organizations use a mix of all three types.

Output Control

Output control focuses on measurable results within an organization. Examples from the business world include

the number of hits a website receives per day, the number of microwave ovens an assembly line produces per

week, and the number of vehicles a car salesman sells per month (Table 9.6 “Output Controls”). In each of

these cases, executives must decide what level of performance is acceptable, communicate expectations to the

relevant employees, track whether performance meets expectations, and then make any needed changes. In an

ironic example, a group of post office workers in Pensacola, Florida, were once disappointed to learn that their

paychecks had been lost—by the US Postal Service! The corrective action was simple: they started receiving their

pay via direct deposit rather than through the mail.

Many times the stakes are much higher. In early 2011, Delta Air Lines was forced to face some facts as part

of its use of output control. Data gathered by the federal government revealed that only 77.4 percent of Delta’s

flights had arrived on time during 2010. This performance led Delta to rank dead last among the major US airlines

and fifteenth out of eighteen total carriers (Yamanouchi, 2011). In response, Delta took important corrective steps.

In particular, the airline added to its ability to service airplanes and provided more customer service training for

its employees. Because some delays are inevitable, Delta also announced plans to staff a Twitter account called

Delta Assist around the clock to help passengers whose flights are delayed. These changes and others paid off.

For the second quarter of 2011, Delta enjoyed a $198 million profit, despite having to absorb a $1 billion increase

in its fuel costs due to rising prices (Yamanouchi, 2011).

Table 9.6 Output Controls

Outcome controls assess measurable production and other tangible results. Often output controls emphasize

“bottom-line” performance. We illustrate some outcome controls found in organizations below.

Because real estate agents are paid a percentage of the selling price when a house sells, the number of dollars generated in houses sold is an important metric. Many realty offices have designations like “five million dollar club” to recognize very productive realtors.

Grade point averages provide a tangible means to compare students for employers and graduate schools.

In the movie Elf, the main character Buddy leaves Santa’s workshop when the number of Etch-A-Sketch toys he produces is nearly nine hundred units lower than the standard pace.

To ear tenure in a research-focused business schools, a professor’s output generally must include publishing numerous high-quality articles at reputable scholarly journals.

Within restaurants, servers can increase a key output–amount of tips received–by providing customers with fast, friendly, and high-quality service.

Output control also plays a big part in the college experience. For example, test scores and grade point averages

are good examples of output measures. If you perform badly on a test, you might take corrective action by

studying harder or by studying in a group for the next test. At most colleges and universities, a student is put on

academic probation when his grade point average drops below a certain level. If the student’s performance does

not improve, he may be removed from his major and even dismissed. On the positive side, output measures can

trigger rewards too. A very high grade point average can lead to placement on the dean’s list and graduating with

honors.

While most scholarships require a high GPA, comedian David Letterman created a scholarship for a “C” student at Ball State

University. Ball State later named a new communications and media building after its very famous alumnus.

Wikimedia Commons – public domain.

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Behavioral Control

Table 9.7 Behavioral Controls

Behavioral controls dictate the actions of individuals. Such controls often emphasize rules and procedures. We

illustrate some behavioral controls found in organizations below.

No shoes, no shirt, no paycheck. Many food service companies have strict attire requirements to make sure

employees are in compliance with the rules of the Food and Drug Administration and those of local health

departments. Casual Fridays provide a welcome break in offices that enforce strict dress codes. Many businesses

require that checks are signed by two people. This prevents a dishonest employee from embezzling money.

Grading attendance is a behavioral control designed to force students to show up for class. This can be very

helpful because research shows that attendance is positively related to grades. Unfortunately, however, there are

no behavioral controls that force professors’ lectures to be interesting.

Gotta go? Be careful to not take too much time at certain auto factories, where bathroom breaks are monitored

in an effort to cut costs. Some employees of U.S. firms are limited to forty six minutes of bathroom time per shift,

while Japanese automakers allow their American employees only 30 minutes per shift.

While output control focuses on results, behavioral control focuses on controlling the actions that ultimately

lead to results. In particular, various rules and procedures are used to standardize or to dictate behavior (Table

9.7 “Behavioral Controls”). In most states, for example, signs are posted in restaurant bathrooms reminding

employees that they must wash their hands before returning to work. The dress codes that are enforced within

many organizations are another example of behavioral control. To try to prevent employee theft, many firms have

a rule that requires checks to be signed by two people. And in a somewhat bizarre example, some automobile

factories dictate to workers how many minutes they can spend in restrooms during their work shift.

Behavioral control also plays a significant role in the college experience. An illustrative (although perhaps

unpleasant) example is penalizing students for not attending class. Professors grade attendance to dictate students’

behavior; specifically, to force students to attend class. Meanwhile, if you were to suggest that a rule should be

created to force professors to update their lectures at least once every five years, we would not disagree with you.

Outside the classroom, behavioral control is a major factor within college athletic programs. The National

Collegiate Athletic Association (NCAA) governs college athletics using a huge set of rules, policies, and

procedures. The NCAA’s rulebook on behavior is so complex that virtually all coaches violate its rules at one

time or another. Critics suggest that the behavioral controls instituted by the NCAA have reached an absurd level.

Nevertheless, some degree of behavioral control is needed within virtually all organizations.

Creating an effective reward structure is key to effectively managing behavior because people tend to focus

their efforts on the rewarded behaviors. Problems can arise when people are rewarded for behaviors that seem

positive on the surface but that can actually undermine organizational goals under some circumstances. For

example, restaurant servers are highly motivated to serve their tables quickly because doing so can increase their

tips. But if a server devotes all his or her attention to providing fast service, other tasks that are vital to running

a restaurant, such as communicating effectively with managers, host staff, chefs, and other servers, may suffer.

Managers need to be aware of such trade-offs and strive to align rewards with behaviors. For example, waitstaff

who consistently behave as team players could be assigned to the most desirable and lucrative shifts, such as

nights and weekends.

9.4 Creating Organizational Control Systems 300

Although some behavioral controls are intended for employees and not customers, following them is beneficial to everyone.

Wikimedia Commons – CC BY-SA 3.0.

Clan Control

Table 9.8 Clan Controls

Rather than measuring result (as in outcome control) or dictating behavior (as in behavioral control), clan

control relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their

301 Mastering Strategic Management

organization. Some of the most interesting and unusual examples of clan control are found on college campuses.

Below we illustrate a few striking examples that help build school spirit and loyalty.

Roughly one-quarter of Brandeis University’s student body gets adorned in pain–and nothing else–at the annual Liquid Latex event.

No matter how you slice it, the Toast Toss seems strange to outsiders. University of Pennsylvania students fling the breakfast staple into the air after the third quarter of home football games.

Students at Texas Tech University honor the school’s southwest heritage by throwing torillas at sporting events.

Instead of measuring results (as in outcome control) or dictating behavior (as in behavioral control), clan

control is an informal type of control. Specifically, clan control relies on shared traditions, expectations, values,

and norms to lead people to work toward the good of their organization (Table 9.8 “Clan Controls”). Clan control

is often used heavily in settings where creativity is vital, such as many high-tech businesses. In these companies,

output is tough to dictate, and many rules are not appropriate. The creativity of a research scientist would be likely

to be stifled, for example, if she were given a quota of patents that she must meet each year (output control) or if

a strict dress code were enforced (behavioral control).

Google is a firm that relies on clan control to be successful. Employees are permitted to spend 20 percent of

their workweek on their own innovative projects. The company offers an ‘‘ideas mailing list’’ for employees to

submit new ideas and to comment on others’ ideas. Google executives routinely make themselves available two

to three times per week for employees to visit with them to present their ideas. These informal meetings have

generated a number of innovations, including personalized home pages and Google News, which might otherwise

have never been adopted.

9.4 Creating Organizational Control Systems 302

As part of the team-building effort at Google, new employees are known as Noogles and are given a propeller hat to wear.

Wikimedia Commons – CC BY-SA 3.0.

Some executives look to clan control to improve the performance of struggling organizations. In 2005, Florida

officials became fed up with complaints about surly clerks within the state’s driver’s license offices. The solution

was to look for help with training employees from two companies that are well-known for friendly, engaged

employees and excellent customer service. The first was The Walt Disney Company, which offers world-famous

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hospitality at its Orlando theme parks. The second was regional supermarket chain Publix, a firm whose motto

stressed that “shopping is a pleasure” in its stores. The goal of the training was to build the sort of positive team

spirit Disney and Publix enjoy. The state’s highway safety director summarized the need for clan control when

noting that “we’ve just got to change a little culture out there (Bousquet, 2005).”

Clan control is also important on many college campuses. Philanthropic and social organizations such as clubs,

fraternities, and sororities often revolve around shared values and team spirit. More broadly, many campuses

have treasured traditions that bind alumni together across generations. Purdue University, for example, proudly

owns the world’s largest drum. The drum is beaten loudly before home football games to fire up the crowd.

After athletic victories, Auburn University students throw rolls of toilet paper into campus oak trees. At Clark

University, Rollins College, and Emory University, time-honored traditions that involve spontaneously canceling

classes surprise and delight students. These examples and thousands of others spread across the country’s colleges

and universities help students feel like they belong to something special.

Management Fads: Out of Control?

Table 9.9 Managing Management Fads

The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad arises

when some element of culture–such as fashion, a toy, or a hairstyle–becomes enthusiastically embraced by a

group of people. Fads also seem to be a predictable aspect of the business world. Below we illustrate several fads

that executives have latched onto in an effort to improve their organizations’ control systems.

Management by objectives

A supervisor and an employee create a series of goals that provide structure and motivation for the employee. A huge set of studies shows that setting challenging but attainable goals leads to good performance, but not every aspect of work can be captured by a goal.

Sensitivity training

Free-flowing group discussions are used to lead individuals toward greater understanding of themselves and others. Because a “mob mentality” can take over a group, sensitivity training too often degenerates into hostility and humiliation.

Quality circles

Volunteer employee groups developed to brainstorm new methods or processes to improve quality. Quality is important, but managers face trade-offs among quality, cost, flexibility, and speed. A singular obsession with quality sacrifices too much along other dimensions.

Strong culture

Fueled by 1982’s In Search of Excellence and fascination with Japanese management systems, having a strong culture became viewed as crucial to organizational success. Within a few years, many of the “excellent” companies highlighted in the book had fallen on hard times. However, firms such as Disney continue to gain competitive advantage through their strong cultures.

Don’t chase the latest management fads. The situation dictates which approach best accomplishes the team’s

mission.

Colin Powell

The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad arises

when some element of popular culture becomes enthusiastically embraced by a group of people. Over the past

few decades, for example, fashion fads have included leisure suits (1970s), “Members Only” jackets (1980s),

Doc Martens shoes (1990s), and Crocs (2000s). Ironically, the reason a fad arises is also usually the cause of its

9.4 Creating Organizational Control Systems 304

demise. The uniqueness (or even outrageousness) of a fashion, toy, or hairstyle creates “buzz” and publicity but

also ensures that its appeal is only temporary (Ketchen & Short, 2011).

Fads also seem to be a predictable aspect of the business world (Table 9.9 “Managing Management Fads”).

As with cultural fads, many provocative business ideas go through a life cycle of creating buzz, captivating a

group of enthusiastic adherents, and then giving way to the next fad. Bookstore shelves offer a seemingly endless

supply of popular management books whose premises range from the intriguing to the absurd. Within the topic of

leadership, for example, various books promise to reveal the “leadership secrets” of an eclectic array of famous

individuals such as Jesus Christ, Hillary Clinton, Attila the Hun, and Santa Claus.

Beyond the striking similarities between cultural and business fads, there are also important differences. Most

cultural fads are harmless, and they rarely create any long-term problems for those that embrace them. In contrast,

embracing business fads could lead executives to make bad decisions. As our quote from Colin Powell suggests,

relying on sound business practices is much more likely to help executives to execute their organization’s strategy

than are generic words of wisdom from Old St. Nick.

Many management fads have been closely tied to organizational control systems. For example, one of the best-

known fads was an attempt to use output control to improve performance. Management by objectives (MBO)

is a process wherein managers and employees work together to create goals. These goals guide employees’

behaviors and serve as the benchmarks for assessing their performance. Following the presentation of MBO in

Peter Drucker’s 1954 book The Practice of Management, many executives embraced the process as a cure-all for

organizational problems and challenges.

Like many fads, however, MBO became a good idea run amok. Companies that attempted to create an objective

for every aspect of employees’ activities eventually discovered that this was unrealistic. The creation of explicit

goals can conflict with activities involving tacit knowledge about the organization. Intangible notions such as

“providing excellent customer service,” “treating people right,” and “going the extra mile” are central to many

organizations’ success, but these notions are difficult if not impossible to quantify. Thus, in some cases, getting

employees to embrace certain values and other aspects of clan control is more effective than MBO.

Quality circles were a second fad that built on the notion of behavioral control. Quality circles began in Japan in

the 1960s and were first introduced in the United States in 1972. A quality circle is a formal group of employees

that meets regularly to brainstorm solutions to organizational problems. As the name “quality circle” suggests,

identifying behaviors that would improve the quality of products and the operations management processes that

create the products was the formal charge of many quality circles.

While the quality circle fad depicted quality as the key driver of productivity, it quickly became apparent that

this perspective was too narrow. Instead, quality is just one of four critical dimensions of the production process;

speed, cost, and flexibility are also vital. Maximizing any one of these four dimensions often results in a product

that simply cannot satisfy customers’ needs. Many products with perfect quality, for example, would be created

too slowly and at too great a cost to compete in the market effectively. Thus trade-offs among quality, speed, cost,

and flexibility are inevitable.

Improving clan control was the aim of sensitivity-training groups (or T-groups) that were used in many

organizations in the 1960s. This fad involved gatherings of approximately eight to fifteen people openly

discussing their emotions, feelings, beliefs, and biases about workplace issues. In stark contrast to the rigid nature

of MBO, the T-group involved free-flowing conversations led by a facilitator. These discussions were thought to

lead individuals to greater understanding of themselves and others. The anticipated results were more enlightened

workers and a greater spirit of teamwork.

Research on social psychology has found that groups are often far crueler than individuals. Unfortunately, this

meant that the candid nature of T-group discussions could easily degenerate into accusations and humiliation.

305 Mastering Strategic Management

Eventually, the T-group fad gave way to recognition that creating potentially hurtful situations has no place within

an organization. Hints of the softer side of T-groups can still be observed in modern team-building fads, however.

Perhaps the best known is the “trust game,” which claims to build trust between employees by having individuals

fall backward and depend on their coworkers to catch them.

Improving clan control was the basis for the fascination with organizational culture that was all the rage

in the 1980s. This fad was fueled by a best-selling 1982 book titled In Search of Excellence: Lessons from

America’s Best-Run Companies. Authors Tom Peters and Robert Waterman studied companies that they viewed as

stellar performers and distilled eight similarities that were shared across the companies. Most of the similarities,

including staying “close to the customer” and “productivity through people,” arose from powerful corporate

cultures. The book quickly became an international sensation; more than three million copies were sold in the first

four years after its publication.

Soon it became clear that organizational culture’s importance was being exaggerated. Before long, both the

popular press and academic research revealed that many of Peters and Waterman’s “excellent” companies quickly

had fallen on hard times. Basic themes such as customer service and valuing one’s company are quite useful, but

these clan control elements often cannot take the place of holding employees accountable for their performance.

9.4 Creating Organizational Control Systems 306

Spirited games of kickball can help build an organization’s culture, but such events should not substitute for

holding employees accountable for delivering results.

Matthew Peoples – Kickball – CC BY-NC 2.0.

The history of fads allows us to make certain predictions about today’s hot ideas, such as empowerment,

“good to great,” and viral marketing. Executives who distill and act on basic lessons from these fads are likely to

enjoy performance improvements. Empowerment, for example, builds on important research findings regarding

employees—many workers have important insights to offer to their firms, and these workers become more

engaged in their jobs when executives take their insights seriously. Relying too heavily on a fad, however, seldom

turns out well.

Just as executives in the 1980s could not treat In Search of Excellence as a recipe for success, today’s

executives should avoid treating James Collins’s 2001 best-selling book Good to Great: Why Some Companies

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Make the Leap…and Others Don’t as a detailed blueprint for running their companies. Overall, executives should

understand that management fads usually contain a core truth that can help organizations improve but that a

balance of output, behavioral, and clan control is needed within most organizations. As legendary author Jack

Kerouac noted, “Great things are not accomplished by those who yield to trends and fads and popular opinion.”

Key Takeaway

• Organizational control systems are a vital aspect of executing strategy because they track performance and identify adjustments that need to be made. Output controls involve measurable results. Behavioral controls involve regulating activities rather than outcomes. Clan control relies on a set of shared values, expectations, traditions, and norms. Over time, a series of fads intended to improve organizational control processes have emerged. Although these fads tend to be seen as cure-alls initially, executives eventually realize that an array of sound business practices is needed to create effective organizational controls.

Exercises

1. What type of control do you think works most effectively with you and why?

2. What are some common business practices that you predict will be considered fads in the future?

3. How could you integrate each type of control intro a college classroom to maximize student learning?

References

Bousquet, S. 2005, September 23. For surly license clerks. a pound of charm. St Petersburg Times. Retrieved from

http://www.sptimes.com/2005/09/23/State/For_surly_license _cle.shtml.

Ketchen, D. J., & Short, J. C. 2011. Separating fads from facts: Lessons from “the good, the fad, and the ugly.”

Business Horizons, 54, 17–22.

Yamanouchi, K. 2011, February 10. Delta ranks near bottom in on-time performance. Atlanta-Journal

Constitution. Retrieved from http://www.ajc.com/business/delta-ranks-near-bottom-834380.html.

Yamanouchi, K. 2011, July 27. Delta has $198 million profit, says 2,000 took buyouts. Atlanta-Journal

Constitution. Retrieved from http://www.ajc.com/business/delta-has-198-million-1050461.html.

9.4 Creating Organizational Control Systems 308

9.5 Legal Forms of Business

Learning Objectives

1. Know the three basic legal forms of business.

2. Know the two specialized types of corporations.

Table 9.10 Business Forms

Making a profit is a key goal for the overwhelming majority of firms. How a firm’s owners benefit from profits

and suffer from losses varies across different legal forms of business. Below we illustrate how profits and losses

are treated within different business forms.

A sole proprietorship is owned by one person. The firm and its owner are treated interchangeably–the owner is the only beneficiary of any profits and its personally responsible for any losses and debts. Most sole proprietorships are small, but entrepreneur James Cash Penney operated JCPenney as one for many years after buying out his two partners.

In a partnership, two or more partners jointly own the firm. A successful partnership requires trust because profits and losses are shared and because each partner is accountable for the actions of others. Partnerships are a common business form for dental practices and law offices.

A corporation such as Southwest Airlines separates ownership and management by issuing ownership shares that are publicly traded in stock markets. Shareholders do not directly receive profits or absorb losses, but profits and losses tend to be reflected in whether the firm’s stock price rises or falls. Shareholders can also benefit from profits in the form of dividends. A disadvantage of this business form is double taxation: taxes are paid on corporate profits and on any dividends that corporate income fuels.

A limited liability company (LLC) can be thought of as a hybrid of a corporation and partnership. Like in a corporation, owners are not accountable for the firm’s debts. A winner of a legal judgement against an LLC, for example, cannot claim the personal assets of the LLC’s owners. LLC’s also enjoy the management flexibility of partnerships. For federal tax purposes, an LLC must choose to be treated as a corporation, a partnership, or a sole proprietorship. Many architectural and consulting firms are organized as LLCs.

Choosing a Form of Business

The legal form a firm chooses to operate under is an important decision with implications for how a firm structures

its resources and assets. Several legal forms of business are available to executives. Each involves a different

approach to dealing with profits and losses (Table 9.10 “Business Forms”).

There are three basic forms of business. A sole proprietorship is a firm that is owned by one person. From

a legal perspective, the firm and its owner are considered one and the same. On the plus side, this means that

all profits are the property of the owner (after taxes are paid, of course). On the minus side, however, the owner

is personally responsible for the firm’s losses and debts. This presents a tremendous risk. If a sole proprietor is

on the losing end of a significant lawsuit, for example, the owner could find his personal assets forfeited. Most

sole proprietorships are small and many have no employees. In most towns, for example, there are a number of

self-employed repair people, plumbers, and electricians who work alone on home repair jobs. Also, many sole

proprietors run their businesses from their homes to avoid expenses associated with operating an office.

In a partnership, two or more partners share ownership of a firm. A partnership is similar to a sole

proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also responsible for

any losses and debts. Partnerships can be especially attractive if each person’s expertise complements the others.

For example, an accountant who specializes in preparing individual tax returns and another who has mastered

business taxes might choose to join forces to offer customers a more complete set of tax services than either could

offer alone.

From a practical standpoint, a partnership allows a person to take time off without closing down the business

temporarily. Sander & Lawrence is a partnership of two home builders in Tallahassee, Florida. When Lawrence

suffered a serious injury a few years ago, Sander was able to take over supervising his projects and see them

through to completion. Had Lawrence been a sole proprietor, his customers would have suffered greatly. However,

a person who chooses to be part of a partnership rather than operating alone as a sole proprietor also takes on

some risk; your partner could make bad decisions that end up costing you a lot of money. Thus developing trust

and confidence in one’s partner is very important.

Most large firms, such as Southwest Airlines, are organized as corporations. A key difference between a

corporation on the one hand and a sole proprietorship and a partnership on the other is that corporations involve

the separation of ownership and management. Corporations sell shares of ownership that are publicly traded in

stock markets, and they are managed by professional executives. These executives may own a significant portion

of the corporation’s stock, but this is not a legal requirement.

Another unique feature of corporations is how they deal with profits and losses. Unlike in sole proprietorships

and partnerships, a corporation’s owners (i.e., shareholders) do not directly receive profits or absorb losses.

Instead, profits and losses indirectly affect shareholders in two ways. First, profits and losses tend to be reflected

in whether the firm’s stock price rises or falls. When a shareholder sells her stock, the firm’s performance while

she has owned the stock will influence whether she makes a profit relative to her stock purchase. Shareholders

can also benefit from profits if a firm’s executives decide to pay cash dividends to shareholders. Unfortunately, for

shareholders, corporate profits and any dividends that these profits support are both taxed. This double taxation is

a big disadvantage of corporations.

A specialized type of corporation called an S corporation avoids double taxation. Much like in a partnership,

the firm’s profits and losses are reported on owners’ personal tax returns in proportion with each owner’s share of

the firm. Although this is an attractive feature, an S corporation would be impractical for most large firms because

the number of shareholders in an S corporation is capped, usually at one hundred. In contrast, Southwest Airlines

has more than ten thousand shareholders. For smaller firms, such as many real-estate agencies, the S corporation

is an attractive form of business.

A final form of business is very popular, yet it is not actually recognized by the federal government as a

form of business. Instead, the ability to create a limited liability company (LLC) is granted in state laws. LLCs

mix attractive features of corporations and partnerships. The owners of an LLC are not personally responsible

for debts that the LLC accumulates (like in a corporation) and the LLC can be run in a flexible manner (like

in a partnership). When paying federal taxes, however, an LLC must choose to be treated as a corporation,

a partnership, or a sole proprietorship. Many home builders (including Sander & Lawrence), architectural

businesses, and consulting firms are LLCs.

9.5 Legal Forms of Business 310

Key Takeaway

• The three major forms of business in the United States are sole proprietorships, partnerships, and corporations. Each form has implications for how individuals are taxed and resources are managed and deployed.

Exercises

1. Why are so many small firms sole proprietorships?

2. Find an example of a firm that operates as an LLC. Why do you think the owners of this firm chose this form of business over others?

3. Why might different forms of business be more likely to rely on a different organizational structure?

311 Mastering Strategic Management

9.6 Conclusion

This chapter explains elements of organizational design that are vital for executing strategy. Leaders of firms,

ranging from the smallest sole proprietorship to the largest global corporation, must make decisions about the

delegation of authority and responsibility when organizing activities within their firms. Deciding how to best

divide labor to increase efficiency and effectiveness is often the starting point for more complex decisions that lead

to the creation of formal organizational charts. While small businesses rarely create organization charts, firms that

embrace functional, multidivisional, and matrix structures often have reporting relationships with considerable

complexity. To execute strategy effectively, managers also depend on the skillful use of organizational control

systems that involve output, behavioral, and clan controls. Although introducing more efficient business practices

to improve organizational functioning is desirable, executives need to avoid letting their firms become “out of

control” by being skeptical of management fads. Finally, the legal form a business takes is an important decision

with implications for a firm’s organizational structure.

Exercises

1. The following chart is an organizational chart for the US federal government. What type of the four structures mentioned in this chapter best fits what you see in this chart?

2. How does this structure explain why the government seems to move at an incredibly slow pace?

3. What changes could be made to speed up the government? Would they be beneficial?