For All Solve Worker

9-1. Departmentalization

Organizational structure is the vertical and horizontal configuration of departments, authority, and jobs within a company. Organizational structure is concerned with questions such as, “Who reports to whom?” and “Who does what?” and “Where is the work done?” In their 2016 letter to shareholders, Chairman David Thomson and CEO James Smith described the core businesses of Thomson Reuters (“the answer company”) like this: “We help investors make smarter investments. We help lawyers practice better law. We help accounting professionals craft the best advice. We do this for some of the biggest companies in the world, as well as some of the smallest.” *  Thomson Reuters is organized into three business units: Financial & Risk ($6 billion in annual revenues), which provides information to traders, investors, and marketplaces;Legal ($3.4 billion), which provides information to global businesses, law firms, governments, and universities; and Tax & Accounting ($1.5 billion), which provides information to tax professionals, companies, and governments. Those three business units are supported by the Corporate & Other division ($304 million), which provides each business unit help with strategy, funding, technology, and human resources. The “other” in this division is Reuters News, which generates news stories for print, Internet, and TV media outlets.

You can see Thomson Reuters’s organizational structure in Exhibit 9.1. In the first half of the chapter, you will learn about the traditional vertical and horizontal approaches to organizational structure, including departmentalization, organizational authority, and job design.

An organizational process is the collection of activities that transform inputs into outputs that customers value. * Organizational process asks, “How do things get done?” For example, Microsoft uses basic internal and external processes, to write computer software. The process starts when Microsoft gets feedback from customers through the Windows Insider Program and the Windows Insider Program for Business. This information helps Microsoft understand customers’ needs and problems and identify important software issues and needed changes. Microsoft then rewrites the software, testing it internally at the company and then externally through its beta testing process in which customers in its Windows Insider programs provide extensive feedback used to improve the software. Ten million people, from every country on earth but two (Cuba and North Korea), participate as Microsoft Insiders. Using the Feedback Hub App they report bugs that crash programs and indicate what changes and functionality they want. After final corrections are made, Microsoft distributes the officially updated version to its broader base of 400 million customers. The feedback process never ends, however, because as soon as Microsoft releases a new version of Windows, that release is followed by a beta version for testing and feedback from Microsoft’s 10 million Windows Insiders.

This process view of Microsoft, which focuses on how things get done, is very different from the hierarchical view of Thomson Reuters, which focuses on accountability, responsibility, and positions within the chain of command. In the second half of the chapter, you will learn how companies use reengineering and empowerment to redesign their internal organizational processes. The chapter ends with a discussion about the ways in which companies are redesigning their external processes, that is, how they are changing to improve their interactions with those outside the company. In that discussion, you will explore the basics of modular and virtual organizations.

Traditionally, organizational structures have been based on some form of departmentalization. Departmentalization is a method of subdividing work and workers into separate organizational units that take responsibility for completing particular tasks. *  EBay has separate departments or divisions for payment systems, warehousing and logistics, and marketplaces and selling. *

Not all functionally departmentalized companies have the same functions. The insurance company and the advertising agency both have sales, accounting, human resources, and information systems departments, as indicated by the pale orange boxes. The purple and green boxes indicate the functions that are different. As would be expected, the insurance company has separate departments for life, auto, home, and health insurance. The advertising agency has departments for artwork, creative work, print advertising, and Internet advertising. So the functional departments in a company that uses functional structure depend, in part, on the business or industry a company is in.

Functional departmentalization has some advantages. First, it allows work to be done by highly qualified specialists. While the accountants in the accounting department take responsibility for producing accurate revenue and expense figures, the engineers in research and development can focus their efforts on designing a product that is reliable and simple to manufacture. Second, it lowers costs by reducing duplication. When the engineers in research and development come up with a fantastic new product, they don’t have to worry about creating an aggressive advertising campaign to sell it. That task belongs to the advertising experts and sales representatives in marketing. Third, with everyone in the same department having similar work experience or training, communication and coordination are less problematic for departmental managers.

At the same time, functional departmentalization has a number of disadvantages. To start, cross-department coordination can be difficult. Managers and employees are often more interested in doing what’s right for their function than in doing what’s right for the entire organization. A good example is the traditional conflict between marketing and manufacturing. Marketing typically pushes for spending more money to make more products with more capabilities to meet customer needs. By contrast, manufacturing pushes for fewer products with simpler designs so that manufacturing facilities can ship finished products on time and keep costs within expense budgets. As companies grow, functional departmentalization may also lead to slower decision making and produce managers and workers with narrow experience and expertise.

9-1b. Product Departmentalization

Product departmentalization organizes work and workers into separate units responsible for

producing particular products or services. Exhibit 9.4 shows the product departmentalization

structure used by United Technologies Corporation (UTC), which is organized along four

different areas each with its own product line: Climate, Controls & Security (Carrier heating,

ventilating, and air-conditioning; Fire safety, security products and services; and

food/transport refrigeration), Pratt & Whitney jet engines (Pratt & Whitney Commercial

Engines, Pratt & Whitney Military Engines, Pratt & Whitney Canada, and Pratt & Whitney

Aero-Power), UTC Aerospace Systems (wing and cockpit controls, landing systems and

sensors, aerostructures, electric power systems, and plane interiors), and Otis (elevators,

escalators, and moving walkways). *

One of the advantages of product departmentalization is that, like functional departmentalization, it allows managers and workers to specialize in one area of expertise. Unlike the narrow expertise and experiences in functional departmentalization, however, managers and workers develop a broader set of experiences and expertise related to an entire product line. Likewise, product departmentalization makes it easier for top managers to assess work-unit performance. Because of the clear separation of their four different product divisions, UTC’s top managers can easily compare the performance of UTC Aerospace Systems division and the Pratt & Whitney aircraft engines division. In 2016, Pratt & Whitney’s sales ($15.1 billion) were slightly larger than UTC Aerospace’s ($14.5 billion), but UTC Aerospace had a profit of $2.3 billion (a 15.9% margin) compared to Pratt & Whitney’s profit of $1.8 billion (11.9% margin). *

Finally, decision making should be faster because managers and workers are responsible for the entire product line rather than for separate functional departments; in other words, there are fewer conflicts compared to functional departmentalization.

The primary disadvantage of product departmentalization is duplication. You can see in Exhibit 9.4 that both the UTC Climate, Controls & Security division and the Pratt & Whitney division have customer service, engineering, human resources, legal, manufacturing, and procurement (similar to sourcing and logistics) departments. Duplication like this often results in higher costs. If UTC was organized by function, one legal department would handle matters related to both air conditioners and aircraft engines rather than working on only one or the other.

A second disadvantage is the challenge of coordinating across the different product departments. UTC would probably have difficulty standardizing its policies and procedures in product departments as different as the Carrier (heating, ventilating, and air-conditioning) and UTC Aerospace (cockpit controls and landing systems) divisions.

9-1c. Customer Departmentalization

Customer departmentalization organizes work and workers into separate units responsible

for particular kinds of customers. For example, Swisscom AG, Switzerland’s leading

telecommunications provider, is organized into departments by type of customer: residential

customers (mobile, Internet, TV and fixed network, and accessories), small- and medium-

sized businesses (Internet, landline and TV, mobile, and digital solutions), enterprise

customers (banking and industries, network and cloud, mobile business solutions, and digital

enterprise solutions), and IT network and infrastructure (technical strategy and enterprise

architecture, operations, rollout and access, and wholesale). *

The primary advantage of customer departmentalization is that it focuses the organization on customer needs rather than on products or business functions. Furthermore, creating separate departments to serve specific kinds of customers allows companies to specialize and adapt their products and services to customer needs and problems. The primary disadvantage of customer departmentalization is that, like product departmentalization, it leads to duplication of resources. This is why Swisscom AG also has five “group” functions—communication, strategy, security, business steering, and human resources—that support each of its four customer departments, and avoids the disadvantage of duplication common to customer departmentalization structures. It can be difficult to achieve coordination across different customer departments, as is also the case with product departmentalization. Finally, the emphasis on meeting customers’ needs may lead workers to make decisions that please customers but hurt the business.

9-1d. Geographic Departmentalization

Geographic departmentalization organizes work and workers into separate units

responsible for doing business in particular geographic areas. AB InBev has operations in 50

countries, 200,000 employees, and annual revenue of $45.5 billion. AB InBev has nine

regional groups: North America, Middle Americas, Latin America North, Latin America South,

Latin America COPEC, Europe, Asia Pacific North, Asia Pacific South, and Africa. Each of

these regions would be a sizable company by itself. The smallest region, Latin America

COPEC, for instance, sold 30 million hectoliters of beverages for an estimate annual revenue

of $5.5 billion.

The primary advantage of geographic departmentalization is that it helps companies respond to the demands of different markets. This can be especially important when the company sells in different countries. For example, while AB InBev has three brands sold worldwide (Budweiser, Stella Artois, and Corona), and three sold in multiple countries (Beck’s, Hoegaarden, and Leffe), most of its brands are local. You’ll find the Antarctica and Brahma brands in Brazil, the Belle-Vue and Jupiler brands in Belgium, and the Sibirskaya Korona and Klinskoye brands in Russia. *

Another advantage is that geographic departmentalization can reduce costs by locating unique organizational resources closer to customers. For instance, it is cheaper in the long run for AB InBev to build bottling plants in each region than to, for example, transport beer to Mexico, where it has seven beverage plants, after it has been brewed and bottled in Brazil, where it has 25 beverage plants. *

The primary disadvantage of geographic departmentalization is that it can lead to duplication of resources. For example, while it may be necessary to adapt products and marketing to different geographic locations, it’s doubtful that AB InBev needs significantly different inventory tracking systems from location to location. Also, even more than with the other forms of departmentalization, it can be difficult to coordinate departments that are literally thousands of miles from each other and whose managers have very limited contact with each other.

9-1e. Matrix Departmentalization

Matrix departmentalization is a hybrid structure in which two or more forms of departmentalization are used together. The most common matrix combines the product and functional forms of departmentalization, but other forms may also be used. Procter & Gamble, which has 105,000 employees working in 70 different countries. *  Across the top of Exhibit 9.7, you can see that the company uses a product structure where it groups its 22 billion-dollar brands (Pampers, Bounty, Tampax, Crest, Vicks, Gillette, Swiffer, Pantene, and Old Spice are shown for illustration) into four business units: Baby, Feminine & Family Care; Health & Grooming; Fabric & Home Care; and Beauty, Hair & Personal Care. Each of these units is responsible for developing, manufacturing, and marketing its brands to consumers. As such, each unit operates its own research and development department and product supply initiative. The left side of the figure shows that the company also uses a functional structure based on five functions—finance, human resources (HR), communications, legal, and information technology (IT)—and a set of shared global business services including payroll, purchases, data analytics, benefits, and facilities management. The right side of the figure shows that the selling and market operation functions (SMOs) are external to the brand units but are not part of the other functional groups. SMOs make sure that a product is sold, distributed, shelved, and priced well within a particular region of the world. P&G’s SMO regions include Asia Pacific; Europe; Greater China; Latin America; North America; and India, the Middle East, and Africa (IMEA). *

 P&G’s Gillette Group (Gillette is a global brand for men’s grooming products within the Shave Care segment of the Health & Grooming unit) would work with SMOs to sell, market, and distribute Gillette products worldwide; use global business services to work with suppliers and keep costs down; and then rely on corporate functions for assistance in hiring employees, billing customers, and paying suppliers. Similar matrix combinations are shown for Pampers, Bounty, Tampax, Crest, Vicks, Tide, Swiffer, Pantene, and Old Spice within each of the segments of P&G’s four global business units. As shown in Exhibit 9.8, P&G envisions its complex matrix as a set of concentric circles: the business functions at the core, then the brands, then the selling and market operations on the circle closest to the customer.

Several things distinguish matrix departmentalization from the other traditional forms of departmentalization. *  First, most employees report to two bosses, one from each core part of the matrix. For example, in Exhibit 9.7 a manager on the Pampers team responsible for marketing would report to a boss in the baby care segment of the Baby, Feminine, & Family Care global business unit as well as to a manager in Selling and Market Operations. Second, by virtue of their hybrid design, matrix structures lead to much more cross-functional interaction than other forms of departmentalization. In fact, while matrix workers are typically members of only one functional department (based on their work experience and expertise), they are also commonly members of several ongoing project, product, or customer groups. Third, because of the high level of cross-functional interaction, matrix departmentalization requires significant coordination between managers in the different parts of the matrix. In particular, managers have the complex job of tracking and managing the multiple demands (project, product, customer, or functional) on employees’ time.

The primary advantage of matrix departmentalization is that it allows companies to manage in an efficient manner large, complex tasks such as researching, developing, and marketing pharmaceuticals or carrying out complex global businesses. Efficiency comes from avoiding duplication. For example, rather than having an entire information technology function for each project, the company simply assigns and reassigns workers from the information technology department at P&G as they are needed at various stages of product completion. More specifically, an employee may simultaneously be part of five different ongoing projects but may be actively completing work on only a few projects at a time. Another advantage is the pool of resources available to carry out large, complex tasks. Because of the ability to quickly pull in expert help from all the functional areas of the company, matrix project managers have a much more diverse set of expertise and experience at their disposal than managers in the other forms of departmentalization.

The primary disadvantage of matrix departmentalization is the high level of coordination required to manage the complexity involve than individuals in two important steps of the decision-making process: defining the problem and generating alternative solutions.d in running large, ongoing projects at various levels of completion. Matrix structures are notorious for confusion and conflict between project bosses in different parts of the matrix. Disagreements or misunderstandings about schedules, budgets, available resources, and the availability of employees with particular functional expertise are common in matrix structures. Because of these problems, many matrix structures evolve from a simple matrix, in which managers in different parts of the matrix negotiate conflicts and resources directly, to a complex matrix, in which specialized matrix managers and departments are added to the organizational structure. In a complex matrix, managers from different parts of the matrix might report to the same matrix manager, who helps them sort out conflicts and problems.

9-2. Organizational Authority

The second part of traditional organizational structures is authority. Authority is the right to give commands, take action, and make decisions to achieve organizational objectives. *

Traditionally, organizational authority has been characterized by the following dimensions: 9-2a chain of command, 9-2b line versus staff authority, 9-2c delegation of authority, and 9-2d degree of centralization.

9-2a. Chain of Command

Consider again the United Technologies organizational structure. A manager in any of the corporation’s divisions ultimately reports to the head of that division. That division head, in turn, reports to the corporation’s CEO Gregory Hayes. This line, which vertically connects every job in the company to higher levels of management, represents the chain of command. The chain of command is the vertical line of authority that clarifies who reports to whom throughout the organization. People higher in the chain of command have the right, if they so choose, to give commands, take action, and make decisions concerning activities occurring anywhere below them in the chain. In the following discussion about delegation and decentralization, you will learn that managers don’t always choose to exercise their authority directly. *

One of the key assumptions underlying the chain of command is unity of command, which means that workers should report to just one boss. *  In practical terms, this means that only one person can be in charge at a time. Matrix organizations, in which employees have two bosses, automatically violate this principle. This is one of the primary reasons that matrix organizations are difficult to manage. Unity of command serves an important purpose: to prevent the confusion that might arise when an employee receives conflicting commands from two different bosses. Companies don’t necessarily have to have a matrix organization to violate unity of command—they can do so by appointing two CEOs. While co-CEO arrangements sometimes work well, they are rare and often short-lived because, according to research from Professor Lindred Greer, having co-CEOs “causes conflict,” leads to “negative performance by [executive] teams,” and may likely result in the development of “hostile mindsets” as the co-CEOs struggle to work together. *  With market share and profits declining, Whole Foods abandoned its co-CEO arrangement. Analyst Brian Yarbrough commented, “When business is going great, there aren’t a lot of disagreements, and it can work. But when times get tough, that’s when you start to bump heads.” *  Deutsche Bank’s co-CEOs resigned abruptly after a series of financial mistakes and regulatory penalties. *  Finally, Chipotle founder Steve Els became the sole CEO again after co-CEO Monty Moran resigned. Board director Neil Flanzraich said, “Given the ongoing challenges facing the company, the board felt strongly that it was best for Steve to resume leadership of the company going forward.” *

9-2b. Line versus Staff Authority

A second dimension of authority is the distinction between line and staff authority. Line authority is the right to command immediate subordinates in the chain of command. For example, Thomson Reuters CEO James C. Smith has line authority over the president of the company’s Financial & Risk Information division. Smith can issue orders to that division president and expect them to be carried out. In turn, the president of the Financial & Risk Information division can issue orders to his subordinates, who run the trading, investors, marketplaces, and governance, risk, and compliance divisions, and expect them to be carried out. By contrast, staff authority is the right to advise but not command others who are not subordinates in the chain of command. For example, a manager in human resources at Thomson Reuters might advise the manager in charge of the Thomson Reuters Tax & Accounting group on a hiring decision but cannot order him or her to hire a certain applicant.

The terms line and staff are also used to describe different functions within the organization. A line function is an activity that contributes directly to creating or selling the company’s products. So, for example, activities that take place within the manufacturing and marketing departments would be considered line functions. A staff function, such as accounting, human resources, or legal services, does not contribute directly to creating or selling the company’s products but instead supports line activities. For example, marketing managers might consult with the legal staff to ensure the wording of an advertisement is within the law.

9-2c. Delegation of Authority

Managers can exercise their authority directly by completing tasks themselves, or they can choose to pass on some of their authority to subordinates. Delegation of authority is the assignment of direct authority and responsibility to a subordinate to complete tasks for which the manager is normally responsible.

When a manager delegates work, three transfers occur, as illustrated in Exhibit 9.9. First, the manager transfers full responsibility for the assignment to the subordinate. At Apple, when you’ve been delegated to a certain task, you become the DRI, or the “directly responsible individual.” As a former Apple employee explains, “Any effective meeting at Apple will have an action list. Next to each action item will be the DRI,” who of course, is responsible for completing that delegated responsibility. Furthermore, when you’re trying to figure out who to contact to get something done in Apple’s corporate structure, people simply ask, “Who’s the DRI on that?” *  TripAdvisor’s Matthew Mamet says, “When I’m the DRI on a task, it can sometimes come with a bit of apprehension (*Gulp*, not 100% sure how I’m going to do that…but ok I’ll figure it out), or maybe with a bit of grumbling (oh man, I guess I gotta do that, too), but being the DRI always comes with a sense of responsibility to the team.” *

Many managers, however, find giving up full responsibility somewhat difficult. When Lori Lord was COO of Spectrum Health Care, she stayed up all night writing and reviewing 400-page requests for proposals (RFPs), upon which the company’s sales and growth depended. Lord maintained tight control over the RFPs because she considered them critical to the company’s success and believed that she was the only person who could do it right. “These were so important for our organization and I wouldn’t let anyone else put the document[s] together.” *  One reason it is difficult for some managers to delegate is that they often fear that the task won’t be done as well as if they did it themselves. However, one CEO says, “If you can delegate a task to somebody who can do it 75 percent to 80 percent as well as you can today, you delegate it immediately.” Why? Many tasks don’t need to be done perfectly; they just need to be done. And delegating tasks that someone else can do frees managers to assume other important responsibilities. After Lori Lord learned to delegate the RFP review along with other day-to-day activities, she could attend key meetings, focus on the future of the organization, and concentrate on growth, all activities critical to her new role as the company’s CEO. She says that she lost five years of her life from not delegating and that now, “I’m glad I don’t have to be here at 3 a.m. anymore.” * Delegating authority can generate a related problem: micromanaging. Sometimes managers delegate only to interfere later with how the employee is performing the task. But delegating full responsibility means that the employee—not the manager—is now completely responsible for task completion. Good managers need to trust their subordinates to do the job.

The second transfer that occurs with delegation is that the manager gives the subordinate full authority over the budget, resources, and personnel needed to do the job. To do the job effectively, subordinates must have the same tools and information at their disposal that managers had when they were responsible for the same task. In other words, for delegation to work, delegated authority must be commensurate with delegated responsibility.

The third transfer that occurs with delegation is the transfer of accountability. The subordinate now has the authority and responsibility to do the job and, in return, is accountable for getting the job done. In other words, managers delegate their managerial authority and responsibility to subordinates in exchange for results.

9-2d. Degree of Centralization

Centralization of authority is the location of most authority at the upper levels of the organization. In a centralized organization, managers make most decisions, even the relatively small ones. Store managers at Whole Foods’ 430 locations have long been responsible for deciding what to sell in their own stores. To compete more efficiently against Kroger and Costco, however, Whole Foods has decided to centralize purchasing responsibilities for meat, produce, and many nonperishable items at the company’s Austin, Texas, headquarters. Co-CEO John Mackey says of the change, “We want to evolve the structure in such a way that we take out redundancy and waste.” *

Decentralization is the location of a significant amount of authority in the lower levels of the organization. An organization is decentralized if it has a high degree of delegation at all levels. In a decentralized organization, workers closest to problems are authorized to make the decisions necessary to solve the problems on their own.

At Gap, a struggling clothes retailer, CEO Art Peck hopes decentralization produces faster, more effective decisions. Peck first eliminated sign-offs that slowed decisions. So brand merchants acting as fashion collection editors no longer approve every product category. Step two was pushing decision-making authority out to those closest to problems. For example, Gap’s foreign suppliers, who make most of the clothes sold in Gap stores, are now authorized to make decisions on items like men’s dress shirts. *

Decentralization has a number of advantages. It develops employee capabilities throughout the company and leads to faster decision making and more satisfied customers and employees. Furthermore, a study of 1,000 large companies found that companies with a high degree of decentralization outperformed those with a low degree of decentralization in terms of return on assets (6.9% versus 4.7%), return on investment (14.6% versus 9.0%), return on equity (22.8% versus 16.6%), and return on sales (10.3% versus 6.3%). Surprisingly, the same study found that few large companies actually are decentralized. Specifically, only 31 percent of employees in these 1,000 companies were responsible for recommending improvements to management. Overall, just 10 percent of employees received the training and information needed to support a truly decentralized approach to management. *

With results like these, the key question is no longer whether companies should decentralize, but where they should decentralize. One rule of thumb is to stay centralized where standardization is important and to decentralize where standardization is unimportant. Standardization is solving problems by consistently applying the same rules, procedures, and processes. Volkswagen (VW) is one of the largest automakers in the world with a dozen brands (Volkswagen Passenger Cars, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania trucks and buses, and MAN trucks and buses), 620,000 employees, 121 factories, and 330 different vehicles! Running a company this size is enormously complex. For example, the VW Golf, long one of the company’s best selling models, can be made with 89 different steering wheels and 24 different radiator grilles. Using that many varieties for the same part not only increases costs (VW is barely profitable), it decreases quality and reliability. So CEO Matthias Mueller is using standardization to address this problem. The goal is to use a small number of standard parts across different car platforms, eliminating 15,000 different parts in the process. That, combined with job cuts, will contribute to reducing costs by $4 billion a year. *

9-3. Job Design

Could you stand to do the same simple tasks an average of 50 times per hour, 400 times per day, 2,000 times per week, 8,000 times per month? Few can. Fast-food workers rarely stay on the job more than six months. In fact, McDonald’s and other fast-food restaurants have well over 70 percent employee turnover each year. *  As a drive-through employee at McDonald’s, you would repeatedly perform the following steps:

1. Say, “Welcome to McDonald’s. May I have your order please?”

2. Listen to the order. Repeat it for accuracy. State the total cost. “Please drive to the second window.”

3. Take the money. Make change.

4. Give customers cups, straws, and napkins.

5. Give customers food.

6. Say, “Thank you for coming to McDonald’s.”

In this section, you will learn about job design—the number, kind, and variety of tasks that individual workers perform in doing their jobs.

You will learn 9-3a why companies continue to use specialized jobs such as the McDonald’s drive-through job and 9-3b how job rotation, job enlargement, job enrichment, and 9-3c the job characteristics model are being used to overcome the problems associated with job specialization.

9-3a. Job Specialization

Job specialization occurs when a job is composed of a small part of a larger task or process. Specialized jobs are characterized by simple, easy-to-learn steps; low variety; and high repetition, such as the McDonald’s drive-through window job just described. One of the clear disadvantages of specialized jobs is that, being so easy to learn, they quickly become boring. This, in turn, can lead to low job satisfaction and high absenteeism and employee turnover, all of which are very costly to organizations.

Why, then, do companies continue to create and use specialized jobs? The primary reason is that specialized jobs are very economical. As we learned from Frederick W. Taylor and Frank and Lillian Gilbreth in Chapter 2, after a job has been specialized, it takes little time to learn and master. Consequently, when experienced workers quit or are absent, the company can replace them with new employees and lose little productivity. For example, next time you’re at McDonald’s, notice the pictures of the food on the cash registers. These pictures make it easy for McDonald’s trainees to quickly learn to take orders. Likewise, to simplify and speed operations at the drive-through, the drink dispensers are set to automatically fill drink cups. Put a medium cup below the dispenser. Punch the medium drink button. The soft-drink machine then fills the cup to within a half-inch of the top, while the worker goes to get your fries. At McDonald’s, every task has been simplified in this way. Because the work is designed to be simple, wages can remain low because it isn’t necessary to pay high salaries to attract highly experienced, educated, or trained workers.

9-3b. Job Rotation, Enlargement, and Enrichment

Because of the efficiency of specialized jobs, companies are often reluctant to eliminate them. Consequently, job redesign efforts have focused on modifying jobs to keep the benefits of specialized jobs while reducing their obvious costs and disadvantages. Three methods—job rotation, job enlargement, and job enrichment—have been used to try to improve specialized jobs. *

Job rotation attempts to overcome the disadvantages of job specialization by periodically moving workers from one specialized job to another to give them more variety and the opportunity to use different skills. For example, an office receptionist who does nothing but answer phones could be systematically rotated to a different job, such as typing, filing, or data entry, every day or two. Likewise, the “mirror attacher” in an automobile plant might attach mirrors in the first half of the work shift and then install bumpers during the second half. Because employees simply switch from one specialized job to another, job rotation allows companies to retain the economic benefits of specialized work. At the same time, the greater variety of tasks makes the work less boring and more satisfying for workers.

Another way to counter the disadvantages of specialization is to enlarge the job. Job enlargement increases the number of different tasks that a worker performs within one particular job. Instead of being assigned just one task, workers with enlarged jobs are given several tasks to perform. For example, an enlarged “mirror attacher” job might include attaching the mirror, checking to see that the mirror’s power adjustment controls work, and then cleaning the mirror’s surface. Though job enlargement increases variety, many workers report feeling more stress when their jobs are enlarged. Consequently, many workers view enlarged jobs as simply more work, especially if they are not given additional time to complete the additional tasks.

Job enrichment attempts to overcome the deficiencies in specialized work by increasing the number of tasks and by giving workers the authority and control to make meaningful decisions about their work. *

9-3c. Job Characteristics Model

In contrast to job rotation, job enlargement, and job enrichment, which focus on providing variety in job tasks, the job characteristics model (JCM) is an approach to job redesign that seeks to formulate jobs in ways that motivate workers and lead to positive work outcomes. *

The primary goal of the model is to create jobs that result in positive personal and work outcomes, such as internal work motivation, satisfaction with one’s job, and work effectiveness. Of these, the central concern of the JCM is internal motivation. Internal motivation is motivation that comes from the job itself rather than from outside rewards such as a raise or praise from the boss. If workers feel that performing the job well is itself rewarding, then the job has internal motivation. Statements such as “I get a nice sense of accomplishment” or “I feel good about myself and what I’m producing” are examples of internal motivation.

you can see that the JCM specifies three critical psychological states that must occur for work to be internally motivating. First, workers must experience the work as meaningful; that is, they must view their job as being important. Second, they must experience responsibility for work outcomes—they must feel personally responsible for the work being done well. Third, workers must have knowledge of results; that is, they must know how well they are performing their jobs. All three critical psychological states must occur for work to be internally motivating.

For example, grocery store cashiers usually have knowledge of results. When you’re slow, your checkout line grows long. If you make a mistake, customers point it out: “No, I think that’s on sale for $2.99, not $3.99.” Likewise, cashiers experience responsibility for work outcomes. At the end of the day, the register is totaled, and the money is counted. Ideally, the money matches the total sales in the register. If the money in the till is less than what’s recorded in the register, most stores make the cashier pay the difference. Consequently, most cashiers are very careful to avoid being caught short at the end of the day. Nonetheless, despite knowing the results and experiencing responsibility for work outcomes, most grocery store cashiers (at least where I shop) aren’t internally motivated because they don’t experience the work as meaningful. With scanners, it takes little skill to learn or do the job. Anyone can do it. In addition, cashiers have few decisions to make, and the job is highly repetitive.

What kinds of jobs produce the three critical psychological states? Moving another step to the left in Exhibit 9.10, you can see that these psychological states arise from jobs that are strong on five core job characteristics: skill variety, task identity, task significance, autonomy, and feedback. Skill variety is the number of different activities performed in a job. Task identity is the degree to which a job, from beginning to end, requires completion of a whole and identifiable piece of work. Task significance is the degree to which a job is perceived to have a substantial impact on others inside or outside the organization. Autonomy is the degree to which a job gives workers the discretion, freedom, and independence to decide how and when to accomplish the work. Finally, feedback is the amount of information the job provides to workers about their work performance.

To illustrate how the core job characteristics work together, let’s use them to more thoroughly assess why the McDonald’s drive-through window job is not particularly satisfying or motivating. To start, skill variety is low. Except for the size of an order or special requests (“no onions”), the process is the same for each customer. At best, task identity is moderate. Although you take the order, handle the money, and deliver the food, others are responsible for a larger part of the process—preparing the food. Task identity will be even lower if the McDonald’s has two drive-through windows because each drive-through window worker will have an even more specialized task. The first is limited to taking the order and making change, while the second just delivers the food.

Task significance, the impact you have on others, is probably low. Autonomy is also very low: McDonald’s has strict rules about dress, cleanliness, and procedures. But the job does provide immediate feedback such as positive and negative customer comments, car horns honking, the amount of time it takes to process orders, and the number of cars in the drive-through. With the exception of feedback, the low levels of the core job characteristics show why the drive-through window job is not internally motivating for many workers.

What can managers do when jobs aren’t internally motivating? The far left column of Exhibit 9.10 lists five job redesign techniques that managers can use to strengthen a job’s core characteristics. Combining tasks increases skill variety and task identity by joining separate, specialized tasks into larger work modules. For example, some trucking firms are now requiring truck drivers to load their rigs as well as drive them. The hope is that involving drivers in loading will ensure that trucks are properly loaded, thus reducing damage claims.

Work can be formed into natural work units by arranging tasks according to logical or meaningful groups. Although many trucking companies randomly assign drivers to trucks, some have begun assigning drivers to particular geographic locations (for example, the Northeast or Southwest) or to truckloads that require special driving skill (for example, oversized loads or hazardous chemicals). Forming natural work units increases task identity and task significance.

Establishing client relationships increases skill variety, autonomy, and feedback by giving employees direct contact with clients and customers. In some companies, truck drivers are expected to establish business relationships with their regular customers. When something goes wrong with a shipment, customers are told to call drivers directly.

Vertical loading means pushing some managerial authority down to workers. For truck drivers, this means that they have the same authority as managers to resolve customer problems. In some companies, if a late shipment causes problems for a customer, the driver has the authority to fully refund the cost of that shipment without first obtaining management’s approval.

The last job redesign technique offered by the model, opening feedback channels, means finding additional ways to give employees direct, frequent feedback about their job performance. For example, with advances in electronics, many truck drivers get instantaneous data as to whether they’re on schedule and driving their rigs in a fuel-efficient manner. Likewise, the increased contact with customers also means that many drivers now receive monthly data on customer satisfaction.

9-4. Intraorganizational Processes

More than 40 years ago, Tom Burns and G. M. Stalker described how two kinds of organizational designs, mechanistic and organic, are appropriate for different kinds of organizational environments. *  Mechanistic organizations are characterized by specialized jobs and responsibilities; precisely defined, unchanging roles; and a rigid chain of command based on centralized authority and vertical communication. This type of organization works best in stable, unchanging business environments. By contrast, organic organizations are characterized by broadly defined jobs and responsibilities; loosely defined, frequently changing roles; and decentralized authority and horizontal communication based on task knowledge. This type of organization works best in dynamic, changing business environments.

The organizational design techniques described in the first half of this chapter—departmentalization, authority, and job design—are better suited for mechanistic organizations and the stable business environments that were more prevalent before 1980. By contrast, the organizational design techniques discussed in the second part of the chapter, are more appropriate for organic organizations and the increasingly dynamic environments in which today’s businesses compete. The key difference between these approaches is that mechanistic organizational designs focus on organizational structure, whereas organic organizational designs are concerned with intraorganizational process, which is the collection of activities that take place within an organization to transform inputs into outputs that customers value.

Let’s take a look at how companies are using 9-4a reengineering and 9-4b empowerment to redesign intraorganizational processes like these.

9-4a. Reengineering

In their best-selling book Reengineering the Corporation, Michael Hammer and James Champy define reengineering as “the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed.” *  Hammer and Champy further explained the four key words shown in italics in this definition. The first key word is fundamental. When reengineering organizational designs, managers must ask themselves, “Why do we do what we do?” and “Why do we do it the way we do?” The usual answer is “Because that’s the way we’ve always done it.” The second key word is radical. Reengineering is about significant change, about starting over by throwing out the old ways of getting work done. The third key word is processes. Hammer and Champy noted that “most business people are not process oriented; they are focused on tasks, on jobs, on people, on structures, but not on processes.” The fourth key word is dramatic. Reengineering is about achieving quantum improvements in company performance.

From Silicon Valley to Wall Street, 70 percent of U.S. workplaces have some version of an open floorplan. Open offices save money and space, but they also tend to have a palpable buzz and have long been touted for increasing collaboration, productivity, and transparency while flattening organizational hierarchies. While open floorplans have many benefits, a growing body of research is revealing some significant flaws in them as well. Workers in open offices experience higher levels of job stress and workplace distraction; are more likely to be absent due to illness; and are less productive than are employees who work in private spaces. Perhaps because of these reasons, many workers are interested in returning to more traditional working conditions. In a recent study of 10,000 workers around the world, 95 percent said that they wanted more privacy at work, 85 percent loathed their company’s open office plans, and 31 percent said that they had to leave the office to get work done.

An example from IBM Credit’s operation illustrates how work can be reengineered. *  IBM Credit lends businesses money to buy IBM computers. Previously, the loan process began when an IBM salesperson called the home office to obtain credit approval for a customer’s purchase. The first department involved in the process took the credit information over the phone from the salesperson and recorded it on the credit form. The credit form was sent to the credit checking department, then to the pricing department (where the interest rate was determined), and on through a total of five departments. In all, it took the five departments six days to approve or deny the customer’s loan. Of course, this delay cost IBM business. Some customers got their loans elsewhere. Others, frustrated by the wait, simply canceled their orders.

Finally, two IBM managers decided to walk a loan straight through each of the departments involved in the process. At each step, they asked the workers to stop what they were doing and immediately process their loan application. They were shocked by what they found. From start to finish, the entire process took just 90 minutes! The six-day turnaround time was almost entirely due to delays in handing off the work from one department to another. The solution: IBM redesigned the process so that one person, not five people in five separate departments, now handles the entire loan approval process without any handoffs. The results were indeed dramatic. Reengineering the credit process reduced approval time from six days to four hours and allowed IBM Credit to increase the number of loans it handled by a factor of 100!

Reengineering changes an organization’s orientation from vertical to horizontal. Instead of taking orders from upper management, lower- and middle-level managers and workers take orders from a customer who is at the beginning and end of each process. Instead of running independent functional departments, managers and workers in different departments take ownership of cross-functional processes. Instead of simplifying work so that it becomes increasingly specialized, reengineering complicates work by giving workers increased autonomy and responsibility for complete processes.

In essence, reengineering changes work by changing task interdependence, the extent to which collective action is required to complete an entire piece of work. As shown in Exhibit 9.11, there are three kinds of task interdependence. *  In pooled interdependence, each job or department contributes to the whole independently. In sequential interdependence, work must be performed in succession because one group’s or job’s outputs become the inputs for the next group or job. Finally, in reciprocal interdependence, different jobs or groups work together in a back-and-forth manner to complete the process. By reducing the handoffs between different jobs or groups, reengineering decreases sequential interdependence. Likewise, reengineering decreases pooled interdependence by redesigning work so that formerly independent jobs or departments now work together to complete processes. Finally, reengineering increases reciprocal interdependence by making groups or individuals responsible for larger, more complete processes in which several steps may be accomplished at the same time.

As an organizational design tool, reengineering promises big rewards, but it has also come under severe criticism. The most serious complaint is that because it allows a few workers to do the work formerly done by many, reengineering is simply a corporate code word for cost cutting and worker layoffs.*  For this reason, detractors claim that reengineering hurts morale and performance. Even though ordering times were reduced from three weeks to three days, Levi Strauss ended an $850 million reengineering project because of the fear and turmoil it created in the company’s workforce. One low point occurred when Levi management, encouraged by its reengineering consultants, told 4,000 workers that they would have to “reapply for their jobs” as the company shifted from its traditional vertical structure to a process-based form of organizing. Thomas Kasten, Levi Strauss’s vice president for reengineering and customer service at that time, says, “We felt the pressure building up [over reengineering efforts], and we were worried about the business.”*  Today, even reengineering gurus Hammer and Champy admit that roughly 70 percent of all reengineering projects fail because of the effects on people in the workplace. Says Hammer, “I wasn’t smart enough about that [the people issues]. I was reflecting my engineering background and was insufficiently appreciative of the human dimension. I’ve [now] learned that’s critical.” *

9-4b. Empowerment

Another way of redesigning intraorganizational processes is through empowerment. Empowering workers means permanently passing decision-making authority and responsibility from managers to workers. For workers to be fully empowered, companies must give them the information and resources they need to make and carry out good decisions and then reward them for taking individual initiative. *  In other words, employees won’t feel very empowered if they constantly have someone looking over their shoulders. Warby Parker, the online eyeglasses company, wanted to use computer programmers more effectively. So it empowered employees through its new three-step Warbles system, which was designed by two programming teams. First, anyone can nominate projects that they feel deserve programmers’ time and attention. Second, company managers assign points to projects based on perceived value. It’s thought that managers’ responsibilities make them more likely to identify projects with the broadest impact. Third, programmers decide which projects to work on and are rewarded for choosing higher value projects (with more points). CEO Dave Gilboa says that Warbles, “ensures we’re getting a lot of value out of the tech team.” Best of all, “Our engineers are much happier; they love the idea that they have autonomy and they can select ideas that they find most interesting.” *

When workers are given the proper information and resources and are allowed to make good decisions, they experience strong feelings of empowerment. Empowerment is a feeling of intrinsic motivation in which workers perceive their work to have meaning and perceive themselves to be competent, having an impact, and capable of self-determination. *  Work has meaning when it is consistent with personal standards and beliefs. Workers feel competent when they believe they can perform an activity with skill. The belief that they are having an impact comes from a feeling that they can affect work outcomes. A feeling of self-determination arises from workers’ belief that they have the autonomy to choose how best to do their work.

Empowerment can lead to changes in organizational processes because meaning, competence, impact, and self-determination produce empowered employees who take active rather than passive roles in their work. At Ritz-Carlton hotels, all employees are empowered to spend up to $2,000 to solve customer service issues. That’s not $2,000 per year or $2,000 per day, it’s $2,000 per incident. And, employees can spend that $2,000 without asking for managerial approval. *  Bob Kharazmi, Ritz-Carlton’s CEO, shares the powerful story of a wheelchair-bound guest who, overheard by a pool attendant, told her husband she wished they could have dinner on the beach. On his own, without management approval, the pool attendant worked with hotel engineering to build a wooden walkway over the sand and with the kitchen to set up a table to serve the delighted couple dinner. *

9-5. Interorganizational Processes

An interorganizational process is a collection of activities that occur among companies to transform inputs into outputs that customers value. In other words, many companies work together to create a product or service that keeps customers happy. Nutella, the chocolate and hazelnut spread, is headquartered in Italy, has five factories in Europe, two in South America, and one each in Russia, North America, and Australia. Those factories work with suppliers in Turkey (hazelnuts), Malaysia (palm oil), Nigeria (cocoa), Brazil (sugar), and France (vanillin). The 401,500 tons of Nutella produced each year are then sold to grocers by sales offices and sales brokers in 160 different countries. *

In this section, you’ll explore interorganizational processes by learning about 9-5a modular organizations and 9-5b virtual organizations.

9-5a. Modular Organizations

Virgin America airline’s CEO David Cush says, “We will outsource every job that we can that is not customer-facing.” * Except for the core business activities that they can perform better, faster, and cheaper than others, modular organizations outsource all remaining business activities to outside companies, suppliers, specialists, or consultants. The term modular is used because the business activities purchased from outside companies can be added and dropped as needed, much like adding pieces to a three-dimensional puzzle. Exhibit 9.12 depicts a modular organization in which the company has chosen to keep training, human resources, sales, product design, manufacturing, customer service, research and development, and information technology as core business activities but has outsourced the noncore activities of product distribution, web page design, advertising, payroll, accounting, and packaging.

The primary advantage of modular organizations is that they can cost significantly less to run than traditional organizations because they pay for outsourced labor, expertise, or manufacturing capabilities only when needed. Due to a surge in online holiday shopping, Amazon’s fourth quarter revenue is consistently 50 percent higher than that of any other quarter throughout the year. To handle the increase in shipping this creates, Amazon adds 100,000 temporary employees to the 90,000 employees already working at its 70 U.S. warehouses and shipping hubs. Amazon does not hire these seasonal workers itself, however. Instead, it contracts with Integrity Staffing Solutions to provide short-term labor. Integrity handles background checks, tax filings, payroll, unemployment, and other legal issues, saving Amazon roughly $100 million a year on payroll taxes alone. According to former Integrity manager Robert Capo Jr., “If Amazon [was] going to do this themselves, they would have to build an entire different infrastructure.” *  To obtain cost advantages, however, modular organizations need reliable partners—vendors and suppliers with whom they can work closely and can trust.

At some companies, small and large decisions are made not by managers, but by a worker vote. At software company InContext, for example, workers recently voted on whether to have standing desks, cubicles, or open tables. After organizing visits to two locations, marketing technology firm Media-Math let workers decide the location of its new headquarters. Employees at 1Sale.com voted on whether the company should continue to pay for employee lunches, or whether it should use that money to lower the cost of health insurance. According to 1Sale’s Shmuli Bortunk, “They asked us, do you prefer to have your belly full or your wallet full?” While voting can take more time, it can also empower employees and improve morale. With democratized decisions, says InContext Product manager Mackenzie Siren, “People feel like they have a real voice.”

Modular organizations have disadvantages, too. The primary disadvantage is the loss of control that occurs when key business activities are outsourced to other companies. Also, companies may reduce their competitive advantage in two ways if they mistakenly outsource a core business activity. First, as a result of competitive and technological change, the noncore business activities a company has outsourced may suddenly become the basis for competitive advantage. Second, related to that point, suppliers to whom work is outsourced can sometimes become competitors.

9-5b. Virtual Organizations

In contrast to modular organizations, in which the interorganizational process revolves around a central company, a virtual organization is part of a network in which many companies share skills, costs, capabilities, markets, and customers with each other. Exhibit 9.13 shows a virtual organization in which, for today, the parts of a virtual company consist of product design, purchasing, manufacturing, advertising, and information technology. Unlike modular organizations, in which the outside organizations are tightly linked to one central company, virtual organizations work with some companies in the network alliance, but not with all. So, whereas a puzzle with various pieces is a fitting metaphor for a modular organization, a potluck dinner is an appropriate metaphor for a virtual organization. All participants bring their finest food dish but eat only what they want.

Another difference is that the working relationships between modular organizations and outside companies tend to be more stable and longer lasting than the shorter, often temporary, relationships found among the virtual companies in a network alliance. The composition of a virtual organization is always changing. The combination of network partners that a virtual corporation has at any one time depends on the expertise needed to solve a particular problem or provide a specific product or service. For instance, today the business might need to focus on advertising and product design, as shown in Exhibit 9.13, but tomorrow, the business could want something completely different. In this sense, the term “virtual organization” means the organization that exists “at the moment.”

Virtual organizations have a number of advantages. They let companies share costs, and because members can quickly combine their efforts to meet customers’ needs, they are fast and flexible. Finally, because each member of the network alliance is the best at what it does, virtual organizations should in theory provide better products and services in all respects.

As with modular organizations, a disadvantage of virtual organizations is that after work has been outsourced, it can be difficult to control the quality of work done by network partners. The greatest disadvantage, however, is that tremendous managerial skills are required to make a network of independent organizations work well together, especially because their relationships tend to be short and based on a single task or project. Virtual organizations are using two methods to solve this problem. The first is to use a broker. In traditional, hierarchical organizations, managers plan, organize, and control. But with the horizontal, interorganizational processes that characterize virtual organizations, the job of a broker is to create and assemble the knowledge, skills, and resources from different companies for outside parties, such as customers. *  The second way to make networks of virtual organizations more manageable is to use a virtual organization agreement that, somewhat like a contract, specifies the schedules, responsibilities, costs, payouts, and liabilities for participating organizations.